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Showing posts with label Peopole's Bank of China (PBOC). Show all posts
Showing posts with label Peopole's Bank of China (PBOC). Show all posts

Friday 15 June 2018

US Federal Reserve rate rise, Malaysia and regional equity markets in the red


Fed’s big balance-sheet unwind could be coming to an early end


NEW YORK: The Federal Reserve’s balance sheet may not have that much further to shrink.

An unexpected rise in overnight interest rates is pulling forward a key debate among US central bankers over how much liquidity they should keep in the financial system. The outcome will determine the ultimate size of the balance sheet, which they are slowly winding down, with key implications for US monetary policy.

One consequence was visible on Wednesday. The Fed raised the target range for its benchmark rate by a quarter point to 1.75% to 2%, but only increased the rate it pays banks on cash held with it overnight to 1.95%. The step was designed to keep the federal funds rate from rising above the target range. Previously, the Fed set the rate of interest on reserves at the top of the target range.

Shrinking the balance sheet effectively constitutes a form of policy tightening by putting upward pressure on long-term borrowing costs, just as expanding it via bond purchases during the financial crisis made financial conditions easier. Since beginning the shrinking process in October, the Fed has trimmed its bond portfolio by around US$150bil to US$4.3 trillion, while remaining vague on how small it could become.

This reticence is partly because the Fed doesn’t know how much cash banks will want to hold at the central bank, which they need to do in order to satisfy post-crisis regulatory requirements.

Officials have said that, as they drain cash from the system by shrinking the balance sheet, a rise in the federal funds rate within their target range would be an important sign that liquidity is becoming scarce.

Now that the benchmark rate is rising, there is some skepticism. The increase appears to be mainly driven by another factor: the US Treasury ramped up issuance of short-term US government bills, which drove up yields on those and other competing assets, including in the overnight market.

“We are looking carefully at that, and the truth is, we don’t know with any precision,” Fed chairman Jerome Powell told reporters on Wednesday when asked about the increase. “Really, no one does. You can’t run experiments with one effect and not the other.”

“We’re just going to have to be watching and learning. And, frankly, we don’t have to know today,” he added.

But many also see increasingly scarce cash balances as at least a partial explanation for the upward drift of the funds rate, and as a result, several analysts are pulling forward their estimates of when the balance sheet shrinkage will end.

Mark Cabana, a Bank of America rates strategist, said in a report published June 5 that Fed officials may stop draining liquidity from the system in late 2019 or early 2020, leaving US$1 trillion of cash on bank balance sheets. That compares with an average of around US$2.1 trillion held in reserves at the Fed so far this year.

Cabana, who from 2007 to 2015 worked in the New York Fed’s markets group responsible for managing the balance sheet, even sees a risk that the unwind ends this year.

One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.

The requirement, known as the Liquidity Coverage Ratio, says banks must hold a certain percentage of their assets either in the form of cash deposited at the Fed or in US Treasury securities, to ensure they have enough liquidity to deal with deposit outflows.

The Fed flooded the banking system with reserves as a byproduct of its crisis-era bond-buying programs, known as quantitative easing, to stimulate the economy. The money it paid investors to buy their bonds was deposited in banks, which the banks in turn hold as cash in reserve accounts at the Fed.

In theory, the unwind of the bond portfolio, which involves the reverse swap of assets between the Fed and investors, shouldn’t affect the total amount of Treasuries and reserves available to meet the requirement. The Fed destroys reserves by unwinding the portfolio, but releases an equivalent amount of Treasuries to the market in the process.

But if Fed supervisors are telling banks to prioritise reserves, that logic no longer applies. Nelson asked Randal Quarles, the Fed’s vice-chairman for supervision, if this was the Fed’s new policy. Quarles, who was taking part in a May 4 conference at Stanford University, said he knew that message had been communicated and is “being rethought”.

If Fed officials do opt for a bigger balance sheet and decide to continue telling banks to prioritise cash over Treasuries, it may mean lower long-term interest rates, according to Seth Carpenter, the New York-based chief US economist at UBS Securities.

“If reserves are scarce right now, and if the Fed does stop unwinding its balance sheet, the market is going to react to that, a lot,” said Carpenter, a former Fed economist. “Everyone anticipates a certain amount of extra Treasury supply coming to the market, and this would tell people, ‘Nope, it’s going to be less than you thought’.” — Bloomberg

Malaysia and regional equity markets in the red


In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

PETALING JAYA: It was a sea of red for equity markets across the region after the Federal Reserve raised interest rates by a quarter percentage point to a range of 1.75% to 2% on Wednesday, and funds continued to move their money back to the US. This is the second time the Fed has raised interest rates this year.

