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Action Insight: Special Reports

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USD Index Stays Undervalued, Despite Soaring Rate Hike Hopes Print E-mail
Special Reports | Written by | Aug 29 16 11:30 GMT
Fed Chair Janet Yellen's speech last Friday lifted speculations of additional policy rate hike later this year. Last Friday, CME's 30-day Fed funds futures priced in 33% chance of a hike in September, up from 21% before the speech. The chance of a hike in December soared to 59%, up from 51.8% Thursday. Yellen has turned more upbeat on the Fed's monetary policy outlook, mainly driven by stronger employment situation and household spending. As she indicated, "in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook".
Deepening Deflation Adds Pressure To Further BOJ Action Print E-mail
Special Reports | Written by | Aug 26 16 10:38 GMT
Japan's deflation persisted for a fifth month in July. Core CPI (excluding fresh food) worsened to -0.5% y/y in July to -0.4% a month ago. Core CPI (excluding food and energy) narrowed to +0.3% y/y from +0.5% in June while core CPI (excluding fresh food and energy), a barometer that BOJ prefers, also narrowed to +0.5% y/y in July from +0.7% in the prior month. Looking at leading indicators, Tokyo's core CPI deflation stayed at -0.4% y/y in August while the core CPI (excluding food and energy) softened to +0.1% y/y this month, from +0.2% in July. As the deflation trend continues, BOJ is under pressure to add further stimuli imminently. Lower energy cost is the key driver of deflation. As we can see, inflation excluding energy remained in the positive territory. That said, downward price pressure is broadly based with food, household goods and clothing prices declining. Elevated Japanese yen has been restraining domestic demand.
Rally in LIBOR Due to Regulatory Change... to Continue as Rate Hike Hopes Increase Print E-mail
Special Reports | Written by | Aug 25 16 13:31 GMT
The 3-month USD LIBOR has been surging recently, rising to a 7-year high of 0.83 earlier this week. The move is mainly due to SEC's regulatory change aiming at making money-market funds safer, increasing transparency and containing the fallout that could result from many investors cashing out at once. As the effective date (October 14) of the new regulations approaches, supply of US dollar shrinks as investors flee the US$2.7 trillion US money market funds which buy short-term corporate and municipal debts. They are shifting a large amount of their holdings out of prime and municipal funds and into government funds.
RBNZ Affirms Further Easing Would Not Be Aggressive Print E-mail
Special Reports | Written by | Aug 23 16 05:53 GMT
RBNZ published a speech, titled 'Monetary policy faces challenges in turbulent times', written by Governor Graeme Wheeler but delivered by Assistant Governor John McDermott to the Otago Chamber of Commerce, earlier today. The key message is that the central bank does 'not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easing'. We retain the view of another cut of -25 bps in November, and probably one more in 1H17.
ECB Cautioned over Heightened Uncertainty after Brexit Print E-mail
Special Reports | Written by | Aug 18 16 14:17 GMT
In its account of the monetary policy meeting in July, ECB warned that uncertainty has increased since UK voted to leave EU on June 23. The central bank believed that this "could affect the global economy in deeper and less predictable ways than through the direct trade channel". Yet policymakers believed it was prudent to spend more to gauge its impacts and as a result left the deposit rate unchanged at -0.4% and the main refinancing rate at 0%. ECB also maintained the asset purchase of 80B euro per month until March 2017 or beyond, if necessary.
FOMC Minutes Unveiled Divided Views Over Next Rate Hike Print E-mail
Special Reports | Written by | Aug 18 16 04:37 GMT
The FOMC minutes for the July meeting unveiled that members were divided over the monetary policy outlook. While a 'couple' of members called for an immediate rate hike, others preferred to see economic and inflation grow more sustainably. Bear in mind, however, that, the meeting was held before the strong August employment report and 2Q16 GDP data were released. Policymakers’ judgments were mainly based on the June employment report (which was strong, though), a number of 2Q16 macroeconomic data as well as the immediate aftermath of the EU referendum. Bets on a December rate hike dropped modestly after the minutes.
RBA Confident That Rate Cut Would Boost GDP Growth Print E-mail
Special Reports | Written by | Aug 16 16 08:07 GMT
The RBA minutes for the August meeting confirmed that the -25 bps rate cut earlier this month was mainly driven by appreciation in Australian dollar. the central bank acknowledged that cost pressures had been subdued and weak domestic inflation would likely continue for the next 2 years. Policymakers appeared more confident over a cool down of the housing market, suggesting some estimates of property prices have been overstated. The central bank kept the door open for further easing.
China Adds More Evidence On Economic Slowdown Print E-mail
Special Reports | Written by | Aug 12 16 07:51 GMT
China's latest set of macroeconomic data reconfirmed economic slowdown. In July, industrial production growth slowed to +6% y/y in July from +6.2% a month ago, fully reversing the acceleration in June. Retail sales expanded 10.2% y/y in July, easing from June's +10.6% and weaker than consensus of +10.5%. The biggest drag was petroleum sales with decline in global prices. Growth in car sales and household goods remained resilient, though the paces of both moderated. The former was supported by government subsidies while the latter was driven by the strong housing market.
