1. Fed officials appear split on whether to keep raising rates
The 2023 FOMC voting committee and Philadelphia Fed Chairman Harker said on Friday that “additional tightening” measures are needed to deal with high inflation, and that the inflation target will not be changed at present, and remains committed to the 2% level. He expects to hit his 2 percent inflation target by 2025. In addition, he believes that the U.S. economy remains strong, but expects U.S. GDP growth to be below 1% this year.
However, Fed Governor Cook’s statement on Saturday was slightly different. She believes that the pullback in commodity prices may not be a smooth process, and has so far supported a sharp increase in interest rates, but the previous crisis in the banking industry may weigh on the prospect of interest rate hikes. The path of interest rates may be appropriately lower.
2. U.S. Markit manufacturing services PMI unexpectedly rises in April
At 21:45 on April 21, Beijing time, Markit announced the initial value of PMI for the US manufacturing and service industries, which were 50.4 and 53.7, respectively, which were better than expected and the previous value, hitting a new high in 6 months and 12 months respectively. Chris Williamson, chief business economist at S&P Global Market Intelligence, believes that this is inconsistent with more and more signs of cooling demand. The higher PMI may explain why the core inflation is high, while the latest data shows that the annualized GDP growth rate is slightly above 2%. .
3. Fed megaphone: Banking chaos may not be over
“Fed megaphone” Nick Timiraos wrote that the extent of the economic hit from the reduction in loans may not be clear for several months. Smaller and mid-sized banks that have lost access to cheap funding due to deposit flight could face funding pressures. He quoted former Federal Reserve official Kaplan as saying that the situation across the United States is that small and medium-sized banks have either frozen the deposit-loan ratio, or are more likely to want to reduce the deposit-loan ratio. The current banking crisis “is in the second or third stages, not epilogues”. That makes it possible that the current turmoil is similar to the savings and loan crisis of the late 1980s, when hundreds of lenders failed. Problems persisted for several years, but the economy did not experience a recession until 1990.
4. ECB Governing Council Divided
Several European Central Bank management committees spoke out on Friday, among which Mahlouf and Rehn continued to insist on hawkish remarks, arguing that it is too early to suspend tightening policy and should not withdraw from tightening prematurely, but another management committee, Visco, believes that , We must pay attention to the risks of credit and financial stability, and we cannot raise interest rates too hastily.
5. Ministry of Commerce: China is willing and able to join CPTPP
Wang Shouwen, International Trade Negotiator and Vice Minister of the Ministry of Commerce, said that regarding China’s participation in the CPTPP, First China is willing to join the CPTPP. The report of the 20th National Congress of the Communist Party of China mentioned that China will further expand its opening up, and joining the CPTPP is to further expand its opening up. Second, China has the ability to join the CPTPP. We have conducted in-depth research on all the terms of CPTPP and assessed the costs and benefits China will pay for joining CPTPP. We believe that China is capable of fulfilling its obligations under CPTPP. Third, joining the CPTPP is in the interests of China, in the interests of all CPTPP members, and in the interests of economic recovery in the Asia-Pacific region and even the world.
Central banks have softened their hawkish tone following pressure on U.S. and European banks in March, pricing in lower interest rates. In our view, the size of the rate move that the market is currently pricing in seems overdone, but the current shift in central bank policy stance is consistent with past responses. There was a banking crisis before the global financial crisis, and 70% of the central banks cut interest rates within 6 months, which is also consistent with the current market policy expectations. Even if the banking crisis does not lead to economic recession, the probability of the central bank cutting interest rates It is also 4 times the interest rate increase. However, from a historical point of view, the rate cuts are still relatively moderate, and the cumulative rate cuts after 6 months are about 50-100 basis points. In addition, the rapid rate hikes and inflation levels before the crisis did not have a significant impact on the rate cuts. From our perspective According to the sample, there is no significant correlation between the central bank’s policy response after the banking crisis and the previous interest rate changes or inflation levels. However, the pressure on the banking industry in the United States and Europe has eased, and the market may have exaggerated the downside risk of future interest rates. Our model finds that banking stress generally depresses the interest rate path, and that the rate path responds more sharply to banking stress when stress begins to spread to other areas of the financial system or when central banks have stronger incentives to stabilize the financial system. Our model predicts that the path of interest rates in most economies will be moderately lower in 2023 due to banking sector stress, perhaps on average not as much as the market priced in in March. If the banking crisis does not lead to a recession, the divergence between the actual path of interest rates and market expectations may widen further. Overall, the current data support our view that the global interest rate hike cycle has come to an end, but the interest rate path priced by the market is too pessimistic.
