2015.03.02 News


Tonight let’s begin with China where the central bank followed up with a second rate cut this year. While many believe this is a step in the right direction, the move alone will do little to reduce high real rates and tight effective monetary policy.

In fact money market rates in China have been rising – here is the one-week interbank rate (SHIBOR).

At the same time inflation has been moving lower, with CPI hitting 0.8% YoY in the last report. This results in real rates that are are multi-year highs (chart below) in a slowing economy. The situation in the repo markets is similar. The effective monetary policy is just too tight and these real rates are not sustainable – many more cuts will be needed.

The PBoC pointed out that the reason for the cut was to achieve “real interest rate levels suitable for fundamental trends in economic growth, prices and employment”. Market participants and economists remain a skeptical.

Deutsche Bank: – The rate cut is not enough to stabilize the economy. We believe growth will continue to weaken in March and Q1 GDP will drop to 6.8% (consensus 7.2%). The key issue is whether the central government will loosen fiscal policy significantly and quickly enough to offset the slide of fiscal spending on local government side. We do not see signal of such easing yet. Without meaningful pickup of fiscal spending, growth momentum will likely weaken further.

With recent talk of a US rate hike in 2015, this puts the Fed and the PBoC on a diverging policy trajectories. That exerts further downward pressure on the yuan which now trades at the lowest levels since 2012. The chart below shows USD appreciating against CNY.

Many now believe that Beijing will soon let the USD/CNY peg go. With rate cuts alone insufficient to stabilize growth, weaker currency may be just the medicine China’s economy needs.

One of the reasons Beijing may drop the peg to the dolar is the fact that USD continues to rally and China does not want to ride along. It was easy when the dollar was weakening, but no more …

That’s why Turkey for example is informally pegging the lira to the euro to ride along with the Eurozone. Makes sense.

Israel’s central bank cuts interest rates to 10bp as deflation sets in.

In fact the nation’s core CPI has collapsed and negative rates and QE may be required.

Israel’s 10-year government bond yield hit new lows as a result.

Brazil’s economy remains vulnerable as the country faces stagflation and the government deals with weakening fiscal situation. Sovereign CDS spreads remain elevated –

Now let’s take another look at US equities. Once again, valuations are now highly vulnerable to rate increases.

Based on the so-called “risk premium” valuations look attractive. But the main reason for this elevated risk premium is due to low interest rates. And that’s what has provided support to valuations.


– Tens of thousands of people marched through Moscow yesterday inmemory of Boris Nemtsov, the slain liberal politician. In the largest opposition demonstration the city has seen in three years, people marched towards the spot where he was murdered on Friday on his way home from a restaurant near the Kremlin. Marchers held placards saying, “Boris, I’m not afraid” and “They killed you, they are killing freedom”. (FT)
– Markets galvanised by Chinese rate cut The Chinese central bank cut interest rates for the second time in three months in an effort to prop up the slowing economy and stave off the threat of deflation. The decision spurred an equity rally across the Asia-Pacific region. (FT)
– Greece warned to hurry up Jeroen Dijsselbloem, Dutch finance minister and the eurozone’s chief negotiator, said emergency funds could be transferred to the Greek government as early as this month so long as it immediately adopts some of the economic reforms demanded by its creditors. In an interview with the FT, he explains how a deal was done to extend the Greek bailout.(FT)
– European and US data We’ll get a last look at unemployment and consumer prices in the eurozone before the ECB starts its bond-buying programme. The jobless rate is expected to stay at 11.4 per cent and core inflation is expected to stay near zero. Meanwhile, US personal incomes are expected to have risen in January. (NYT$)

Fast FT
– German inflation beats gloomy forecast
– US GDP revised down less than expected to 2.2%
– US pending home sales hit 18-month high
– Winter takes the rap for US confidence drop
– Relief rally can’t hide Brazil’s real woes
– Fall in Aussie inflation supports further easing
– Australia new home sales grow in January
Australia’s housing market is booming, but there are concerns that soaring house prices cannot last. The Reserve Bank of Australia, which recently cut rates to stimulate the economy, has expressed concern over the issue.
– Eurozone manufacturing barely expands in February
– UK manufacturing PMI powers to seven-month high
– UK mortgage approvals steady says BoE

– Fed’s Williams Sees Full U.S. Employment by Year End
– Fischer: Fed Closer to Rate Rises, But Exact Timing Remains Unclear
– Economists React to the Fourth-Quarter GDP Report: ‘The Underlying Picture Remains Good’



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