Date: August 19, 2019
Powell Likely to Use Jackson Hole to Suggest Fed Ready to Cut
“Federal Reserve Chairman Jerome Powell will have no lack of material to choose from when he kicks off the central bank’s annual Jackson Hole symposium Friday with a speech on the challenges for monetary policy. A deglobalization shock touched off by Donald Trump’s trade policy; super low interest rates, including $16.7 trillion in negative-yielding bonds; a never-ending presidential assault on the Fed; and a rising risk of a U.S. and worldwide recession. “There are all sorts of hazards out there,’’ said former International Monetary Fund chief economist Maury Obstfeld, now a senior fellow at the Peterson Institute for International Economics. And some of them, including the risk of a hard Brexit and political protests in Hong Kong, lie outside of the U.S. and aren’t susceptible to the Fed’s influence. Fed watchers expect Powell to do nothing on Friday to disabuse investors of the widespread perception that the central bank will reduce interest rates by another quarter of a percentage point next month. But whether he’ll open the door to a half-point cut, which some traders are looking for, is unclear. “It’s certainly a possibility,’’ that the Fed will lower rates by a half point in September, said Bruce Kasman, chief economist at JPMorgan Chase & Co. “But I don’t see it. The data don’t justify that.’’ He puts the chances of a U.S. recession in the next 12 months at 40% to 45%. Former Fed official Nathan Sheets likened the economic dashboard facing Powell to a Christmas tree. Some lights, such as the steep drop in bond yields, are flashing recession red. Others, such as solid retail sales, are flashing a green all-clear or at worst a cautionary yellow.Powell described the Fed’s policy path as a “mid-cycle adjustment” on July 31 after it cut rates for the first time in a decade. Sheets, who sees one or two more rate cuts, said he’d be fine with Powell repeating that description but he doubted investors would be. The Fed chair though will want to avoid feeding the pessimism in the financial markets and seeing it spread more broadly, said Sheets, who is now chief economist for PGIM Fixed Income.”
Hedge Funds Boost Bets Against Euro on Prospect of ECB Stimulus
“Hedge funds are betting against the euro on the prospect of the European Central Bank amping up its easy monetary policy. Speculators increased their wagers on the shared currency’s decline to the most in almost three months, according to positioning data up to Aug. 13 from the U.S. Commodity Futures Trading Commission. While the euro was supported Monday by the prospect of Germany increasing spending, it touched a two-year low against the dollar on Aug. 1. The common currency is also facing political headwinds with Italy’s government looking close to unraveling, and the U.K. seemingly headed for a crash exit from the European Union in just over two months. Markets are bracing for ECB policy makers to loosen policy even further as soon as next month to prop up the region’s faltering economy. “Despite the softer data, the easing regime-shift by the ECB is not yet fully reflected in positioning or valuations,” said strategists at JPMorgan, including Meera Chandan. “ECB dovishness and weak growth are still the main drivers of our bearish euro stance. Italian politics are an incremental negative in the near term.” The euro traded up 0.1% at $1.1103 at 12:10 p.m. in London, after falling 1% last week. JPMorgan strategists now see the euro slipping to $1.10 by September and trading at that level into the end of the year, lower than their earlier end-2019 call of $1.13. One-month volatility in the shared currency against the dollar has touched a six-month high amid uncertainty over how policy makers will respond to a deepening global downturn.”
China Rate Reform Set to Lower Borrowing Costs as Economy Slows
“China took a major step toward reforming its system of interest rates, in a move aimed at pushing down the cost of borrowing by households and companies as the economy slows. From August 20, new loans must be priced “mainly” with reference to a revamped benchmark that tracks the price of credit to banks’ best customers, the so-called Loan Prime Rate. In turn, that rate is linked to the price the People’s Bank of China charges lenders for cash over one year. The changes push China’s financial system further toward being truly market-led, and away from the Communist-era command economy where officials set both the price and quantity of credit. By unifying market and official rates, the PBOC also intends to bring down the stubbornly high cost of borrowing and aid pass-through of future changes in policy rates. “As the transmission channel will to some extent be improved, the PBOC may be more willing to cut quasi policy rates to drive down the LPR,” Lu Ting, chief China economist at Nomura International in Hong Kong wrote in a note. “We expect riskless rates and government bond yields to drop further as the PBOC catches up with other central banks in rate cutting.” Bank stocks slipped Monday as analysts predicted lower rates will make lending less profitable. Industrial & Commercial Bank of China Ltd. fell as much as 2.2%, Bank of China Ltd. lost 1.4%, and Agricultural Bank of China Ltd. dropped 1.2%. Until now, China has held off reducing its historical benchmark rate, the 1-year lending rate, as such a step would have immediately re-ignited the frothy property market and accelerated debt growth. The central bank said Saturday that commercial lenders submitting prices for the calculation of the new LPR will report in terms of a spread on top of the interest rate of the PBOC’s medium-term lending operations, currently at 3.3%. As the current benchmark 1-year lending rate stands at 4.35%, new loans priced from the LPR could carry a significant discount. Officials have said that the 1-year lending rate, which sets borrowing costs economy wide, will ultimately be abolished. For now, interest rates on existing loans and mortgages won’t be changed, according to the central bank. The reform will make the “overall lending rate for the real economy move downward, which will achieve an effect similar to that of cutting interest rates,” Li Qilin, chief economist at Lianxun Securities Co., wrote in a note. Its effectiveness can only be seen in the pricing on Tuesday, he said. The reform centers on making the one-year and five-year LPRs more reflective of actual lending. The number of banks participating in the pricing will be increased to 18 from 10, with the types of lenders expanded to include city and rural commercial lenders, foreign lenders with operations in China, and privately-owned lenders, the central bank said. Citibank China Co Ltd. and Standard Chartered Bank China Ltd. are the two foreign lenders on the panel. China’s economy weakened more than expected in July after a brief bounce in the previous month, and the effects of the trade war with the U.S. are expanding into finance and the currency. While the PBOC has been providing liquidity to the banking system to reduce inter-bank borrowing costs, the easing has only passed through into the real economy to a limited extent.”
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