Conscious that their economy has lost considerable momentum in the first half of this year, Chinese policy officials are stepping up the pace in terms of easing financial conditions. Yesterday’s 25bp cut in the benchmark deposit and lending rate is the first for four years, and reflects Beijing’s increased confidence that inflationary pressures are easing.
This move on rates is consistent with other measures taken by policy-makers in recent weeks, including substantially increased infrastructure spending, targeted tax cuts, subsidised mortgage lending for first-time home buyers, and a noticeable jump in government spending.
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In addition, the trading band on China’s exchange rate has been widened, and the currency has actually been depreciating. China always had a great deal more policy weapons in their armoury than other major advanced economies, and they are now deploying them. We can expect further initiatives over coming months. For risk assets, the preparedness of the world’s second largest economy to roll out further stimulus is encouraging.
Commentary
Bernanke promises action if required. Consistent with the message of some other major central banks over recent days, Chairman Bernanke confirmed that the Fed is ready to act if necessary, without specifying exactly what steps he would take. In wide-ranging testimony to the Joint Economic Committee, Bernanke declared that the crisis in Europe posed a significant risk to the US economy, and also stated that fiscal policy would drag on the recovery. Helicopter Ben is clearly laying the foundation for further QE, which could be announced as soon as the next meeting on June 19-20. Apparent over recent days is that some FOMC members would not require much convincing – for instance, Vice-Chairwoman Janet Yellen essentially supported further action in a speech on Wednesday. With central banks now lining up again to lend a helping hand to the battered global economy, it is little wonder that risk appetite is improving. As is so often the case, there is nothing like a binge of liquidity to suddenly make the world look a better place, no matter the financial pain one is experiencing.
BOE – what are they waiting for? Yesterday’s decision to leave rates on hold and maintain their asset purchases program at GBP 325bn smacks, at least on the surface, as indecision. What else does the MPC need to see in order to justify a further easing of monetary policy? The economy has slipped back into recession, and the current quarter is not looking too pretty either; the forces blowing over from the Continent are extremely disquieting; the manufacturing sector is really struggling again, the consumer is terrified, and inflation is heading in the right direction, aided by a stronger exchange rate and falling oil prices. Unless there is a conspiracy afoot – are the major global central banks about to undertake a co-ordinated announcement? Let’s hope so, because BOE prevarication at this stage is just not excusable.
Germany warms to Spanish bank recapitalisation proposal. It appears that Germany is genuinely considering the proposal to allow Spain’s bank rescue fund to receive funds from the EFSF/ESM which can then be used to recapitalise Spain’s ailing banks. Although opposed to Spanish banks obtaining direct access to Europe’s bailout funds, Germany might permit the FROB to receive cash which can then be redistributed to those banks that require recapitalisation. Berlin is awaiting the outcome of Spanish bank audits (due before the end of the month) and next Monday’s IMF report on the sector to gain a perspective on how deep the hole really is before deciding. No doubt Germany’s thawing on this prickly issue has contributed to the improvement in risk appetite apparent in the last couple of days.
SNB doggedly defends the CHF ceiling. The surge in SNB currency holdings from CHF 237bn at the end of April to CHF 303.8 bn as at May 31st was comfortably above expectations, and reaffirms the determination of the SNB to protect the 1.20 EUR/CHF ceiling. It is also puts into perspective the extent of capital inflow into the Swissie during last month’s market turmoil. Rather than purchasing much in the way of euros, it appears that the SNB has been a keen buyer of both the Japanese yen and the dollar, although these particular figures do not confirm this assertion. The next SNB monetary assessment by the SNB will take place next Thursday.
Another surprise down under. Still processing Wednesday’s shock jump in Q1 GDP, there was another surprise down under yesterday in the shape of stronger-than-expected employment. Jobs growth last month jumped by almost 39K, well above expectations. Last year, the labour market in Australia was dormant, with essentially no growth in jobs all year. Including May’s shock, employment growth so far this year has been over 120K; as a result, the unemployment rate has been relatively steady at around 5.2% over the last three quarters. In response, expectations for future rate cuts from the RBA have been pared back significantly over recent days, and bond yields have risen sharply. For instance, the 10yr yield has spiked by almost 40bp from the historic low of 2.7% recorded on Monday. The Aussie has also bounced back – it reached parity yesterday, having traded below 0.9650 on Monday. Suddenly, both the Australian economy and currency are taking on a rosier hue.
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