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Daily Market Report for 24 July 2014: Kiwi Tumbled After Reserve Bank of New Zealand (RBNZ)’s Rate Hike On Wheeler’s Warning
Economic Insights
China manufacturing Purchasing Managers’ Index (PMI) bolstered the Aussie, but Kiwi dropped on Wheeler’s comments
China HSBC manufacturing PMI flash reading rose to an 18-month high in July after various easing measures kicked in. Now it looks more realistic that the country stands a high chance to reach its full year growth target of about 7.5%. The preliminary manufacturing PMI is 52.0, topping all the earlier forecasts, even that of our earlier forecast at 51.1, which was already pretty optimistic comparing to most of the houses. Chinese stocks rallied and the Yuan rose to a three-month high, as the report suggested stimulus implemented this year including expedited infrastructure spending is supporting growth.
China flash manufacturing PMI
It’s not impossible for us to see the targeted stimulus this year. China may take further steps to revive the property and mortgage markets after home sales dropped YoY in 30 key cities every month this year and prices dropped YoY in 55 out of 70 cities in June. The country is already set for its first mortgage-backed debt sale in more than six years and the People’s Bank of China (PBOC) in May called on lenders to speed up mortgage approvals. The nation’s eight biggest banks hold 7.4 trillion Yuan of mortgages, mainly led by China Construction and Bank of China.
China’s economic growth accelerated for the first time in three quarters in 2Q, reaching 7.5%. The pickup was aided by easing measures, including PBOC liquidity injections, looser loan-deposit ratio rules and cuts in reserve requirement ratios for small and medium enterprises (SME)- and rural-focused banks. These steps may also support bank lending in 2H and government efforts to meet a 7.5% full-year growth target despite the fact that we had a higher growth base in 2H last year.
Credit issues could be solved in the near term as well. China is working on rules for managing and winding up failed banks, including ways of protecting deposits and ensuring the orderly repayment of financial liabilities, Bloomberg News stated. The move highlights the growing financial stress among the local lenders. Listed banks’ bad debts rose 15% YoY in 1Q, while the reserve-coverage ratio dropped to 264% vs. 283% in 2Q13 and 273% in 1Q13. Bad-debt reserves were equal to 21% of sector Tier 1 capital.
In New Zealand, the RBNZ hiked the rate to 3.5%, however the Kiwi slumped. New Zealand’s central bank signalled a pause after its aggressive rate tightening since beginning of the year. Kiwi tumbled the most in six months.
Governor Graeme Wheeler said that it is prudent that there now be a period of assessment before interest rates adjust further toward a more neutral level after raising the official cash rate by a quarter-percentage point to 3.5%. The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.
Wheeler said while inflation remains moderate, strong economic growth is absorbing spare capacity and adding to domestic price pressures. The speed and extent of further rate increases will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.
RBNZ OCR (white) vs. NZ CPI YoY (yellow)
Economic Insights
China manufacturing Purchasing Managers’ Index (PMI) bolstered the Aussie, but Kiwi dropped on Wheeler’s comments
China HSBC manufacturing PMI flash reading rose to an 18-month high in July after various easing measures kicked in. Now it looks more realistic that the country stands a high chance to reach its full year growth target of about 7.5%. The preliminary manufacturing PMI is 52.0, topping all the earlier forecasts, even that of our earlier forecast at 51.1, which was already pretty optimistic comparing to most of the houses. Chinese stocks rallied and the Yuan rose to a three-month high, as the report suggested stimulus implemented this year including expedited infrastructure spending is supporting growth.
China flash manufacturing PMI
It’s not impossible for us to see the targeted stimulus this year. China may take further steps to revive the property and mortgage markets after home sales dropped YoY in 30 key cities every month this year and prices dropped YoY in 55 out of 70 cities in June. The country is already set for its first mortgage-backed debt sale in more than six years and the People’s Bank of China (PBOC) in May called on lenders to speed up mortgage approvals. The nation’s eight biggest banks hold 7.4 trillion Yuan of mortgages, mainly led by China Construction and Bank of China.
China’s economic growth accelerated for the first time in three quarters in 2Q, reaching 7.5%. The pickup was aided by easing measures, including PBOC liquidity injections, looser loan-deposit ratio rules and cuts in reserve requirement ratios for small and medium enterprises (SME)- and rural-focused banks. These steps may also support bank lending in 2H and government efforts to meet a 7.5% full-year growth target despite the fact that we had a higher growth base in 2H last year.
Credit issues could be solved in the near term as well. China is working on rules for managing and winding up failed banks, including ways of protecting deposits and ensuring the orderly repayment of financial liabilities, Bloomberg News stated. The move highlights the growing financial stress among the local lenders. Listed banks’ bad debts rose 15% YoY in 1Q, while the reserve-coverage ratio dropped to 264% vs. 283% in 2Q13 and 273% in 1Q13. Bad-debt reserves were equal to 21% of sector Tier 1 capital.
In New Zealand, the RBNZ hiked the rate to 3.5%, however the Kiwi slumped. New Zealand’s central bank signalled a pause after its aggressive rate tightening since beginning of the year. Kiwi tumbled the most in six months.
Governor Graeme Wheeler said that it is prudent that there now be a period of assessment before interest rates adjust further toward a more neutral level after raising the official cash rate by a quarter-percentage point to 3.5%. The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.
Wheeler said while inflation remains moderate, strong economic growth is absorbing spare capacity and adding to domestic price pressures. The speed and extent of further rate increases will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.
RBNZ OCR (white) vs. NZ CPI YoY (yellow)