Apparently, President Xi
Is worried that his ‘conomy
Has lost all its verve
So, throwing a curve,
Reached out to the PBOC
The central bank promptly cut rates
As things head toward more dire straits
Investors, though, said
Seems China’s still dead
As equity buying abates
After yesterday’s winter doldrums session, with virtually nothing going on in Europe with the US on holiday, last night we got a surprisingly large cut in the 5-year Loan Prime Rate from the PBOC. The 25 basis point cut was the largest since this rate was created five years ago, and 10bps larger than anticipated. This rate is the one on which mortgages in China are based, hence the effort to try to support the property market there. The problem is, this will only be relevant for new mortgages and does not help the outstanding loans in any way. Perhaps it will help spur some new property demand at the margin, but as evidenced by the tepid equity market response (CSI 300 +0.2%), it was hardly a panacea for the problems in China.
Ultimately, the issue there remains that decades of inflating a property bubble combined with the demographic impact of the one-child policy have led to a situation where a large proportion of China’s middle class relies almost entirely on their property investments for their retirement nest egg. As those continue to deflate in value, the idea of increasing consumption continues to recede and the only way to deliver any economic growth is via continued reliance on production and exports. Alas for the Chinese, the end of the globalization phase around the world has put a crimp in that plan as well.
I suspect that this is not the last rate cut we will see from China as it remains clear more stimulus is needed to maintain their target growth rate of GDP. At some point, I also suspect that we will see a large bout of fiscal stimulus, but clearly Xi is avoiding that over concerns regarding the net debt position in China. Despite their efforts to eliminate the dollar as the global reserve currency, there are precious few people or nations willing to hold renminbi for that purpose, so China does not have the flexibility to be as irresponsible as the US in this case. Ultimately, I continue to look for the renminbi to depreciate as it is the only natural outlet valve the Chinese have. It is clear this move will take time, but that is the direction of travel in my view.
Away from that, though, there was nothing happening overnight of any consequence as will be evident when we review the overnight session. Elsewhere in Asia, the Hang Seng. (+0.6%) had a decent session but Japanese shares were a bit softer, and the rest of the APAC nations showed no consistency with some gains (India and Taiwan) and some laggards (Korea and Australia). Perhaps the Aussies suffered after the RBA Minutes showed they considered an additional rate hike last month and still have the thought in their minds. In Europe, things are also quite dull with both gainers and losers with everything +/- 0.3% or less. As to US futures, at this hour (7:30) they are softer by -0.4% or so across the board.
In the bond market, yields have edged lower with Treasuries down by 1bp and most of Europe lower by 2bps as investors await the next signals regarding central bank activity. Interestingly, there was an article in Bloomberg News this morning that discussed the idea some traders were preparing for a potential rate hike in the US as the next move, rather than the still consensus rate cuts. That would not surprise me greatly, but there is no doubt the equity markets are not pricing in that scenario.
Oil prices are slipping this morning, down -1.1%, but there is no obvious catalyst as the driver. In truth, the oil market looks like it is simply trading within a range of $70-$90 and until it breaks out of that range, there is little to do but watch. Metals markets are mixed this morning with gold (+0.5%) leading the way higher on a weaker dollar although copper (+0.5%) and aluminum (-0.75%) are showing no consistency.
Finally, the dollar is under pressure pretty much across the board with AUD and NZD leading the way higher in the G10, both advancing by 0.5%, with EUR and GBP (+0.2% each) in tow. The only outlier is the yen which is unchanged today. In the EMG bloc, the direction is consistent with almost all currencies a touch stronger, but the magnitude is just on the order of 0.2%. This appears to be a dollar weakness story on the back of softening yields, rather than anything else.
On the data front, arguably the big statistic today is Canadian CPI which is expected to slip a tick from last month’s readings, but given the heat we have seen elsewhere lately, I would not be surprised to see a stronger reading. We also see Leading Indicators (exp -0.3%), which if it remains negative, will be the 21st consecutive negative reading, traditionally a harbinger of a recession.
And that’s really it for the day. No major data and no slated Fed speakers. I expect things will remain quiet, with risk assets driving any FX moves.
Good luck
Adf
fxpoetry 