Economists Think Fed Will Wait Until September to Raise Rates The Federal Reserve will likely start raising short-term interest rates in September, according to most private economists polled in recent days by The Wall Street Journal–a significant shift away from earlier predictions of liftoff in June.
China inflation misses Beijing target Subdued demand and falling oil prices pull CPI below goal
China’s consumer price index maintained a sluggish year-on-year pace of 1.4 per cent in March, the same rate as in February, according to the government’s official figures.
Producer prices deflated for a 37th consecutive month in March, falling 4.6 per cent, versus a 4.8 per cent fall in February. (…)
By one alternative measure, China’s retail price index, consumer prices are already in deflation, with a contraction of 0.3 per cent in January, followed by a fall of 0.1 per cent in February. March figures are due out in the coming days.
The RPI does not include prices of services or rents or items such as utilities that are distorted by government price controls.
Deflationary pressures are unlikely to disappear in the near term, with data showing the official CPI fell 0.5 per cent on a month-on-month basis, following a 1.2 per cent increase in February.
China Finally Gets Cheaper Credit Borrowing costs in China seem finally to be edging down. While more easing is in store, it may not be as aggressive as stock market investors seem to believe.
Banks are flush with cash; China’s seven-day interbank lending rate fell to 3% Friday, the lowest level since October. The average this year through March was 4.3%. (…)
Weak Chinese demand is causing price declines in many metals. On a Bloomberg Intelligence trip, a construction slowdown was evident in idle cranes, empty sites and unfinished projects. New starts fell 10.7 percent in 2014; they’re down again 17.7 percent so far this year.
Metals demand deteriorates as China slows its infrastructure building and transforms to a consumer economy. Chinese domestic steel demand fell 3 percent to 4 percent in 2014 and is off 3.4 percent during 2015 to date.
Homes for 3.4 billion people are planned for a country of 1.3 billion — illustrating a plague of exorbitant spending that has spurred government to aim for more centrally planned, slower growth. Over-development of real estate may have caused a massive glut which will take years to absorb.
China traders say the exit of large western banks from the commodities business is threatening liquidity in the Asian metals trading system. Meanwhile, a seasonal surge in Chinese steel demand in March after the annual Lunar New Year celebrations was small this year and quickly reversed. This may bode poorly for any rebound in the short term.
Delivered Iron Ore Prices Have Retraced Entire Gain Since ’09
(…) The decline in commodity and oil prices has hit the export revenues of some key EM countries such as Brazil and Russia, while the strong US dollar has exacerbated outflows of capital from several leading EMs, including China, Thailand, Malaysia and South Korea. Such net capital outflows are expected to increase, according to analysts. (…)
Capital Economics, which monitors preliminary data from 46 emerging markets, expects average EM economic growth in the first three months of the year to decline to 4 per cent year on year, down from 4.5 per cent in the fourth quarter of last year — the lowest level since 3.9 per cent in the final quarter of 2009.
Referring to separate estimates of average growth in gross domestic product, Felix Huefner, chief economist at the Institute of International Finance, said the year-on-year expansion rate for EMs would be 3.4 per cent in the first quarter, down from 3.8 per cent in the final quarter of last year and 4.6 per cent in the first quarter of 2014.
Meanwhile, Chris Williamson, chief economist at Markit Economics, said: “EM GDP growth will slip below 5 per cent in the first quarter, which would be the weakest pace of expansion since the third quarter of 2009, according to our analysis of official data.”
(…) Brazil’s economic growth rate, for instance, appears to have slumped to a negative 1.24 per cent in the first quarter, down from a negative 0.3 per cent in the fourth quarter of last year, he said. China’s expansion rate may decline to 6.82 per cent, from 7.3 per cent in the fourth quarter. Mexico, a relative EM bright spot, could see a slide from 2.6 per cent in the fourth quarter to 2 per cent in the first.
The Crazy, Pragmatic New World of Bond Yields The only thing crazier than the idea that governments are getting paid to borrow money, is the realization that there’s a rational explanation for it. That’s the state of the capital markets today.
That’s the state of the capital markets today, where Switzerland sold 10-year debt on Wednesday that had a negative interest rate, and Mexico sold a 100-year bond, denominated in euros, with a yield of only 4.2%.
“If financial theory is grounded in one principal, it’s the ‘time value of money,’ or the idea that individuals prefer consumption today over consumption in the more uncertain future,” Russ Koesterich, global chief investment strategist at BlackRock, wrote in a Tuesday note. “In order to encourage the deferral of consumption, borrowers must pay lenders, and it has always been assumed that interest rates are ‘bound at zero.’ But as has repeatedly been the case since the financial crisis, the theory is being challenged by the practice.”
Global benchmark rates on 10-year government bonds, as seen in the table below, are hitting all-time, and in some cases multi-century, lows. Germany pays a paltry 0.16% on 10-year notes, and has paid negative rates on maturities up to five years. Ireland, Italy, Spain, and Portugal all are paying lower interest rates than the U.S. Only Greece’s 11% rates keeps all of Europe’s economic basket cases from having lower rates on their debt than the U.S.
But the bond sales in Switzerland was the big eye opener. No government had ever issued a bond with a maturity of 10-years or longer at negative rates. “Why would anyone pay to lend money?” Mr. Koesterich asked rhetorically. The answers revolve around “the unusual economic environment prevalent in Europe.”
The first issue is deflation. If you expect prices to fall, then negative nominal rates could possibly turn into positive real rates. Also, if you expect rates to keep coming down, you may be betting that you can sell the bonds at a profit sometime before they mature. With European bond yields so low, U.S. debt looks attractive by comparison, and this he noted is helping keep U.S. rates down. The capital flows coming with that, moreover, are helping to keep the dollar strong. “The last six years have involved a non-stop guessing game of how low interest rates would go. Most of us assumed that there was a lower bound. It turns out we were wrong.”
So, what’s it all mean? On the one hand, you can look at the current landscape and find pragmatic reasons for buying government debt that carries negative interest rates, for lending the government money, and paying it for the privilege rather than it paying you. On the other hand, all this business about negative rates to us is another piece of evidence supporting what our Michael Casey wrote earlier this week: “The bond market is malfunctioning.”
No bulls, no bears!…
Iranian stocks go nuclear!
Ayatollah Ali Khamenei, Iran’s supreme leader, has accused the US of distorting the nuclear framework agreed with world powers. Washington‘s fact sheet about the framework, agreed last week after months of negotiations, was “mostly against reality” and contained a “narrative … [that] is distorted … to save face”, he charged. (FT and BBC)
Iran’s main gripe is that it wants sanctions lifted “on the first day” of the final deal’s implementation. That’s not what the US wants, but are the interests of Tehran and Washington closer than many think? (FT)