Tagged: BOJ

The Day Today 19 Feb 2015

* ECB give Greece an extra 3.3bn EUR in ELA, to be reviewed in 2 weeks

* Fed Minutes: prefer to keep rates lower for longer (Hilsenrath), and dollar strength “expected to be a persistent source of restraint” on exports
* They also discussed looking at “trimmed mean measures of inflation” as deflation has been focused on a “narrow range of items in households’ consumption basket”

* US Economic surprise index at its lowest for 2 yrs

* Japan’s LDP finance panel chief Shibayama: “I don’t think the reflationary policies are bad, but we’re in a tight spot right now with nationwide local elections just two months away”

* S&P warns Australia’s AAA rating under pressure, due to commodity price fall

What happens to Japan when everyone else is doing a Japan

Strange things are afoot in the Japanese bond market. Yesterday, China cut the reserve ratio requirement for banks by 50bp, the first RRR cut since May 2012 (the third of the BRICs to ease this year, following India’s surprise January 25bp cut and Russia’s 200bp cut last week). We already know that yields are plummeting in the developed economies. But not Japan. The sell off has continued ever since the spike following the ECB QE decision. 10 year yields have doubled from their 0.22% lows (see 1st chart), while the 5yr has snapped back aggressively from trading at negative yields to just over 0.10% today:

10yr JGB 5yr JGB


What is going on?

Re-allocation looks like a large part of the answer. The Government Pension Fund announced last year that it would be moving away from JGBs to assets with higher yields; insurance companies can’t meet their payouts at negative rates so they are moving into riskier assets (Dai-ichi Life insurance is looking at real estate); and ECB QE means that you can find better yields elsewhere, in a market where you know a central bank will be buying right behind you.

The thing is, this wasn’t really supposed to happen. The BOJ are also right behind everyone, after unexpectedly upping their QQE programme last October. As you can see from the charts, JGB yields merrily plummeted from that point onward. But it looks like there comes a point when other parts of the market just decide that they’re better off out of it, and go looking elsewhere for yield. That point would appear to come when the middle of the curve trades at negative rates. What is the point of buying a 5 year bond with a sub-zero yield? Better to move further out the curve… but then what if the 10year isn’t yielding much more for the extra 5 years? Then you go looking for other assets.

This should be a warning for Germany. Their 5 year has been trading in negative yield territory since the middle of January, even before QE was announced:

Germany 5yr

You can see that it’s been bobbing around zero ever since. Meanwhile the 10year is coming down – currently at 0.34% it’s not quite at Japan’s 0.22% levels, but it’s not that far off:

Germany 10y

Now, part of the attraction of QE for Europe is what Draghi calls the “portfolio” effect, where it shifts investors into riskier assets, thus kickstarting lending etc. But what if the growth and reflation isn’t there when that happens? Is this where Japan now finds itself? If it is, what could Japan do?

Last night a new appointment to the BOJ board was made: Yutaka Harada, who wrote a book called “Reflationist Economics Saves Japan”. He believes so firmly in the power of reflation that he pointed out in the book that Japan’s suicide rate reached its peak in the 2000s, concluding “If the economy gets better, we can save one-third of those committing suicide”. In a 2002 Bloomberg interview he said “If the BOJ buys all of the bonds from Japan’s debt market, that will create inflation without a doubt. That’s it.”

So perhaps we may see some renewed easing efforts from the BOJ…. without that, Yen strength will be back on the radar as Abenomics First Arrow fails.

The Day Today 21 Jan 2015

* Bill White, the man who predicted the financial crisis, warns the current situation is even worse: “We are holding a tiger by the tail”; and that more QE won’t work: “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?”

* Greece deposit flight continues: 1bn on Monday, 850m on Tues (the record in 2012 was 2.8bn) – total deposits now 152bn, vs 150.5bn in 2012

* NZ inflation turns negative for first time in 2 years, -0.2% in Q4, unch was expected

* BOJ cut their inflation forecasts, increase their GDP forecasts, say “inflation expectations appear to be rising on the whole from a somewhat longer-term perspective”

* QE is already working? Spain issues record amount at record low: 10 yr at 1.66% yield, down from 4% a year ago

* How investors are positioned for QE (according to SG survey):
– 70% expect QE, of amounts from EUR 500bn-1trn
– Euro and bonds both not yet pricing it in
– More sellers of EUR/USD rallies than buyers – expecting 1.1000
– 19% expect Grexit
– Peripheral bond yields – some expect to fall by another third

* ML Fund Manager Survey:

– Lowest cash levels in 6 months, despite vol
– 72% expect ECB QE
– 45% see oil as undervalued, the most in 6 years
– Fed hike seen in Q3 from Q2 in the last survey

* Poland launches enquiry into Swiss mortgages: 550,000 Polish homeowners hold $36bn worth of CHF mortgages

