*PBoC fixes yuan trading band at weakest level in five years; spillover effects limited:
PBoC set trading band for yuan on Wednesday at weakest level against dollar since March 2011. Midpoint fixed at 6.5693, 0.34% below prior session and largest depreciation since 19-May. Also worse than levels reached during January turmoil Yuan has depreciated ~1.3% against the dollar this month. However, spillover effects fairly limited as both spot and offshore yuan held up better. In addition, while there has been a renewed pickup in concerns amid the repricing of near-term Fed policy normalization expectations about the potential for a meaningful yuan depreciation, a recent WSJ article may have offered some reprieve. It highlighted Beijing’s flip-flop on yuan policy in favor of stability, citing concerns about capital outflows, competitive currency devaluations and debt servicing.
*Greece and creditors strike deal on debt relief and reforms:
Eurogroup announced multi-timeframe deal on Greece. Big area of focus has been on IMF concession to leave details on debt relief undecided until 2018. Agreement will allow €10.3B in aid to be disbursed over several installments. First €7.5B to meet debt servicing needs, with subsequent disbursements made after summer. Short-term involves smoothing EFSF loan repayments and reducing interest rate risk. Medium-term will depend upon implementation of reforms and revised debt sustainability analysis. Measures may involve Greece receiving profits on ECB’s Greek bond purchases under SMP. Some Greek loans may also be repaid early from unspent ESM money. If necessary there will be some targeted EFSF re-profiling, including extension of maturities and capping interest payments. As expected, no haircuts.
*Bullard talks about labor market, downplays election and Brexit complications:
Largely more of the same in terms of the latest Fedspeak. St. Louis Fed President Bullard, a current FOMC voter, noted that while a June or July move is not set in stone, data pointing to a labor market that is at or beyond full employment provides strongest signal for a rate hike. However, also pointed out that other data not as strong, noting tracking estimates for Q2 growth running at 1.6%, below the 2% trend growth expected. Downplayed need for Fed to wait for a meeting that has a press conference to tighten (note no press conference in July). Like other officials, also said Fed policy will not be influenced by the US presidential election. In addition, noted he does not consider Brexit vote the global financial market event that some are saying.
*Conflicting headlines surrounding Japan’s sales tax intentions:
More conflicting headlines surrounding Japan’s intentions for its sales tax, which is currently scheduled to increase to 10% from 8% in April 2017. Finance Minister Aso today confirmed reports that he told his G7 counterparts last weekend that Japan will proceed with the increase. However, Reuters noted that he dodged a question in parliament about whether that represented an official pledge. In line with a recent Nikkei article (and economist/market expectations, Yomiuri also reported today that Prime Minister Abe has decided to delay the increase. However, that report was denied by Chief Cabinet Secretary Suga, who reiterated that Abe will decide on the sales tax "appropriately at the appropriate time."
*China plans to ask Fed about rate hike timing:
Pickup in near-term Fed tightening expectations appears to have already triggered renewed concerns about the need for better coordination among global policy makers. Bloomberg, citing people familiar with the matter, reported that Chinese officials plan to ask their US counterparts at the annual US-China Strategic and Economic dialog talks scheduled for June 6-7 in Beijing about the chance for a Fed rake in June. Article noted that the Chinese delegations will try to deduce whether a June or July move is more likely in an effort to better prepare for the potential impact on financial markets and the yuan. Added that Beijing would prefer for the Fed to wait for its July meeting to move.
*More concerns about flat yield curve:
Risk assets have held up much better than many expected amid recent re-pricing of near-term Fed rate hike expectations. However, also talk the continued flattening of the yield curve may be signaling concerns about a policy mistake. WSJ latest to discuss this dynamic. Noted curve (2/10 spread) at 92 bp is flattest since late 2007 and about half its level from August 2014. Paper said message from bond market seems to be that while the US may be able to handle higher rates, the rest of the world cannot. Highlighted increasingly intertwined machinations of global markets and economies. Separately, a CNBC article wondered if the surprising strength of yesterday’s two-year note auction may have been partly due to concerns about the sensitivity of the US economy to higher rates.
