Tag Archives: #Goolsbee

Juiced

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No doubt it was President Xi
Who leaned on the PBOC
To cut rates at last
And try to recast
The tone of its cash policy
 
So, mortgage rates will be reduced
While bank reserves, too, will be juiced
But will cutting rates
Be what motivates
The people and give growth a boost?

 

It’s almost as though Pan Gongsheng, head of the PBOC, read my note yesterday morning and decided that it was time to really do something big!  While obviously, we know that is not the case (at least I don’t see his name on my subscriber list), the PBOC definitely painted the tape last night with their actions.  Fortunately, Bloomberg listed them for us as per the below:

  1. The seven-day reverse repurchase rate will be lowered to 1.5% from 1.7%
  2. RRR lowered by 0.5 percentage points, unleashing 1 trillion yuan in liquidity
  3. PBOC didn’t specify when RRR cut takes effect
  4. MLF expected to be cut by 0.3 percentage points
  5. Minimum down-payment ratio cut to 15% for second-home buyers, from 25%
  6. China may cut the RRR further this year by another 0.25 to 0.5 percentage points
  7. RRR cut won’t apply to small banks
  8. LPR and deposit rates to fall by 0.2 to 0.25 percentage points
  9. The PBOC to cover 100% of loans for local governments buying unsold homes with cheap funding, up from 60%

A glossary of terms is as follows:

  • RRR is the reserve ratio requirement which describes how much leverage banks may take, with the lower the number equating to more leverage (need to hold fewer reserves).
  • MLF is the medium-term lending facility which is the program that the PBOC uses to lend money to banks in China, and the rate had been the key interest rate for policy. 
  • LPR is the loan prime rate, the rate at which banks lend to their best clients
  • Seven-day reverse repurchase rate is a relatively new rate that the PBOC uses for its monetary policy efforts, similar to the Fed funds rate, and is now deemed the PBOC’s key interest rate.

Now, that’s a lot of activity for a central bank in one day.  Consider how long it takes the Fed to decide to raise or cut the Fed funds rate and compare that to just how much was done.  

And that’s just the rate moves.  In addition, they indicated they would lend up to CNY 500 billion for funds, brokers and insurers to buy Chinese shares and another CNY 300 billion for companies to buy back their own shares.  Again, I find the irony of a strictly communist nation worrying about their stock market unbelievably delicious.  So, the government is willing to roll out significant monetary stimulus, but as yet, has not been willing to inject fiscal stimulus.  Arguably the biggest economic problem in China right now is that sentiment is weak as people are concerned over both their jobs and the value of their property, hence consumption remains weak overall.  It is not clear what Xi can do to fix that problem, but cheap money is only effective if people and companies want to borrow and spend it.  That remains to be seen, although the odds of China achieving its 5.0% GDP growth target for 2024 have improved now.

One other thought is that this likely would not have been possible for the Chinese had the Fed not cut 50bps last week.  As I have consistently explained, once the Fed gets going, central banks everywhere will feel more comfortable cutting their own rates and easing policy further.  At least in China, inflation is not a problem, so they have plenty of room to cut.  However, elsewhere inflation has proven stickier than most central bankers would like to see.  Nothing is yet carved in stone as to just how many rate cuts are in the offing.

As this was the only noteworthy story, let’s look at how it impacted markets everywhere.  It can be no surprise that shares in China exploded higher given the explicit PBOC support with both the CSI 300 and Hang Seng rallying more than 4.1% on the session.  As well, Chinese yields backed up a bit, off the lows I described yesterday, but only by a few basis points.  As seen below, CNY (+0.4%) rallied nicely, trading to its strongest level since May 2023 and commodities rallied across the board with oil (+2.1%) and copper (+2.4%) the leaders although precious metals (Au +0.3%, Ag +0.8%) are also rising.

Source: tradingeconomics.com

Perhaps the most interesting thing about this story is just how little it impacted non-Chinese markets. Japanese shares (Nikkei +0.6%) rallied but given the yen’s decline (-0.3%) overnight, that likely had a bigger impact on those shares.  And the rest of Asia saw a mix of modest gains and losses, with Taiwan (+0.6%) and Korea (+1.1%) the next best performers although India, Australia and Singapore saw no benefit whatsoever.  It appears they are awaiting the fiscal boost.

