Macro communication and Thinking: monetary easing, enough to stop — constraints from capital outflow
Interest rate cuts may still come, and the range may shrink. The central bank official announced the implementation of the RRR reduction, but the intensity of this RRR reduction is the lowest in history. Even considering the adjustment of the upper limit of the benchmark deposit interest rate, the amount of funds released by this monetary easing may be less than the overall RRR reduction of 50bp. At present, the market is more concerned about the possibility and time of interest rate reduction. Last year’s adjustment of deposit benchmark interest rate gives two enlightenment: first, the reduction of MLF interest rate is not a prerequisite for interest rate reduction (LPR). Therefore, there should be interest rate reduction operation followed; Second, I’m afraid the range of interest rate cut will shrink, which is not symmetrical with the adjustment of deposit benchmark interest rate.
Easing has gradually stopped, and we should be vigilant against changes in the exchange rate. We believe that the monetary policy easing marked by the reduction of reserve requirements and interest rates may have gradually stopped. Under the premise of tightening monetary policy in developed economies, there is no room for continuous reduction of reserve requirements and interest rates, and the pressure of capital outflow or the unbearable weight of policy. Our neighbor Japan has made a leading demonstration. As a result, the exchange rate has depreciated significantly and there has been a significant outflow of funds. At present, the interest rate difference between China and the United States has been upside down, and the next more noteworthy will be the trend of RMB exchange rate. In fact, the relationship between China US interest rate spread (whether from the perspective of nominal interest rate spread or real interest rate spread) and exchange rate is not stable, and export growth is of decisive significance to the trend of exchange rate. In March, China’s export growth has been slightly weak, and in the case of the spread of the epidemic in April, the sealing and control measures continued to have an impact on production and logistics. The Chinese mainland’s container for the United States registered a -2% growth rate in March, the first time in 22 months, lower than the previous year’s level, and exports were down or dragging down the RMB exchange rate.
Outflow has intensified, restricting loose space. The depreciation expectation of the exchange rate has actually been reflected in the capital flow. According to the statistics of the International Finance Association, China bore the brunt of the net outflow of emerging market portfolio in March. It is also the first capital outflow in China’s stock market since September 2020. If monetary easing continues to increase, it may further aggravate the expectation of exchange rate depreciation and increase the pressure of capital outflow. In the short term, there is no room for continuous reduction of reserve requirements and interest rates. From past experience, although China’s history has gone against the Fed’s monetary policy, they all ended soon, and monetary easing is generally enough.
The rise of inflationary pressure is also a concern for easing. It should also be noted that inflation pressure has increased recently. The closure and control of the epidemic has brought logistics pressure and boosted the growth rate of prices. We expect that the CPI growth rate in April is likely to exceed 2%. Although price growth is not yet the main constraint of monetary policy, it is worried if it continues to be loose.
The bond market is cautious, and rights and interests win over consumption. RRR reduction is indeed good for the capital market in the short term, but if it means that monetary easing will come to an end for a while, remember not to be greedy. On the one hand, for the bond market, the effect of LPR interest rate change without MLF interest rate adjustment on the cost of capital is limited. If the epidemic situation improves and the interest rate level of foreign and American bonds in Shanghai is likely to rise further, the bond market still recommends caution; On the other hand, the performance of the equity market can still be expected, but the protagonist may not have benefited from more growth sectors that cut reserve requirements and interest rates in the past. At present, the direction of policy support has gradually switched from supply to demand. If the epidemic situation has peaked and the decline and steady growth is still the policy demand, consumption may be the opportunity in the year.
One week scan:
Epidemic situation: the epidemic situation in China is rising rapidly, and new diagnoses in the United States are on the rise. As of April 15th, Chinese mainland and Hong Kong, Macao and Taiwan had over 13 thousand cases and 5800 cases newly diagnosed in a week. At present, the newly confirmed cases in China are still concentrated in Shanghai and Jilin. The epidemic situation in Shanghai is rising rapidly, and the community transmission has not been effectively curbed, and the spillover is in many provinces and cities. The overall epidemic situation in Jilin Province is on a downward trend and is gradually liberalizing the social aspect. In the last week, about 6.45 million new confirmed cases of covid-19 pneumonia were recorded in a week, a decrease of 20.3% compared with the previous week. Japan’s new diagnosis reached a new high, and the epidemic in the United States continued to rise. There were about 21000 new deaths from covid-19 pneumonia worldwide, down 12.9% from last week. New deaths continued to rise in Germany and Thailand. Japan and South Korea have seen the first case of infection with a new strain of virus. The United States has tightened the ban on masks, and South Korea has cancelled covid-19 epidemic prevention measures. Economies stepped up vaccination, Pfizer may launch covid-19 vaccine against Omicron polyvariant.
Overseas: the US CPI growth rate “broke 8”, and the European Central Bank accelerated its exit from QE. As US prices continue to be on the “edge of losing control”, most Fed officials are open to raising interest rates by 50 basis points at the May meeting. Brennard, the voting Committee of the Federal Reserve, said that the Federal Reserve would make a decision on the scale reduction as soon as possible, and the scale reduction might begin in June. Fed Balkin said that if faced with a longer period of inflation, the Fed will need to tighten policy more than ever before. Japan still maintains monetary easing. The European Central Bank accelerated its exit from QE, and many central banks raised interest rates to fight inflation. According to the minutes of the European Central Bank meeting, many members believe that the current high inflation level and its persistence require immediate further measures to normalize monetary policy. Europe and the United States increased sanctions against Russia. Russia Ukraine negotiations reached an impasse. Russian President Vladimir Putin said that Kiev had broken away from the previous consensus. The growth rate of CPI in the United States in March “broke 8”, a new high since December 1981. The growth rate of retail sales in the United States hit a 13 month low in March.
Prices: Shenzhen Agricultural Products Group Co.Ltd(000061) wholesale prices fell and international oil prices rose. This week, the Shenzhen Agricultural Products Group Co.Ltd(000061) wholesale price index of the Ministry of agriculture fell month on month, with the average price of 28 key monitored vegetables falling and 7 key monitored fruits rising. The average price of Brent crude oil and WTI crude oil rose month on month this week, the average price of China Shipbuilding Industry Group Power Co.Ltd(600482) coal was stable, and the average price of rebar fell.
Liquidity: the short-term capital interest rate fell and the US dollar index rebounded. The short-term capital interest rate fell this week, the weekly average of dr001 fell 17.5bp month on month, and the weekly average of dr007 fell 10.1bp month on month; The weekly average of 3-month Shibor interest rate and 3-month certificate of deposit issuance interest rate decreased. The interest rate of bills declined, and the weekly average of 1-month, 6-month and 1-year rediscount interest rate of state-owned shares and silver bills fell. This week, the central bank conducted a total of 60 billion yuan of reverse repo and 150 billion yuan of MLF operations in the open market. This week, the central bank’s open market has a total of 40 billion yuan of reverse repo, 150 billion yuan of MLF and 70 billion yuan of treasury cash deposit due; Next week, 60 billion yuan of reverse repo will expire in the central bank’s open market. The dollar index rebounded this week and the RMB fell slightly.
Performance of major categories of assets: A shares fell and treasury bond yields rose. Most of the global stock markets fell this week, led by Nasdaq, and the main indexes of the A-share market fell, with the small and medium-sized board index and gem index falling the most. The top three sectors in which Chinese stocks rose this week were coal, food and beverage and commercial trade. This week, the weekly average yield of 10-year Treasury bonds rose by 1.4bp, and the weekly average yield of 10-year CDB bonds rose by 0.5bp.
Risk tip: policy changes, economic recovery is less than expected.