After the end of the US tax season on April 18, foreign exchange markets should gain clarity in the coming days on the so-called “Day X”, when the US Treasury will run out of funds to meet its obligations, forcing the US Congress to decide whether to raise or suspend debt ceiling. The recent surge in short-term U.S. Treasury yields suggests that market uncertainty is growing, especially given that Congress remains divided. Historically, the months leading up to a debt ceiling deal have been negative for the dollar and risk sentiment, making currencies like the Australian dollar, Swiss franc and Japanese yen some of the top performers. Having said that, we also note that the USD will be the best performing currency when the debt ceiling collapse coincides with persistently weak US economic data or even a US recession. We therefore maintain our overall constructive view on the greenback over the next three months. However, we also think evidence that the Fed is sticking to its hawkish stance despite recent softer US data could weigh on risk sentiment, boosting the safe-haven dollar. This week the market focus will turn to the US core PCE data for March. We believe that more conclusive evidence is needed to show that the data is still sticky in order to improve the attractiveness of the dollar.
The Bank of Japan is among those being left behind as others continue to plan for an exit from easy policy. The bank’s interest rate decision on Friday will be the main focus of markets, with global markets highly sensitive to any possibility of even a minor policy surprise. This week’s Bank of Japan interest rate decision will be the first since new Governor Kazuo Ueda took office. While there is always the possibility of surprises – as we saw in December when former BOJ Governor Haruhiko Kuroda unexpectedly raised the 10-year yield target range from 0.25% to 0.5% – Kazuo Ueda is unlikely to do so at the moment, and probably won’t in the foreseeable future. If that forecast turns out to be wrong, the bond market could see serious volatility this week, as any policy change from the Bank of Japan could spill over into relevant markets, affecting U.S. Treasuries, gilts, European government bonds and every other major bond market.
A look at core CPI inflation in Japan suggests that the time may be ripe for a tightening of stimulus. The index recently accelerated to 3.8%, compared with 3.5% before the data and 3.6% expected. When combined with the fairly stable composite PMI (which could signal stronger GDP in the second quarter), this has driven the yen higher. In my view, we are still in the same place where the impact of the weaker yen and higher oil prices was in a temporary way The way pass through to the period of inflation. The BOJ’s research tends to show that these lagged effects can push up inflation for 1-2 years before fading away. The drop in oil prices since last June and the appreciation of the yen since late last year suggest that lagged downward pressure on inflation is likely to continue into later this year and into 2024. The lack of sufficiently strong wage support also hinders the sustainability of 2% inflation. Persistent. By that logic, I don’t think Kazuo Ueda will introduce any major policy shifts at this week’s meeting.
Predicting the timing of the BoJ’s exit from YCC is a difficult task. If the BOJ starts to steer the market by hinting at a steeper JGB yield curve, investors will immediately sell their bond holdings and the BOJ will be forced to throw in the towel. Therefore, we should not expect any clues from the BoJ, nor should we read too much into BoJ Governor Kazuo Ueda’s message of maintaining monetary accommodation. When discussing the BoJ’s entry into tightening mode, it’s important to remember that Japan, unlike other large economies around the world, has still not actually recovered from the pandemic. Despite the improvement, domestic private demand remained subdued due to pandemic-related lockdowns and higher inflation. After decades of deflation, premature policy tightening still risks returning the economy to deflationary or low-inflationary mode before a sustainable price-wage spiral is achieved. In our view, the BoJ will not tighten policy until it confirms a broad-based pay hike. Still, it’s a good balancing act, and we believe the BoJ will ultimately view the current situation as a good opportunity to finally loosen its grip on the yield curve. However, we also know that there is no consensus within the BoJ on the urgency of exiting YCC. We expect the BoJ to take a cautious approach and slowly widen the tolerance range for the 10-year JGB yield target at its June or July meeting. We think tweaking YCC is more likely than abandoning YCC entirely. We remain strategically bearish on the USDJPY, although we acknowledge that a relatively hawkish Fed and a dovish BOJ may pose upside risks to crosses in the near term. From a strategic point of view, our model shows that USDJPY is fundamentally overvalued, and the 3-month target price of USDJPY is expected to fall towards 127.