In Europe, though, shares are definitely feeling the love led by the CAC (+1.6%) although even the DAX (+0.75%) is rallying despite another series of lousy data, this time the Ifo surveys all printing weaker than last month and weaker than expectations.  I guess given the importance of China as an export market for Germany, the PBOC news trumps the Ifo surveys from earlier this month.  As to US futures, after very modest gains yesterday, although some more record highs, they are essentially unchanged at this hour (7:00).

In the bond market, Treasury yields continue to back up, higher by 3bps this morning and now 15bps off the lows pre-FOMC meeting.  European sovereign yields are higher by 1bp across the board except for UK gilts (+4bps) as concerns grow that the fiscal situation in the UK may deteriorate more rapidly given the apparent confusion in the Starmer government about what to do to pay its bills.  It is also worth noting that JGB yields have slipped 3bps this morning and are now back to levels last seen back in April before the BOJ’s policy tightening got somewhat serious. 

As to the dollar, overall, it is on its back foot this morning although other than the renminbi, most of the moves have been 0.2% or less.  Today’s story is CNY for sure.

On the data front, this morning brings Case-Shiller Home Prices (exp 5.8%) and Consumer Confidence (103.8).  While there are no Fed speakers today, yesterday we heard from three (Goolsbee, Bostic and Kashkari) all of whom agreed with the 50bp cut last week and were mostly pushing for another one before the end of the year.  It seems Goolsbee has taken the mantle of chief dove on the committee, explaining there are “hundreds” of basis points left to cut before they achieve the neutral rate, however neither of the other two indicated any hesitation to cut further.  As of this morning, it is basically a 50:50 proposition as to 25bps or 50bps at the November 7th meeting according to the Fed funds futures market.

And that’s where we stand this morning.  China has opened their coffers and are adding yet more liquidity to the global system.  This should continue to help risk assets everywhere, and ultimately feed into inflation readings, although in China that is not a problem.  But what about elsewhere?  For now, it feels like the dollar is more likely to suffer given the dovish enthusiasm from the Fed speakers, but Thursday will bring 4 more speakers, including Chairman Powell, so perhaps we need to hear that before getting too excited.

Good luck

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Three Extra Trill

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Said Goolsbee, I’m, processing, still
Why bond yields keep moving uphill
Perhaps he should look
At Yellen’s full book
Of issuance, three extra trill

So, with the third quarter now ending
And core PCE, today, pending
The hope and the dream
Is next quarter’s theme
Will be ‘bout risk assets ascending

In a speech yesterday at the Peterson Institute for International Economics, Chicago Fed President Austan Goolsbee laid out his current views on the US economic situation, which he thought was generally in good shape, and warned about overtightening.  He also noted the Fed has a rare opportunity to achieve a soft landing.  All that is ordinary enough.  The odd comment came when he mentioned that he was “still processing’ why bond yields were rising so much recently.  It is always disconcerting to me when the so-called best and brightest who lead our key institutions expose themselves as being clueless in their main role.  

As I have discussed in the past, it is not very difficult to determine why long-term yields are rising in the US, it is a combination of two absolutes and one likelihood.  The absolutes are the amount of supply hitting the market and the reduced demand.  Treasury Secretary Yellen has indicated in Q4 there will be new issuance of ~$852 billion on top of current refinancing of >$1.3 trillion, hitting the market.  At the same time, the Fed continues its QT program reducing demand by $180 billion in Q4 and both China and Japan, the two largest holders of Treasuries have been slowly reducing their positions.  The point is excess supply and reduced demand will drive prices lower.  The likelihood is that the private sector that will be required to purchase these bonds is wary of inflation rebounding on the back of higher energy prices and increasing wage costs (between the UAW strike and the latest law in California that mandates a $20/hour minimum wage for fast food workers, wages seem set to rise further still), and so are demanding to be paid more to buy the paper.  It is not really that complex.

