It was a fairly lively overnight session on the heels of the Fed.
We start in China where the PBoC imported themselves a rate hike, although not “officially.” As you may or may not be aware, Beijing has essentially shelved policy rates in favor of repo rates when it comes to tightening. Thursday’s hike…
- PBOC RAISES INTEREST RATES IN OPEN-MARKET OPERATIONS
…looks like it might have been an attempt to kill the arb between interbank rates and OMO rates. The PBoC hiked the cost of seven-, 14- and 28-day reverse-repurchase agreements by 10 basis points each to 2.45%, 2.6% and 2.75%, respectively. This is the second 10bps hike in two months.
And another look:
(SocGen)
“The odds of more rate hikes in open-market operations are rising with the PBOC voicing arbitrage concerns,” Goldman Sachs wrote, adding that “OMO rates are still meaningfully below market rates even after Thursday’s rate increase.” Here’s what Goldman means:
(SocGen)
The yuan gave back some of its post-Fed gains on the news:
“More flexible interest rates can help deleveraging, curb bubble and prevent risks,” the PBOC said. “Market participants already had relatively strong expectation on higher OMO rates based on China’s economy rebound and Fed rate hike.”
Well no. If “market participants” had “relatively strong expectations on higher OMO rates,” it was because i) you hiked them last month, ii) you can’t use policy rates for fear of bursting a giant debt bubble, and iii) you have to figure out a way to stamp out speculation and delever without tanking the economy, and one way to do that is to try and stealth tighten via repo rates. Of course it’s nice when the Fed gives you an opportunity to effectively hike rates without hiking rates. Here’s how SocGen explains it:
Fed’s policy and US-China interest rate differentials do play a role in PBoC’s consideration. It may not be a very big role, as offering 10bp for every 25bp from the Fed is at best half-hearted help to the RMB. However, the Fed’s action offered the PBoC a timing to make the move, appearing to support the argument that the interbank rate hikes are “following the market”.
Meanwhile, the BoJ was a laugh-a-thon, as usual. To be sure, nothing was expected, and nothing was delivered:
- BOJ MAINTAINS POLICY BALANCE RATE AT -0.100%
- BOJ MAINTAINS 10-YEAR JGB YIELD TARGET AT ABOUT 0.000%
But it’s always Kuroda that provides the excitement. And by excitement, I mean entertainment. Just scan these headlines and try to appreciate the how many punchlines this man manages to cram into an otherwise bland meeting:
- Kuroda Says Appropriate to Continue With Current Policy Settings
- Kuroda: Momentum for getting to 2% price target not strong enough
- Kuroda: To continue increasing monetary base until goal reached
- Kuroda: Will adjust policy as needed
- Kuroda: Japan’s economy is recovering gradually
- KURODA: CHANCES OF CUT IN NEG. RATE NOT ZERO IF EASING NEEDED
- Kuroda Says Economic Risks Are Tilted to Downside
- Kuroda: U.S. economy is growing steadily
- Kuroda: FED policy not having bad effect on emerging markets
- Kuroda Syas U.S. Rate Rise Won’t Have Direct Effect on BOJ
- Kuroda: Can’t just talk about bilateral rate differentials
- Kuroda: Japan’s yields won’t rise just because those of U.S. rise
- Kuroda: Japan’s yields won’t rise because it has BOJ’s yield curve control policy
- Kuroda says he doesn’t think monetary policy effects are weakening
- KURODA: NO PLANS TO RAISE RATE JUST BECAUSE CPI HITS 1%
- Kuroda Says No Plans to Raise Rate Just Because CPI Hits 1%
- Kuroda says he doesn’t think global yield rises will force the BOJ into a rate hike
- Kuroda: Yield curve control policy is working
- Kuroda says he doesn’t think there is any chance that the BOJ loses control of yields
I mean he’s a marvel of Keynesian insanity. He is the embodiment of “I’ve got my story and I’m sticking to it, goddammit.”
And it’s a good thing we “can’t just talk about bilateral rate differentials,” because that’s certainly something a lot of folks are going to want to start talking about given the BoJ’s commitment to keeping JGB 10s anchored at 0% in the face of rising yields globally. Here’s SocGen’s take:
The Bank of Japan decided to maintain its current monetary easing programme with yield curve control at its monetary policy meeting held on 15-16 March, in line with what most market participants had anticipated. Recent economic data continues to confirm that Japan’s economy is turning to the upside as uncertainties in the global economy and markets have started to recede and corporate activity is starting to recover. However, we continue to expect that the BoJ will not raise its long-term target for the time being and will increase its purchase amounts to suppress yields at the 0.0% target. We think CPI will need to grow above 1% and the USDJPY to weaken to the 120 level before the bank moves towards increasing its target rate, which will likely be met sometime in 1Q18. With Prime Minister Abe likely to remain in power for some time yet, we expect the BoJ’s current easing framework to continue alongside the other policies of ‘Abenomics’. We expect the long-term yield target over the mid-term. As economic conditions improve, we expect the JGB yield curve to steepen. This should help support financial institutions, leading to increased lending activity. This in turn should also help corporates invest and releverage, thus helping Japan resume its move towards a complete exit from deflation.
Lot’s of “shoulds” and “expects” in there.
In any event, here’s your overnight Asia wrap:
- Nikkei up 0.07% to 19,590.14
- Topix up 0.09% to 1,572.69
- Hang Seng Index up 2.1% to 24,288.28
- Shanghai Composite up 0.8% to 3,268.94
- Sensex up 0.5% to 29,542.85
- Australia S&P/ASX 200 up 0.2% to 5,785.79
- Kospi up 0.8% to 2,150.08
