In fact, the week for the western world started on a quiet note, as there were no major releases in Europe and the US bond markets were closed for Columbus Day. European indices saw a lacklustre trade, where FTSE 100 ended 0.7% lower, while the DAX eked out a 0.2% gain. In US, the equity markets were opened but saw thin volume.
Market participants eyed the speeches from three Fed officials, although there is really nothing much to listen to, given that it is clear the Fed’s stance – data-dependent, and still hoping for a rate hike this year if pre-set conditions permit.
To raise or not to raise (in 2015), that is the question
Even since the September meeting where the FOMC deemed it appropriate to leave rates unchanged, the question of ‘when will the Federal Reserve pull the trigger?’ has been asked ad nauseam. The media have asked. The clients have asked. Even colleagues also asked.
It did not help that the FOMC minutes provided few clues as to when they might take action. In their individual speeches, they continue to allude to the script that they would like to see rate normalisation this year.
Atlanta Fed president Lockhart, a hawk, reinforced the message of his colleagues yesterday, saying that the improving job market merits an interest rate increase this year. He said, ‘I would expect to continue to make progress. So the beginning of normalisation of interest rates I think is quite justifiable in the context of continuing progress of multiple measures of employment.’
His remarks echoed Fed vice chair Fischer’s remarks on Sunday, who said the US economy may be strong enough to warrant a rate hike by the end of the year. However, Mr Fischer cautioned that they are assessing slower US job growth and international developments for the timing of the lift-off.
In contrast, Chicago Fed president Evans backs a rate move in the 2016, where he reiterated yesterday his views that it is better to hold until mid-2016. But he downplayed the timing of the first increase by stressing that a gradual pace of rate normalisation following the lift-off is more important.
Fed governor Lael Brainard appeared to be standing with Evans, warning that the Fed should not raise rates prematurely, due to rising global risks. However she did not state a preference for a 2015 or 2016 rate move. The markets remained quite sceptical there will be enough growth momentum in the US economy for the Fed to act this year. The Fed funds futures market continues to price in a sub-40% probability of a December move.
The FOMC next meet on 27-28 October, and 15-16 December.
The lack of clarity and weakening expectations of a US rate hike this year (at least from the market’s perspective) underscored USD vulnerability as a very short-term theme. The dollar index (DXY) slipped below 95.00 again, trading below multiple moving averages. Technically, the MACD has crossed to the downside last Wednesday.
As long as the DXY is trading below the 96.60-70 resistance, we may see further weakness to the nearest support at 94.00. This means we could see more upside in commodity currencies and the euro, particularly if the commodity sector continues to recover.
Over the weekend, the PBOC announced it would expand its refinancing policy to more commercial lenders, in a form of quasi-easing stimulus, according to the Wall Street Journal. Under the policy, the Chinese central bank will allow more commercial banks to use loans as collateral to borrow cheaply from the PBOC. These banks are then supposed to increase lending to the private sector, especially to the small and medium enterprises, where an increase in bad loans has made Chinese banks more cautious with extending loans to businesses deemed risky. This helped to trigger a rally in the Chinese equity markets, particularly the smaller-cap stocks. CSI 300 added 3.2% while the Shenzhen Composite surged 4.2%.
However, the fact that there is an increase in bad loans, might make the PBOC initiative could increase its own exposure to default risks. There were rumours that this could lead to irresponsible lending. This means that the PBOC needs to carefully monitor who is receiving these cheap loans. UBS and Goldman Sachs highlighted that the PBOC is likely to tightly regulate this programme.
It is worthwhile to understand that the PBOC is forbidden by law to buy financial assets, such as bonds, directly, which explained why we will not see a Fed, or ECB or BOJ QE/QQE programme. Nonetheless, the objective is more or less the same. The government wants to free up credit to banks to increase loans, and by extension, stimulate the economy.
Meanwhile, the fifth plenary session of the 18th CPC central committee will be held from 26 to 29 October. The leaders of the CPC will gather in Beijing to discuss the development plan for the next five years. As mentioned in a previous note, the focus is likely to be on reforms.
Looking ahead to Asia
Asian markets may be even more cautious today after the weak leads from overnight markets. Nonetheless, China will march to its own beat, which may lift regional markets, such as Singapore, or sink them. Otherwise, we should see last week’s rally fizzling out. Australian and Japanese markets already started under pressure. USD/Asians may see better bids, as the DXY saw support in early Asia.
Meanwhile, BOJ minutes showed that most members expect the inflation trend to continue improving, reinforcing governor Kuroda’s views, and adding that the QQE programme is having the intended effects. The implication is that we are unlikely to see an expansion of the stimulus programme at the BOJ meeting later this month or even the rest of this year.
On the data front, China September trade numbers are due at 10am SGT.Meanwhile, BOJ minutes showed that most members expect the inflation trend to continue improving, reinforcing governor Kuroda’s views, and adding that the QQE programme is having the intended effects.
The implication is that we are unlikely to see an expansion of the stimulus programme at the BOJ meeting later this month or even the rest of this year. On the data front, China September trade numbers are due at 10am SGT.
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