The Fed’s shrinking balance sheet is expected to be postponed, and China’s economic and fiscal stabilization is expected to exert force
After the release of the strong non-agricultural employment data last Friday, traders had high expectations for the Fed's announcement of a balance sheet reduction at the end of August.
However, the July US Consumer Price Index (CPI) announced on Wednesday did not exceed expectations, which may have bought time for the Fed to postpone its balance sheet reduction.
The U.S. CPI rose 5.4% year-on-year in July, the largest increase since August 2008, but it was unchanged from the previous value and rose 0.5% month-on-month, in line with market expectations.
"It is worth noting that in recent months, in the global semiconductor shortage environment, the price of second-hand cars, which has greatly pushed up price pressures, rose by only 0.2% month-on-month. This is an issue for Fed Chairman Powell and other officials who uphold'inflation is a temporary phenomenon'. The point of view is a major endorsement, which is expected to partially alleviate the pressure on the Fed to announce its balance sheet reduction plan at the Jackson Hole Global Central Bank Annual Meeting at the end of this month." City Index global research director Matt Weller told reporters.
Chief economists and strategists of overseas institutions interviewed by CBN reporters generally believe that the Fed will announce the reduction of the balance sheet at the FOMC (Federal Open Market Committee) meeting in September or November, and will officially start the balance sheet reduction early next year.
However, China will be even more "self-centered." Under the background of repeated epidemics, high export growth rates, and high inflation scissors, the outside world believes that macro policies are expected to loosen the margins and fiscal policies will be exerted. It is still controversial whether to cut the RRR or even cut interest rates.
The Fed's balance sheet reduction is likely to start early next year
Market sentiment has fluctuated with the recent intensive release of economic data-first the US ADP "small non-agricultural" was not as expected, and then there was an ultra-high July non-agricultural employment data of nearly 1 million, and then the June JOLT (job vacancies) And the labor mobility survey). The results were much better than expected. The forecast that the balance sheet was announced at the end of August, which was previously extinguished, was pushed up again, and the US dollar index broke through 93 in one fell swoop.
However, the latest inflation data is in line with expectations, not as much as expected in previous months, which also delayed the tightening expectations.
In July, the US CPI rose by 5.4% year-on-year, slightly higher than the expected value of 5.3%; it rose 0.5% from the previous month, which was in line with expectations; at the same time, the core CPI rose by 4.3% and 0.5% year-on-year and 0.5% respectively, in line with expectations.
The market responded to this.
The 10-year U.S. Treasury yield fell by 3 basis points to 1.34%; US stock index futures rose slightly; the US dollar index retreated 20 points from the resistance area of 93.20 to near 93; gold quickly rose by US$10 to US$1746 per ounce.
"Some traders originally expected inflation to become hot again, stimulating the Fed to announce its balance sheet reduction plan at the Jackson Hole meeting at the end of the month. But the data is only in line with expectations, and expectations may be lost." Weller said.
"We think the Fed will not announce the timetable for the reduction of the balance sheet until the FOMC meeting in September or November." Robertson, global chief strategist at Standard Chartered, previously told reporters.
"It is expected that the Fed may announce at its December meeting this year that the balance sheet will be reduced in January next year, but the interest rate hike is expected to be in the second quarter of 2023," said Robert Subbaraman, head of global macro research at Nomura. "As early as At the beginning of 2014, the Fed also said that it would start raising interest rates, but in fact the first rate hike started in December 2015, with a long interval."
It should be noted that despite the recurrence of the new crown pneumonia epidemic, inflation is not without concern. Rental prices are considered to be a “rising star” that promotes higher inflation in the United States. Therefore, the process of shrinking the balance sheet may continue.
CPI data in July showed that owners equivalent rent and rent increased by 0.29% and 0.16% respectively from the previous month. Although they have fallen back, they are quite sticky.
At the same time, industry data paints a more worrying picture.
The U.S. rent report released by the apartment rental website Apartment List shows that from June to July, U.S. rental prices increased by 2.5%, and the cumulative increase since 2021 has reached 11.4%.