PBoC set trading band for yuan on Wednesday at weakest level against dollar since March 2011. Midpoint fixed at 6.5693, 0.34% below prior session and largest depreciation since 19-May. Also worse than levels reached during January turmoil Yuan has depreciated ~1.3% against the dollar this month. However, spillover effects fairly limited as both spot and offshore yuan held up better. In addition, while there has been a renewed pickup in concerns amid the repricing of near-term Fed policy normalization expectations about the potential for a meaningful yuan depreciation, a recent WSJ article may have offered some reprieve. It highlighted Beijing’s flip-flop on yuan policy in favor of stability, citing concerns about capital outflows, competitive currency devaluations and debt servicing.
*Greece and creditors strike deal on debt relief and reforms:
Eurogroup announced multi-timeframe deal on Greece. Big area of focus has been on IMF concession to leave details on debt relief undecided until 2018. Agreement will allow €10.3B in aid to be disbursed over several installments. First €7.5B to meet debt servicing needs, with subsequent disbursements made after summer. Short-term involves smoothing EFSF loan repayments and reducing interest rate risk. Medium-term will depend upon implementation of reforms and revised debt sustainability analysis. Measures may involve Greece receiving profits on ECB’s Greek bond purchases under SMP. Some Greek loans may also be repaid early from unspent ESM money. If necessary there will be some targeted EFSF re-profiling, including extension of maturities and capping interest payments. As expected, no haircuts.
*Bullard talks about labor market, downplays election and Brexit complications:
Largely more of the same in terms of the latest Fedspeak. St. Louis Fed President Bullard, a current FOMC voter, noted that while a June or July move is not set in stone, data pointing to a labor market that is at or beyond full employment provides strongest signal for a rate hike. However, also pointed out that other data not as strong, noting tracking estimates for Q2 growth running at 1.6%, below the 2% trend growth expected. Downplayed need for Fed to wait for a meeting that has a press conference to tighten (note no press conference in July). Like other officials, also said Fed policy will not be influenced by the US presidential election. In addition, noted he does not consider Brexit vote the global financial market event that some are saying.
*Conflicting headlines surrounding Japan’s sales tax intentions:
More conflicting headlines surrounding Japan’s intentions for its sales tax, which is currently scheduled to increase to 10% from 8% in April 2017. Finance Minister Aso today confirmed reports that he told his G7 counterparts last weekend that Japan will proceed with the increase. However, Reuters noted that he dodged a question in parliament about whether that represented an official pledge. In line with a recent Nikkei article (and economist/market expectations, Yomiuri also reported today that Prime Minister Abe has decided to delay the increase. However, that report was denied by Chief Cabinet Secretary Suga, who reiterated that Abe will decide on the sales tax "appropriately at the appropriate time."
*China plans to ask Fed about rate hike timing:
Pickup in near-term Fed tightening expectations appears to have already triggered renewed concerns about the need for better coordination among global policy makers. Bloomberg, citing people familiar with the matter, reported that Chinese officials plan to ask their US counterparts at the annual US-China Strategic and Economic dialog talks scheduled for June 6-7 in Beijing about the chance for a Fed rake in June. Article noted that the Chinese delegations will try to deduce whether a June or July move is more likely in an effort to better prepare for the potential impact on financial markets and the yuan. Added that Beijing would prefer for the Fed to wait for its July meeting to move.
*More concerns about flat yield curve:
Risk assets have held up much better than many expected amid recent re-pricing of near-term Fed rate hike expectations. However, also talk the continued flattening of the yield curve may be signaling concerns about a policy mistake. WSJ latest to discuss this dynamic. Noted curve (2/10 spread) at 92 bp is flattest since late 2007 and about half its level from August 2014. Paper said message from bond market seems to be that while the US may be able to handle higher rates, the rest of the world cannot. Highlighted increasingly intertwined machinations of global markets and economies. Separately, a CNBC article wondered if the surprising strength of yesterday’s two-year note auction may have been partly due to concerns about the sensitivity of the US economy to higher rates.
Latest comments