RBNZ Cut OCR, NZD Soars! Print E-mail
Special Reports | Written by | Aug 11 16 07:13 GMT
RBNZ cut the OCR by -25 bps to 2% in August, as the market widely anticipated. It suggested that global economic developments have been below trend and some central banks have adopted further easing of late. More importantly, it noted that the trade-weighted index (TWI) of exchange rate is 'significantly higher' than that was projected in June, making it difficult for the central bank to achieve its inflation target. The accompanying statement is dovish with guidance that 'further policy easing will be required to ensure that future inflation settles near the middle of the target range'. The staff revised lower the inflation expectations, and revised higher the NZD TWI. Kiwi climbed higher after the announcement as the rate cut had been fully priced in.
RBNZ Rate Cut Fully Priced In. Dovish Statement Might Hint More Easing Print E-mail
Special Reports | Written by | Aug 10 16 05:49 GMT
The market has fully priced in a -25 bps cut in OCR by RBNZ in August. Three weeks ago, RBNZ's unscheduled 'Economic Update' has already set the tone for a move this month. Indeed, given the persistent strength in New Zealand dollar and stubbornly subdued inflation, many are expected one more cut in November. A dovish RBNZ statement this month should give more hints. While the strong housing market price might be a factor hindering monetary easing, the central bank has anticipated the macro-prudential measures would take effects. Meanwhile, RBNZ's proposal of broadening current Auckland LVR limits in mid-July is another move to restrain housing price rally, paving the way for further rate cuts.
BOE Cut Rate, Expanded QE, Trimmed Growth Forecasts Print E-mail
Special Reports | Written by | Aug 04 16 13:36 GMT
BOE voted unanimously to cut the Bank rate by -25 bps to 0.25% in August. The members generally expect more reduction later this year. Falling to the upper end of our forecast, it also expanded the asset purchase program by +70B pound to 445B pound, of which 60B pound is for the purchases of government bonds over 6 months and 10B pound for sterling non-financial investment-grade corporate bonds purchases over 18 months. The members were split on QE measures with 6-3 vote (Kristin Forbes, Ian McCafferty and Martin Weale dissented) in favor of increasing the government bonds purchases and 8-1 vote (Kristin Forbes dissented) in favor of corporate bond purchases. Policymakers also added a 100B pound loan program for banks. The staff trimmed the GDP growth forecasts for 2017 but upgrade the inflation outlook, expecting it to breach the +2% target by the end of next year. British pound plunged as the measures came in more than the market had anticipated. GBPUSD had fallen as much as -1.6% to 1.311 while EURGBP had risen as much as +1.1% to 0.849 after the announcement
BOE Rate Cut Almost Certain, QE Expansion Closely Watched Print E-mail
Special Reports | Written by | Aug 03 16 08:54 GMT
We expect BOE to cut the Bank rate, by -25 bps, to 0.25% in August, followed by further reduction to 0% by year-end. Policymakers would also likely to expand asset purchases by 50-75B pounds. As noted in the July meeting minutes, 'most members expected monetary policy to be loosened in August' and the Committee had 'an initial exchange of views on various possible packages of measures'. A move has been widely anticipated. The issue is the scale of the package and how extensive the package is. The minutes would unveil members' different opinions and concerns which would affect the size and the timing of the package. Policymakers would likely downgrade UK's growth forecasts.
RBA Cut Cash Rate To 1.5% Print E-mail
Special Reports | Written by | Aug 02 16 06:39 GMT
RBA lowers the cash rate, by-25 bps, to 1.5% in August. Policymakers attributed the decision to ease further to the stubbornly low inflation. They also indicated that the impact of lower interest rates on the housing market would be limited. Policymakers anticipated that “overall growth is continuing at a moderate pace, despite a very large decline in business investment”. AUDUSD slipped to 0.749 after the announcement but the recovery to above 0.75 was swift. Aussie’s rebound from Monday’s -0.8% drop would be quite strong, had RBA kept it powder dry this month.
Chinese Manufacturing Sector Fell To Contraction In July Print E-mail
Special Reports | Written by | Aug 01 16 10:34 GMT
The official (NBS) manufacturing PMI for China slipped to 49.9, a reading below 50 indicates contraction, in July from 50 in June. The market had anticipated a flat reading. Separately, Caixin's manufacturing PMI recovered to the expansionary trajectory for the first time since February 2015. The reading rose to 50.6 in July from 48.6 a month ago. The market had anticipated a mild improvement to 48.9. A key difference between NBS’ official PMI and Caixin’s is that the former tracks large and state-owned companies while the latter focuses smaller-scale private firms. Another difference is the sample size with NBS and Caixin PMIs covering 3 000 and 420 firms respectively.