Yesterday, after printing at 4.68%, a new high for the move, the 10-year yield fell back a bit, which is much more about market technicals and an oversold condition rather than a change in the underlying issues discussed above.  This morning, that yield is lower still, but just by 2bps and currently trading at 4.55%.  Of equal interest is the fact that the yield curve continues to bear steepen with the 2yr-10yr curve inversion now down to -50bps.  While we are likely to see a little trading bounce, this trend remains clear, and the fundamentals support higher yields.  I expect the 10-year yield to reach 5% by the end of 2023 and somewhere between 5.5% and 6.0% by the election next year.

If we look elsewhere in the world, we are seeing yields rise right alongside Treasury yields.  Perhaps the only place that is lagging is Japan, where the BOJ executed an unscheduled JGB buying operation last night of¥300 billion to help moderate recent movement.  This was interesting given the data out of Japan last night, notably weaker Retail Sales and a lower-than-expected Tokyo CPI at 2.8% (2.5% core) implies that the BOJ is not likely to feel much pressure to tighten.  With the Fed still all-in on higher for longer and the BOJ able to point to softening inflation as a reason to continue QE and loose policy, USDJPY will continue to be the outlet valve in the economy, and it should rise (yen weaken) still further.

Meanwhile, the most important spread in Europe, the bund-BTP spread in the 10-year space is back to 200bps.  This is the level at which the ECB has demonstrated concern in the past and I am confident that there is much discussion ongoing today.  We did hear from one of the ECB hawks overnight, Nagel, who was clear that another rate hike might be appropriate, but I assure you, if that spread widens much further, rate hikes are not going to be the ECB’s approach.  All in all, we are likely to see much future stress in bond markets.  And to think, none of this even touches on the potential government shutdown tomorrow!

And yet, equity markets bounced yesterday into month/quarter end and European bourses and US futures are all in the green today as the bulls are now telling us that things are oversold, and a rip-roaring rally is imminent.  Clearly, we have seen some pretty weak behavior in the risk asset space lately and a technical bounce is not surprising.  However, it remains very difficult for me to see the upside for stocks as long as bond yields are rising along with oil and inflation remains sticky.  Too, the dollar, while it also reversed course yesterday after a remarkable run higher over the past two plus months, is still quite firm overall, and as long as US yields rise, I look for the dollar to follow.

On the lighter side, the best non-sequitur correlation I have seen is that Top Gun was released in May 1986 and Black Monday, which saw the largest equity market selloff in history occurred in October 1987.  Well, Top Gun II was released in May 2022.  Should we be looking for a massive market decline in the next two weeks?  The starting conditions are not actually that different with an overvalued stock market, rising rates, rising oil prices and a rising dollar.  Just sayin!

As we look to the calendar today, the Core PCE data is set to be released at 8:30 and expected at 0.2% M/M, 3.9% Y/Y.  Many analysts continue to use the concept of annualizing last month’s data and pointing to the Fed achieving its target, or excluding the rise in prices of certain segments beyond food and energy and claiming not only is inflation falling, but deflation is coming.  Clearly, if you exclude the prices that are rising in the index, then the index will demonstrate falling prices, however it is not clear to me what that tells us.  We also get the Goods Trade Balance (exp -$95.0B), that excludes services, and we see Chicago PMI (47.6) and Michigan Sentiment (67.7).  Yesterday’s GDP data was a touch softer than expected at 2.1% with the most concerning part that Real Consumer Spending rose only 0.8% Q/Q, half the level of forecasts and down from 3.8% in Q1. On the flipside, Initial Claims fell to 204K, back to levels seen in January, and certainly no indication of economic weakness.

And that’s how we are heading into the weekend.  While yesterday saw trading reversals of the recent trends, there is no indication that those trends have ended.  The reversal and consolidation may last through today’s quarter end trading and into early next week but look for the longer term trends of a higher dollar, higher bond yields, higher oil prices and lower risk asset prices to resume before too long.

Good luck and good weekend

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