Archives of “public finance” tag

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Markets and the Pathogen in the Week Ahead

  
Analysis, Forex
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The infectious and mortality rates of the new coronavirus have become the main force driving the pendulum of investor sentiment toward fear. The move is all the more dramatic as the investors had been positioned for a continuation of the historic bull market in equities and eager to take on new risks.

The coronavirus has surpassed the earlier precedents of SARS (2003) and the Swine Flu (2009). The World Health Organization declared an international health emergency, which will free up resources and boost efforts to contain the pathogen. It took roughly 20 months to devise a vaccine for SARS, and it is estimated that a vaccine is possible within a month or so now to begin the testing process. Although China is expected to return from the extended Lunar New Year on February 2, more than a dozen provinces and cities will be closed several days longer, which ballpark estimates suggest are responsible for a little more than 2/3 of GDP and 3/4 of exports. Supply-chain and business disruptions will likely last longer still.

Investors fear that the health crisis will turn into an economic crisis. Although President Xi is understood to be the strongest Chinese leader in a generation, the challenges that China faces are immense: US rivalry and trade conflict, Hong Kong, Taiwan, and a highly leveraged domestic economy underpinned by a deteriorating demographics. China recently reported its birthrate fell to a record last year. Still, some argue that the situation is even more dire as the official figures exaggerate both the population and the birth rate. More monetary and fiscal stimulus is expected to be delivered to cushion the impact. Some forecasts show the Chinese economy slowing to around 4.5% in Q1 20 from 6.0% in Q4 19.

Since the onshore yuan (CNY) stopped trading for the holiday, the dollar appreciated by a net of a little less than 1% against the offshore yuan (CNH). A catch-up move of roughly the same magnitude would bring the greenback toward CNY7.0. While the last time the dollar rose through that threshold, the US accused China of currency manipulation, this time is considerably different. Moreover, of all times, this is the time when China could likely get away with manipulation if it wanted. It is not just because of the macro shock, but also because the US has played the card once and relatively quickly reversed itself. (more…)

ECB leaves key rates unchanged in January meeting

  
  Analysis
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The ECB announces its latest monetary policy decision – 23 January 2020

  • Prior decision
  • Deposit rate facility -0.50%
  • Main refinancing rate 0.00%
  • Marginal lending facility 0.25%
  • Rates to remain at present or lower levels until inflation outlook robustly converges to target, reflected in underlying inflation
  • Announces first strategic review of policy since 2003
  • Further details on scope, timetable of review will be due later at 1430 GMT
  • Bond buying to continue until shortly before rates are raised
Pretty much a non-event as the details of the statement is very much a repeat of December – or so it seems, the ECB website link is down – besides the announcement of the strategic review, which was very much expected.
The euro is barely moved on the release as all eyes will turn towards Lagarde’s press conference, which is due at 1330 GMT later.
Update: Here’s the full statement.

“At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

The Governing Council will continue to make net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The Governing Council also decided to launch a review of the ECB’s monetary policy strategy. Further details about the scope and timetable of the review will be published in a press release today at 15:30 CET.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.”

BOJ announce no change to monetary policy settings, as expected

  
Analysis, Economy
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Bank of Japan monetary policy meeting for January 2020 has concluded

As expected, policy unchanged:
  • keeps monetary policy steady
  • maintains short-term interest rate target at -0.1%
  • maintains 10-year JGB yield target around 0%
  • maintains forward guidance on interest rates, says they will remain at current or lower levels for as long as needed to guard against risk momentum for hitting price goal may be lost
I’ll have more on this separately

BOJ minutes: Downside risks to overseas economies remained signficant

  
  Analysis
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Minutes of the Bank of Japan October 2019 monetary policy meeting.

  • most members shared view that there had been no further increase in the possibility that the momentum toward achieving the price stability target would be lost
  • most members shared view downside risks to overseas economies remained significant, must continue to pay close attention to chance inflation momentum would be lost
  • one member said given downside risks, BOJ should continue to examine whether additional monetary easing would be necessary
  • some members said BOJ must not hesitate to take additional easing measures if there was a greater possibility momentum toward achieving the price target would be lost
  •  important to enhance cooperation with government on economic policies

Headlines via Reuters

Singapore loosens monetary policy for first time in 3.5 years

  
Analysis, Economy
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Singapore has moved to loosen its monetary policy for the first time in three-and-a-half years to help offset slowing economic momentum due to prolonged U.S.-China trade tensions.

As a small, heavily trade-dependent economy, the country has been heavily exposed to the tariff battle between two of its largest trading partners. Exports have been falling at a double-digit pace from last year’s levels.

The Monetary Authority of Singapore, the central bank, said in its semiannual policy statement Monday that it would slightly decrease the slope of the Singapore dollar’s exchange policy band, a move to guide a weaker appreciation of the local currency.

The nation’s monetary policy is based on its exchange rate whereby the Singapore dollar is managed against a basket of currencies representing the country’s major trading partners.

With this move, Singapore follows regional peers such as Indonesia, the Philippines and India, all of which have eased monetary policy by cutting interest rates in recent months.

