China Will Usher In A New Policy Easing Window
Difficult to raise interest rates soon
US dollar exchange rate
Tend to oscillate
In March 18th, the Fed issued a statement in the policy statement that it would give up the "patience" to raise interest rates, making it possible for every interest conference to become a point of interest rate increase in the future. However, the Federal Reserve lowered the forecast of economic growth and inflation at the same time, with the growth limit from 3% in December 2014 to 2.7% and the core inflation interval from 1.5% to 1.8% to 1.3% to 1.4%.
In addition, the Fed officials' forecast of the federal funds rate dropped from 1.125% at that time to 0.625%, while Yellen's position at the next press conference was also enough to send doves, which led to a sharp retreat in the US dollar index on that day and a 1.8% drop in a single day.
At present, the US economic and inflation portfolio is still far away from the desirable goal of the fed when it enters the normalization of monetary policy.
On the one hand, from the economic point of view, the Citi economic accident index continued to decline to -72, and more industry, retail sales and real estate market data were lower than expected; on the other hand, from the inflation point of view, the consumer price index (CPI) in January showed a negative growth of 0.1%, while the 5 year inflation rate for 5 years was only 2%, down 50 basis points compared with the end of 2014.
Even the Fed's most concerned labour market index rose by only 4%.
Therefore, we expect the Federal Reserve to observe the economy before June. The first rate hike in the future will still be in September or even later.
Although the Fed's policy tends to dove, the dollar exchange rate will not continue to fall. In the coming months, the US dollar index will maintain a range of shocks around 100, which means that the yen and euro will become the main financing pactions in the foreign exchange market for a long time.
From the data point of view, the current 1 year Euro swap rate is -12 basis points, and the European Central Bank will carry out quantitative easing (QE) to September 2016, which means that the easing policy will be long-term and credible, which will inhibit the rebound of the euro exchange rate for a long time.
Relying on internal and external financial market environment
The unilateral appreciation of the US dollar slows down, which constitutes the external condition for stabilizing the RMB exchange rate.
In addition, internal factors supporting the strengthening of the RMB exchange rate are also increasing.
On the one hand, with more countries in the UK, France, Germany and other countries joining the China's Asian infrastructure investment bank before March 31st, the strategic plan for the "one belt along the way" will also be released. In the course of implementing the RMB internationalization strategy, the exchange rate needs to be moderately strong. On the other hand, with the recovery of the US and European economies, the "declining surplus" of our current account will remain high. The change in the private sector's expectation of the unilateral appreciation of the US dollar will increase foreign exchange, which will support the RMB exchange rate.
With the stabilization of the RMB exchange rate, it is still possible for the central bank to relax the fluctuation range of exchange rate to 3% during the year.
In consideration of
exchange rate
The 1 year RMB Repo interest rate has dropped by 50 basis points from the high point of 5.55%, and the offshore RMB exchange rate (CNH) has dropped to 50 near the 6.30 high point in early March. At the same time, the downward pressure on China's monetary policy is still very large. Prices in the real estate market are still declining, and sales rebounded slowly. In February, the price of the 100 cities reached 0.24%, 61 cities fell, and the average sales of 30 cities in the four cities increased slightly. The deflation pressure in the industrial sector was larger than that in February, and the industrial added value increased by 6.8% in February, while the producer price index (PPI) fell to 4.8% in the same period. Easing the pressure on domestic easing monetary policy from the offshore market
The two quarter will become a period of intensive China's easing policy.
In terms of monetary policy, we expect to cut interest rates by 25 basis points at the beginning of the two quarter. In addition, the Central Bank of China will release fairly 2 to 3 full scale monetary base through collateral Supplemental Loan (PSL), medium term structural convenience (MLF) operation and direct downgrading. In terms of fiscal policy, the policy will also tend to be positive. The government will revitalize its fiscal infrastructure, borrow from the "quasi finance" of the CDB, increase the central fiscal expenditure and other ways to maintain the growth rate of infrastructure construction around 20%.
"
interest rate
Curve upside down
Difficult to alleviate
From the point of view of monetary policy, we believe that after March, the central bank has begun to become more relaxed. This includes reducing the 7 day reverse repo rate by 10 basis points to 3.65%, continuing to do and increasing the amount of medium term structural convenience (MLF), but the 7 day repo rate Center is still around 4.8%.
We do not think that the future easing policy in the two quarter will guide short-term interest rates to come down effectively.
First of all, at the paction level, although the central bank's reverse repo can release the policy of easing policy, it is not the market interest rate decision maker because of the limited amount and discrete distribution of the open market. Similarly, although the central bank can create the basic currency through PSL and MLF, it is difficult for commercial banks to form stable expectations for the scale and timing of the funding. This makes the market participants mostly increase excess liquidity and reduce the efficiency of the lending market. Secondly, the stock market has a greater impact on the money market interest rate. On the one hand, the scale expansion of the two tier market plus leverage paction, the two financial balance in the middle of March reached 1 trillion and 340 billion, an increase of 30% compared with the beginning of the year, and the ratio of financing to buying accounted for 18% of the paction.
The high turnover of the paction or the increase of short-term financing needs; on the other hand, because the myth of "unbeaten new shares" has always existed in China, the expansion of IPO is frozen at more than 1 trillion and 500 billion yuan each time, which is also a major disturbance to the short-term interest rate. Finally, the Central Bank of China is unable to effectively identify paction or financing needs in the money market. Data show that in the second half of 2014, the average growth rate of commercial banks' repurchase balance is 20%, while the growth rate of generalized funds including credit cooperatives, funds and brokerages is as high as 57%.
From this point of view, the behavior of non banking financial institutions increased the fluctuation of money market.
Therefore, if the central bank does not restrict liquidity at low interest rates, it will undoubtedly increase the risk of excessive risk-taking by investors and make the financial market more vulnerable.
Based on the above, we still have doubts about whether the interest rate curve will return to steepy in the future.
Nevertheless, on the basis of higher short-term interest rates, it is also a sub optimal option for the government to increase the direct financing by increasing the supply of long-term bonds and stocks.
We maintain more than 1 trillion of the annual increase in IPO and so on through equity market financing.
The fourth quarter will be a period of intensive easing policy, including monetary policy reduction, reduction, acceleration of fiscal investment and relaxation of real estate sales.
Despite the strong performance of the stock market, total liquidity is still abundant, and the impact of leverage and initial public offering in financial markets is still a cautious trend for short-term interest rates to be downhill.
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