* The National Futures Association is considering whether to review leverage limits for FX trades

The New Year’s Day Today

Over the holiday, main stories: Greek elections now coming in Jan; ECB debate continues: Knot says no proposal for sovereign QE yet but Praet says current measures not enough and there will be negative CPI prints for a number of months that they can’t look through; Spanish CPI missed estimates, -1.1% YoY vs -0.7% exp; Chicago PMI lower than exp but US Pending Home Sales better —

* Draghi getting the argument lined up for ECB QE: “The risk that we do not fulfill our mandate of price stability is higher than six months ago,” ….”We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this.”
* He also says anyone leaving the Eurozone would cause difficulties for all of the members, and Europe must “complete” monetary union

* Tspiras has been wooing investors as apparently we’re not worried about SYRIZA anymore

* Last year’s 3 Fed dissenters rotate off the voting panel this year

* BOJ Kuroda confirms again how committed he is to reflation: “There are plenty of ways to adjust monetary policy”

* Headache remains for Merkel over the rise of anti-immigration sentiment – she now directly attacks supporters of the anti-Muslim marches, though 29% of people support them

* Russia props up various companies with capital injections: Yamal LNG, Gazprombank, VTB

Singapore’s slower-than-expected Q4 growth signals weaker outlook for 2015

* HSBC think China will cut rates twice in H1


Hands up if you’re not easing

So China cuts rates for the first time in 2 years, Abe stakes his political reputation on aggressive stimulus in Japan, and Mario Draghi rolls out another speech to bounce the ECB into action. A little more digging, however, and it’s not quite as straightforward as the free money party of 2009 onwards. It’s easing, Jim, but not as we know it …

1. China’s rate cut
Societe Generale’s excellent China economist, Wei Yao, points out that the rate cut doesn’t actually manifest itself as a rate cut, for two reasons:
(i) Although the depo rate was cut to 2.75%, the limit that  banks can charge over this was raised from 1.1 times to 1.2x. So, they went from (1.1 x 3%) to (1.2 x 2.75%), which, as you very mathematically abled readers will now, amounts to the same number!
(ii) The lending rate was also cut, but the lower bound to that rate was removed a year ago. So there was nothing to stop banks lending at lower rates anyway.

Deutsche point out that rate cuts haven’t always done much for Chinese stock markets anyway:

China stocks DB
Having said all of that, it’s clearly a signal.. but one that chimes with policymakers’ cautious comments this year so far, such as Premier Li’s September statement that “There is already a lot of money in the pool. We cannot rely again on increasing the supply of currency to stimulate economic growth”. So how much store should we set on the Reuters sources this morning who claim that “Top leaders have changed their views”?

2. Abenomics Take 2
Blondemoney is very optimistic on the steps being taken by the Japanese authorities, which are bucking the historical trend. Previously, the BOJ hiked only after the Nikkei had fallen 40-50%; this time it’s easing after a 30% rally:

NKY monthly

However, there is a roadbump to overcome first, and that’s the snap election itself. Japan Today reports that Abe’s support has fallen further, now at its lowest levels since he took office, at 39% (down 3 pct pts). Nearly two-thirds of voters say they don’t know why the election is being called. However, given the electoral set-up and general support for the LDP, he is still likely to win. But these kinds of headlines won’t make it easy for the market in the run up to the election.

3. ECB action ahoy!
Draghi’s speech on Friday was as clear as it could be that more needs to be done:
A low reading for core inflation for such a period of time indicates that it is not only temporary factors that are operative: underlying demand weakness is also playing a role’
The firm anchoring of inflation expectations is critical under any circumstances, as it ensures that temporary movements in inflation do not feed into wages and prices and hence become permanent. But it is even more critical in the circumstances we face today.’
If further monetary stimulus is needed, central banks need to by-pass the money market and intervene directly in other asset markets’
[QE in US and Japan] led to a significant depreciation of their respective exchange rates’
‘through these portfolio balance effects the central bank can also expect to have a strong signalling effect’
we are committed to recalibrate the size, pace and composition of our purchases as necessary to deliver our mandate. This is why the Governing Council has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed’

Draghi is looking at this chart of 5y5y EU inflation expectations, and knows he has to turn it around:

EU 5y5y

So far, so QE. But in his conclusion, Draghi fires an arrow off into the fiscal authorities – i.e. the Eurozone politicians:
the aggregate fiscal stance of the euro area has to be consistent with our position in the cycle…. And as investment does not only create current demand, but also future supply – by raising growth potential – appropriate structural policies are also a key part of the policy mix. We need to create a business environment where new investment is attractive. And this in turn would also help monetary policy to reap its full effects.’

Note the three words he uses right at the end of his speech: ‘For our part, we will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.‘ Yes, they are doing their bit. Will the politicians do theirs? Will they interfere with what the ECB need to do? This is a question mark hanging over ECB action.