Singapore’s adjustment comes as trade-related industries stagnate under pressure from the U.S.-China standoff, though economists say domestically focused sectors have held up better. (more…)

RBA cuts cash rate by 25 bps from 1.25% to 1.00%

  
Analysis, Economy
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RBA announces its latest monetary policy decision – 2 July 2019

  • Prior 1.25%
  • Says rate cut will help to make inroads into spare capacity
  • Says rate cut will help achieve progress towards inflation target
  • Says rate cut is to support jobs, bring inflation back in-line with target
  • Says rate cut will help quicken reduction in unemployment
  • Notes that inflation pressures are subdued across the economy
  • Sees underlying inflation at 2% in 2020
  • But expects inflation to pick up, boosted by petrol prices in Q2
  • To adjust policy if needed to support growth, inflation
  • Central scenario for Australian economy remains reasonable
  • Tentative signs of house prices stabilising in Sydney, Melbourne
  • AUD at the lower end of narrow range
More details to come…

Upcoming Week : Cutting to the Quick

  
  Analysis
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Central banks are prepared to take fresh measures to strengthen and extend the business cycle primarily because price pressures are below what their predecessors thought would be acceptable levels. Draghi, speaking for the ECB, the Federal Reserve, and the Bank of Japan ratcheted up their concerns, which, even without new initiatives, were sufficient to drive interest rates lower.
There is no real definition of many terms economists throw around like recession or depression.  The “two negative quarters of declining GDP” is not a technical definition but a rule of thumb.  Ironically there weren’t recessions before the Great Depression.  The end of business or credit cycles were called panics and crises.  The use of “recession” appears to have been applied to economies to distinguish the end of the business cycle from the Great Depression.  Neither the US nor Europe seems to be on the verge of an economic contraction.  Given a shrinking population, the Japanese economy can contract, and per capita GDP can still rise.
The Bundesbank warned last week that the German economy may have contracted in Q2, but the eurozone flash composite PMI suggests the region expanded.  Although the composite PMI averaged 51.8 in Q2, following a 51.5 average in Q1, GDP growth maybe half of the 0.4% in recorded in the first three months of the year.
The most important data point for the eurozone next week is the flash CPI reading.  Some may see it as a non-story as headline inflation is expected to remain at 1.2% and the core rate at 0.8%.  Unchanged data is the story.  Draghi was clear: if conditions do not improve, the ECB needs to provide more stimulus.

(more…)

China to increase budget deficit in 2016 -More Fiscal Stimulus ?

  
Analysis, Education
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China Daily reports that fiscal policy in China will become ‘more forceful’ in 2016

An official statement (issued after a national fiscal work conference) from China says

  • China will increase its budget deficit next year
  • Will gradually raise its fiscal deficit ratio
  • Increase government debt issuance and set a limit for newly increased local government debt
  • Will continue to cut taxes

Expectations are that the budget deficit will rise to 3% of GDP

  • Compared with 2.3% for 2015
  • And 2.1% in 2014-

Note – the official statement the China Daily is reporting on was out on Monday, and its impact may well have already flowed through to the AUD, which was up during European and US trade overnight.

Biggest Bubble Ever? 2017 Recapped In 15 Bullet Points

  
Analysis, Education
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Here are his 15 bullet points that show why in 2017 we may have seen the biggest bubble ever (and why we can’t wait to see what 2018 reveals).

  1. Da Vinci’s “Salvator Mundi” sold for staggering record $450mn
  2. Bitcoin soared 677% from $952 to $7890
  3. BoJ and ECB were bull catalysts, buying $2.0tn of financial assets
  4. Number of global interest rate cuts since Lehman hit: 702
  5. Global debt rose to a record $226tn, record 324% of global GDP
  6. US corporates issued record $1.75tn of bonds
  7. Yield of European HY bonds fell below yield of US Treasuries
  8. Argentina (8 debt defaults in past 200 years) issued 100-year bond
  9. Global stock market cap jumped1 $15.5tn to $85.6tn, record 113% of GDP
  10. S&P500 volatility sank to 50-year low; US Treasury volatility to 30-year low
  11. Market cap of FAANG+BAT grew $1.5tn, more than entire German market cap
  12. 7855 ETFs accounted for 70% of global daily equity volume
  13. The first AI/robot-managed ETF was launched (it’s underperforming)
  14. Big performance winners: ACWI, EM equities, China, Tech, European HY, euro
  15. Big performance losers: US$, Russia, Telecoms, UST 2-year, Turkish lira

As Hartnett summarizes, “2017 was a perfect encapsulation of an 8-year QE-led bull market”

  • Positioning was too bearish for either a bear market or a correction in risk assets.
  • Profits were higher than expected (global EPS jumped 13.4%) this time thanks to a synchronized global PMI recovery.
  • Policy was aggressively easy, as the ECB and BoJ bought a massive $2.0tn of financial assets; fiscal policy also easy (e.g., US federal deficit up $81bn to $666bn).
  • Returns were abnormally high in 2017 (Table 3); corporate bonds and equities soared, but the biggest surprise was stubbornly low government bond yields: thematic leadership of scarce “growth” (e.g. tech stocks), “yield” (e.g., HY, EM and peripheral EU bonds) and “volatility” once again remained the core of the bull.

ALERT : Japan to downgrade fiscal 2016 growth forecast

  
Analysis, Education
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The Japanese government will cut its fiscal 2016 estimate for real economic growth from 1.7% to 0.9%, owing to uncertainty over the global economy and expectations of lower consumption after a tax hike set for the following year was delayed.

The nominal growth forecast will be lowered from 3.1% to 2.2%. The Council on Economic and Fiscal Policy will release the adjusted outlook Wednesday for approval by the cabinet. The new figures will not take into account a stimulus package to be put together as soon as early August.

 The downgrade owes partly to the postponement of a consumption tax hike that had been slated for April 2017. The January estimate had factored in a surge in demand ahead of the increase. With the hike having been pushed back, the government will cut its projection for real consumer spending growth from 2% to around 1%.

Another issue is uncertainty surrounding the global economy, stemming from such factors as the U.K.’s decision to leave the European Union. The yen’s unexpected strength and slowdowns in China and other emerging markets are expected to depress exports and capital spending.

The Japanese government plans to set its real and nominal growth estimates for fiscal 2017 at 1.2% and 2.2%, respectively. It sees growth picking up slightly as the world economy gradually improves.

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