RBA On Crossroad Print E-mail
Special Reports | Written by | Jul 29 16 08:22 GMT
Better-than-expected underlying CPI in Australia might buy RBA some time before rate cut. Headline CPI increased 0.4% q/q in 2Q16, after contracting -0.2% a quarter ago. From a year ago, CPI moderated to +1% from +1.3% in 1Q16. This also missed expectations of +1.1%. However, RBA' s trimmed mean core CPI accelerated to +0.5% q/q, and +1.7% y/y, in 2Q16, from +0.2% and +1.7%, respectively in the first quarter. The readings beat expectations of +0.4% q/q and +1.5% y/y. The weighted median of core CPI came in line with expectations, improving to +0.4% q/q, from +0.1% in 1Q16. From a year ago, the reading steadied at +1.3%. Yet, core inflation remained soft in the second quarter and should continue to pressure RBA to ease further later this year.
BOJ Under-Delivers… Print E-mail
Special Reports | Written by | Jul 29 16 07:28 GMT
To our, as well as the market's, disappointment, BOJ announced fewer than expected stimulus measures in July. The central bank voted 7-2 to raise ETF purchases to an annual pace of about 6 trillion yen, from 3.3 trillion previously. All other measures stayed unchanged: BOJ will purchase Japanese government bonds (JGBs) at an annual pace of about 80 trillion yen .It would also purchase J-REITs, CP and corporate bonds, at annual paces of about 90 billion yen, about 2.2 trillion yen and about 3.2 trillion yen, respectively. The IOER rate stayed unchanged at -0.1%.BOJ also trimmed its CPI forecasts, indicated in its quarterly report. This came in below our expectations of an IOER rate cut to -0.3%, and acceleration the qualitative part of its QQE by raising purchases of ETFs and J-REITs from the current 3 trillion yen and 9 billion yen, respectively. The market is obviously disappointed with Japanese yen soaring to a 2.5-week high of 102.85 against USD at one point before recovery.
Fed Stays Put, Turns More Hawkish, Thanks To Job Market Improvement Print E-mail
Special Reports | Written by | Jul 28 16 06:51 GMT
FOMC voted 9-1 to leave the Fed funds rate unchanged. However, policymakers sent a more hawkish message, citing stronger labor market and household spending growth. They also noted that near-term risks to the economy have diminished. Yet, they remained concerned about inflation and inflation expectations. The Fed left the door open for a rate hike this year. In our opinion, the chance of a September hike has increased but the Jackson Hole symposium on August 26 should send a more definitive signal about the next move. We expect Chair Janet Yellen to send a firmer message about a September hike by then.
BOJ To Add More Stimuli In July, No Helicopter Money For Now Print E-mail
Special Reports | Written by | Jul 27 16 11:08 GMT
We expect BOJ to add more stimuli at the July meeting. First, it would trim the rate of interest on excess reserves (IOER) to -0.3% from the current -0.1%. Second, it would also accelerate the qualitative part of its QQE by raising purchases of ETFs and J-REITs from the current 3 trillion yen and 9 billion yen, respectively. For now, it is more likely that the pace of JGB purchases (quantitative part of QQE) would stay unchanged at 80 trillion yen per year. Although speculations of helicopter money stimulus have pressured Japanese yen recently, we do not expect any announcement of this kind would be made this month. On inflation expectations, policymakers might revise lower slightly their forecast for the next fiscal year. Measures to boost economic growth and inflation in Japan include also fiscal policies. Prime Minister Shinzo Abe has on Wednesday announced a economic stimulus plan worth of 28 trillion yen, including 13 trillion yen of fiscal measures. Media source suggests that the package would be compiled next week but no information on the size of new spending has been unveiled.
ECB Left Rates Unchanged; Discussed about Backstop for NPLs Print E-mail
Special Reports | Written by | Jul 21 16 14:34 GMT
As widely anticipated, ECB left the deposit rate unchanged at -0.4% and the main refinancing rate at 0%. The central bank also maintained the asset purchase of 80B euro per month until March 2017 or beyond, if necessary. When asked about if ECB has considered changing the terms of its asset-purchase scheme, to avoid it running out of government bonds to buy, President Mario Draghi noted that it's too early to assess the need for fresh measures and policymakers might consider the situation at the September meeting. A key topic of the press conference is Brexit. Draghi indicated markets have coped the situation "relatively well". He added that Eurozone financial markets have "weathered the spike in volatility with encouraging resilience". Despite rigorous questions about Brexit's impact on Eurozone's outlook and ECB's monetary policy outlook, Draghi refrained from giving any hints about the next move. Banks shares were boosted by the President's call for public backstop to help banks shed their bad loans.
RBNZ Signals Rate Cut In Near Future Print E-mail
Special Reports | Written by | Jul 21 16 07:26 GMT
RBNZ in its unscheduled 'Economic Update' signaled a rate cut would adopted in coming months. The central bank warned that stronger-than-expected NZD would weigh on exports demand and pressure tradable goods inflation. Policymakers suggested while the global economic growth prospects have 'diminished', especially after the Brexit referendum, domestic growth would remain supported by factors including migration and accommodative monetary policy. Risks to the outlook, however, are skewed to the downside. RBNZ pledged to maintain accommodative monetary policy and suggested that 'further policy easing will be required'. We expect RBNZ to cut OCR by -25 bps in August.
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