In general, markets weren’t down by much, probably because the rate hike had mostly been anticipated. Furthermore for Asia, the withdrawal of funds has been taking place over the last 11 weeks, hence, the pace of selling was slowing.

The Nikkei 225 was down 0.99% to 22,738, the Hang Seng Index was down 0.93% to 30,440, the Shanghai Composite Index was down 0.08% to 3,047.34 while the Singapore Straits Times Index was down 1.05% to 3,356.73.

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

Meanwhile, the Fed is nine months into its plan to shrink its balance sheet which consists some US$4.5 trillion of bonds. The Fed has begun unwinding its balance sheet slowly by selling off US$10bil in assets a month. Eventually, it plans to increase sales to US$50bil per month.

With the economy of the United States showing it was strong enough to grow with higher borrowing costs, the Federal Reserve raised interest rates on Wednesday and signalled that two additional increases would be made this year.

Fed chairman Jerome H. Powell in a news conference on Wednesday said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

Rate hikes basically mean higher borrowing costs for cars, home mortgages and credit cards over the years to come.

Wednesday’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75% to 2%. The last time the rate reached 2% was in late 2008, when the economy was contracting.

“With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions,” said Anthony Dass, chief economist in AmBank.

Dass expects the policy rate to normalise at 2.75% to 3%.

“Thus, we should potentially see the yield curve invert in the first half of 2019,” he said.

So what does higher interest rates mean for emerging markets?

It means a flight of capital back to the US, and many Asian countries will be forced to increase interest rates to defend their respective currencies.

Certainly, capital has been exiting emerging market economies. Data from the Institute of International Finance for May showed that emerging markets experienced a combined US$12.3bil of outflows from bonds and stocks last month.

With that sort of global capital outflow, countries such as India, Indonesia, the Philippines and Turkey, have hiked their domestic rates recently.

Data from Lipper, a unit of Thomson Reuters, shows that for the week ending June 6, US-based money market funds saw inflows of nearly US$34.9bil.

It makes sense for investors to be drawn to the US, where the economy is increasingly solid, coupled with higher yields and lower perceived risks.

Hong Kong for example is fighting an intense battle to fend off currency traders. Since April, Hong Kong has spent at least US$9bil defending its peg to the US dollar. Judging by the fact that two more rate hikes are on the way this year, more ammunition is going to be needed.

Hong Kong has the world’s largest per capita foreign exchange reserves – US$434bil more in firepower.

By right, the Hong Kong dollar should be surging. Nonetheless, the currency is sliding because of a massive “carry trade.”

Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the US, where 10-year Treasury yields are near 3%.

From a contrarian’s perspective, global funds are now massively under-weighted Asia.

With Asian markets currently trading at 12.3 times forward price earnings ratio, this is a reasonable valuation at this matured stage of the market.

By Tee Lin Say StarBiz

Related:

PBOC Seen Mirroring Fed With Hike While Keeping Other Taps Open  Bloomberg

 
Foreign investors more willing to hold yuan assets: FX regulator
Reuters ·

 

 Faster Indian Inflation Puts Analysts on Watch for Rate Hike - Bloomberg

 

Abenomics' impact fading at sensitive moment for Japanese economy - Business News 


Bank Negara governor a short but memorable stint - Business News | The Star Online

 

Malaysia should first check yen loan terms, advises economist - The Star

Thursday 5 February 2015

People's Bank of China (PBOC) joins monetary easing wave: cuts reserve requirement to spur growth

A woman walks past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, in this file picture taken June 21, 2013. [Photo/Agencies]
http://t.cn/RwhoVB4

PBOC cuts bank reserve requirement to spur growth - CCTV News - CCTV.com English

China's banks' cash holding as reserves were at a lowered level, after the central bank cut the reserve requirement ratio, or RRR, which took effect on Thursday.

The PBOC cut the RRR on Wednesday by 50 basis points, which was the first industry-wide cut in more than 2 and a half years. After the cut, big banks' RRR was lowered to 19.5 percent. Meanwhile, the RRR was lowered by an additional 50 basis points for urban and rural commercial banks that lend to small and medium sized enterprises.

In line with investors' expectations, analysts say the move would help in injecting more liquidity and support economic growth.

