A ray of hope shines through
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A ray of hope shines through

Just like London buses, for a long time there is no good news whatsoever and then suddenly three announcements come along at once. China got the ball rolling, announcing a 50bp reduction in bank reserve requirements in a move that we and others had been mooting recently. This was followed not long after by a bold and necessary piece of co-ordinated policy intervention by the Fed and five other central banks – they decided to reduce the extreme pressure on global money markets by lowering the interest rate on temporary dollar liquidity swaps by 50bp.

And finally there was the surprise jump in US employment of 206K for November announced by ADP Employer Services. By far the most critical of these was the dollar swap rate decision, which briefly sent the EUR flying two big figures higher to 1.35, while the Aussie soared 3% to above 1.03. European bourses greeted the arrival of these three buses with three cheers – the DAX rose 5%. Overnight, Asian equities have also popped higher, led by the Hang Seng (up 5.5%) and the Kospi (nearly 4% higher). Money market rates, the real target of the swap rate decision, dipped significantly, with the 3mth EUR basis swap dropping 30bp to -133bp.

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Global action for a global currency. Markets rallied further on the last trading day of the month on the coordinated announcement from the major central banks to reduce the rate payable on their dollar swap lines (by 50bp). On one level, this could be interpreted as a sign that things are really bad because central banks are getting together and doing something.   Alternatively, it is a reflection of the fact that the dollar is a global currency currently in short supply. We err more towards the latter. The strain in dollar funding markets has been evident for some time and we’ve written about it on several occasions (for example ‘The increasing euro premium‘). Central banks introduced such dollar funding lines in the wake of the credit crisis back in 2008 and they have largely remained in place ever since, even if not utilised on an ongoing basis.  The fact that they have been adjusted into year-end should also not be that surprising, given that this is when the need for liquidity tends to be greatest.   It’s a reflection of the fact that the dollar is a global reserve currency, currently in short supply, and is different from central banks taking a coordinated approach to monetary policy changes, which has occurred on a far less frequent basis.

China plays its part. China yesterday cut by 0.5% what’s known as the required reserve ratio (RRR), the percentage of total deposits which it requires banks to hold on deposit with the People’s Bank of China (PBOC). This is the first cut in three years and follows a period during which the PBOC has been steadily increasing the RRR, from late last year to the middle of this year. As such, the fact that China has now started to ease the RRR is a more tangible reflection of the fact that it is now less concerned about credit expansion and high inflation and more concerned that the impact of what is being experienced elsewhere in the world could start to have a meaningful effect on its economy. But this should not come as a surprise, given that last month the reserve ratio was cut for some rural cooperative banks by the same amount. The initial market reaction has seen stocks pushed into positive territory, softening the dollar and sending AUD/USD back above parity once again. This is largely based on the perception of a more accommodative policy in China providing some cushion to the global situation, especially at a time when western policy makers are looking rather short of options, especially in the eurozone. There is also a more concerning element however, the wider question of whether China and the other emerging nations will be able to de-couple from the fresh strains we are seeing elsewhere. China has wanted to see a softer path to growth and an economy more balanced towards consumption, but it is treading a fine line between slowdown and a more sustained and unwanted shortfall in demand.

A slightly healthier prognosis for the US labour market. The US labour market remains in intensive care, but it is just possible to make out a torch shining in that very dark jobs tunnel. According to ADP Employer Services, private sector payrolls jumped 206K in November, after a 130K increase in each of the previous two months. Monthly jobs gains of around 200K were being regularly recorded in the first few months of this year, before dipping alarmingly in the middle months. Separately, jobless claims have been below 400K for each of the past three weeks, suggesting that the pace of job losses is slowing ever so gradually. There is still a terribly long way to go – conditions in the American labour market are truly dire. But at least things are moving in the right direction. Separately, the Chicago PMI registered a larger-than-expected increase last month, climbing to 62.6 from 58.4 previously, and pending home sales surged more than 10% in October, also well above expectations.

The stubborn German economy. Rome may be burning and Athens crumbling but for the Germans it is business as usual, with the economy showing some extraordinary resilience to the turmoil flaring up around its borders. Real retail sales rose 0.7% in October, above expectations, with shoppers expected to raise their spending over the festive season by more than 4%. Separately, according to GfK consumer confidence surged in the current month, aided by a much greater willingness to spend. Also, unemployment in Germany fell another 20K in November, with the unemployment rate dipping to 6.9%, the lowest in Europe.

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