June 6, 2018
United States:
Fed Hikes Augur Well for the World, South Africa’s Kganyago Says
The Federal Reserve tightening monetary policy is a sign that the U.S. economy is doing well, and that’s positive for the rest of the world, South African central bank Governor Lesetja Kganyago said. The Fed has communicated its monetary-policy intentions “very well,” Kganyago said in an interview Tuesday in Johannesburg. “If the Fed tightens policy because they think the U.S. economy is doing well and is growing — a U.S. economy that is doing well is good for the global economy.” The South African Reserve Bank’s seven-member Monetary Policy Committee unanimously decided to keep borrowing costs unchanged last month after easing in July and March. Expectations of further monetary-policy tightening by the Fed have been driving rand weakness, which is a key risk to South Africa’s price outlook, the MPC said. The Federal Reserve meets later this month and is expected to raise interest rates. Indian central bank Governor Urjit Patel made a plea to the Fed in an article in the Financial Times to slow the pace at which it plans to shrink its balance sheet to help emerging economies overcome recent market turmoil and avoid the possibility of a “sudden stop” for the global economic recovery. “You’ve got to think about yourself as a U.S. policy maker, with an economy that is at full employment and you’ve got to say to yourself ‘what do I do in this instance?’,” Kganyago said. “As a matter of principle, I prefer not to say what central banks must do, because I don’t want them to tell me what I must do.”
Europe:
ECB Chief Economist Confirms June Meeting Is Crucial for QE Decision
European Central Bank policy makers anticipate holding a pivotal discussion at their meeting next week that could conclude with a public announcement on when they intend to cease asset purchases, according to euro-area officials familiar with the matter. President Mario Draghi’s Governing Council is likely to treat the June 14 gathering in Latvia as an opportunity to debate winding down bond-buying, said the officials, who asked not to be named because such matters are confidential. Purchases are currently intended to run until at least September. While some members of the council see the session as a so-called live meeting — in which there’s a real chance of policy change — it’s possible nothing will materialize next week. Draghi may use his press conference to signal an announcement will come in July, one of the people said. An ECB spokesman declined to comment. Even just having the conversation though would be a significant leap forward on the path to unwinding unprecedented stimulus, after months in which the ECB avoided formally addressing the matter. In April, Draghi kept the Governing Council’s deliberations away from the future path of monetary policy despite a plea from Austria’s Ewald Nowotny to the contrary. The report prompted a rise in the euro on Tuesday, erasing earlier losses, and bund futures pared gains in the late European session. June may prove to be a critical opportunity for the central bank to show its confidence in the euro-area economy. While the pace of growth has slowed from last year’s decade high, the expansion remains intact and inflation jumped last month. The bond-market scare that hit Italy last week appears to be contained for now, meaning it’s unlikely to affect monetary policy. A June decision also has the advantage of being accompanied by fresh economic forecasts, which are published every quarter, should those predictions show output remaining robust and price growth gradually accelerating.
Asia:
Bonds in India Slide as RBI Raises Benchmark Rate, Rupee Climbs
Indian sovereign bonds slipped while the rupee climbed after the central bank raised its benchmark interest rate for the first time since 2014, but retained its neutral policy stance. Only 14 of 44 economists surveyed by Bloomberg News had predicted the Reserve Bank of India’s decision to increase the repurchase rate by 25 basis points to 6.25 percent. Thirty expected no change. The central bank also said it will grant more entities the right to short-sell securities and allow more players to participate in the when-issued market, as part of measures to improve regulation and deepen financial markets. Both sovereign bonds and the rupee turned volatile after the rate decision as traders read the fine print of the central bank’s statement. The yield on the benchmark 10-year notes jumped to as high as 7.93 percent, before paring its advance to 7.92 percent, up eight basis points for the day. The rupee was 0.3 percent stronger at 66.9250 per dollar, after swinging between gains and losses soon after the RBI’s announcement. Wednesday’s move “should not impact bond yields much, as they already are at elevated levels, thanks to demand-supply issues and expectations for a tighter policy,” said Gopikrishnan MS, Mumbai-based head of FX, rates and credit trading for South Asia at Standard Chartered Plc. A “dovish hike” is what Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc., termed the RBI’s move in a report. The decision to maintain a “neutral” stance suggests that the central bank does not want to signal that it is embarking on a tightening cycle and that it remains data dependent, they wrote. Indian bonds have already been battered by rising crude oil prices, a widening fiscal deficit and tighter cash conditions. Overseas funds are selling domestic debt at a record pace, while local state-run banks — the biggest buyers of sovereign bonds — are shunning the securities as they face mounting losses on their investments. The benchmark 10-yield rose 43 basis points in the previous two months.