"The cut in RRR on the one side helps the steady growth of the credit sector, supports economic growth and structural adjustment. At the same time, it's also helpful in lowering companies' financing costs, as banks will adjust their loan pricing because they have less debt stress," says Lian Ping, chief economist of Bank of Communication.

"The PMI contracted in the latest month, prices of bulk commodities dropped further globally, and the level of price increase was low. These gave us more space to cut the RRR and interest rates," says Zhu Baoliang, chief economist of State Information Center.

China cuts bank reserve requirement to spur growth

Night view of skyscrapers and high-rise buildings of Jianwai Soho and Yintai Centre in CBD in Beijing, China. [Photo/IC]

China's central bank made a system-wide cut to bank reserve requirements on Wednesday, the first time it has done so in over two years, to unleash a fresh flood of liquidity to fight off economic slowdown and looming deflation.

The announcement cuts reserve requirements - the amount of cash banks must hold back from lending - to 19.5 percent for big banks, a reduction of 50 basis points that would free up 600 billion yuan ($96 billion) or more held in reserve at Chinese banks - which could then inject 2-3 trillion yuan into the economy after accounting for the multiplying effect of loans.

"The central bank has tried to use short-term policy tools to inject more liquidity, but such tools were not enough, so it has to cut RRR," said Wen Bin, senior economist at Minsheng Bank in Beijing, adding that signs of increasing capital outflows and a sliding domestic currency were particularly worrying.

The reduction follows a surprise cut to guidance lending rates by the People's Bank of China (PBOC) in November, but that adjustment had negligible impact on spurring productive investment, so many had predicted the more dramatic move that the central bank has now delivered.

"Today's announcement isn't a surprise," wrote Mark Williams of Capital Economics in a research note reacting to the news.

"It is consistent with the more accommodative stance being taken since the benchmark interest rate cut."

Officials had previously said they would wait for fourth quarter data to be released before deciding on further easing measures, and that data gave little cause for comfort.

An official survey of China's mammoth factory sector, the purchasing managers index (PMI), showed it shrank unexpectedly for the first time in nearly 2-1/2 years in January, and other indicators have also been worrying, including signs of strengthening capital outflows and a weakening in China's service sector.

"The main reason was that the PMI was much lower than expected in January, so if there is no further policy reaction, it's very likely that China's Q1 GDP growth could fall below 7 percent," said Liu Li-gang, an economist at ANZ.

Policymakers had previously signalled that they were comfortable with slowing net growth in the name of economic restructuring away from capital-intensive manufacturing toward services, but if restructuring attempts set off an economy-wide slide, Beijing would find its options increasingly constrained.

External factors contributed to the timing of the decision, economists said, such as deflationary pressures from a recent collapse in energy prices and easing moves by other foreign central banks, though domestic issues were still more important.

"The recent wave of central bank easing may have played a role, but we think the above domestic factors are the main reasons behind the RRR cut today," wrote Zhu Haibin of J.P. Morgan, adding that the timing was not surprising, given rising systemic cash demand in the run-up to the week-long Chinese New Year holiday in mid February.

However, the weak impact of previous stimulus measures has some worried that liquidity tools are losing their effectiveness in China, given that the volume of debt required to produce a unit of GDP is steadily rising, given endemic industrial overcapacity and entrenched economic inefficiencies in the state sector.

The bank injected an estimated 644.5 billion yuan into the system through medium-term loan facilities in late 2014, without producing much in the way of stimulation, and swamping the system with money it cannot digest carries other risks.

Previous easing moves are already credited with setting off a massive leverage-fuelled rally in Chinese stock markets, which has become as much a cause for concern as celebration, as it highlights the risk that easing would simply reinflate asset bubbles in stocks, real estate and industrial housing that regulators have been trying to let the air out of for years.

China's economic growth slowed to 7.4 percent in 2014 - the weakest in 24 years - from 7.7 percent in 2013.

Analysts polled by Reuters in January expect economic growth to sag further this year to around 7 percent.

(Agencies) - China Daily/Asia News Network

Related:

Backgrounder: Decoding China's reserve requirement ratio (RRR)
BEIJING, Feb. 5 (Xinhua) -- China's stock markets rallied after the central bank lowered the reserve requirement ratio (RRR) on Thursday for the first time in over two years, underscoring the powerful sway of this unique monetary policy tool.  Full story

China cuts reserve ratio by 50 basis points
BEIJING, Feb. 4 (Xinhua) -- China's central bank on Wednesday decided to lower the reserve requirement ratio (RRR), the minimum level of reserves banks must hold, by 50 basis points from Feb. 5.  Full story
 


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