The actual rent and landlord's equivalent rent accounted for about one-third of the CPI, and the U.S. Department of Labor's estimation model caused the rent to fluctuate or be later than industry data.
According to Mark Zandi, chief economist at Moody's Analytics, the current U.S. housing vacancy rate has fallen to a 35-year low and is still falling rapidly.
He expects that rental prices are likely to rise significantly in early 2022 and will become the biggest worry for persistently high inflation.
It is also worth noting that the U.S. Senate just approved the Biden administration’s $1 trillion infrastructure bill on the 10th, and the House of Representatives will hold a decisive vote on the plan in the next few weeks.
This fiscal stimulus package will also boost inflation and growth, and the "re-inflation transaction" may make a comeback.
For this reason, the Fed's appropriate "reduction" is still reasonable.
Thomas Costerg, senior American economist at Baida Wealth Management in Switzerland, told reporters a few days ago that although the widespread spread of the Delta mutation virus may cause market anxiety, given that property prices have risen sharply in an extremely loose financial environment, The Fed is expected to maintain its balance sheet reduction plan. It is expected to formally announce the balance sheet reduction at the December meeting and implement it in January 2022.
Given that the US Congress may have disputes over the debt ceiling and the federal budget in September, it seems too early to start shrinking the balance sheet in September, but the risk of starting the balance sheet reduction early still exists.
China's monetary policy is difficult to tighten and fiscal policy is more proactive
There is a view that, in the context of the tightening of the Fed, China may also further tighten its monetary policy, and the financial data in July fell short of expectations.
However, mainstream economists interviewed by reporters generally believe that even if the Fed tightens, the pace will be quite slow, the monetary environment will still be loose, and China will still be “mainly based on me”. There is no possibility of significant policy tightening, and fiscal policy is expected to exert force.
According to data released by the People’s Bank of China on July 12, new RMB loans increased by 1.08 trillion yuan in July, which was lower than the median forecast by economists of 1.2 trillion yuan, and hit a new low since October last year; the increase in the scale of social financing was 1.06 trillion yuan, 636.2 billion yuan less than the same period last year, and 1.53 trillion yuan expected; at the end of the month, broad money M2 increased by 8.3% year-on-year, which was also lower than the survey median value of 8.7%.
This seems unexpected in the context of RRR cuts.
Wu Zhaoyin, director of macro strategy at AVIC Trust, told reporters: "Seasonal factors may lead to lower-than-expected credit data-weak social financial data in July is a typical performance of seasonal characteristics. Generally, the first month of each quarter is relatively weak. , The third month is relatively strong. For example, more social financing in June is a seasonal feature."
He also mentioned that compared with the first quarter, the central government's view on the economy has slightly changed.
The Politburo meeting held on July 30 extended the overall judgment of the April 30 meeting on the "recovery of unstable and unbalanced domestic economy", and at the same time stated that "the external environment has become more complex and severe."
In addition, the "window period with less pressure to stabilize growth" has been deleted, which to some extent indicates that the government's view of the economy in the second half of the year is not as optimistic as in the first quarter.
Compared with the first quarter, the economy will face more uncertainty in the second half of the year, so the policy is more likely to loosen the margins rather than tighten.
The agency believes that the Delta mutant virus has accelerated its spread in recent weeks, affecting many provinces in China. The resurgence of the epidemic has impacted the catering, tourism and entertainment industries and put downward pressure on the GDP data in the second quarter. Therefore, policies may be more inclined to support the economy.
At present, most of China's population has been vaccinated, but the prevention and control measures have not slackened at all. Large-scale testing and targeted lockdowns have been carried out in some areas where the epidemic has occurred.
In addition, the latest import and export data show that the peak of external demand may have passed.
The export growth rate in July was 0.44% month-on-month, and the previous value was 6.63%. Various factors such as external demand and supply side led to a decline in export growth.
Affected by this, many banks, including Goldman Sachs, revised their forecasts for GDP in the third quarter.
These banks lowered their forecast for the third-quarter GDP annualized quarterly rate by 3.5 percentage points to 2.3%; and revised the GDP growth rate for the full year of 2021 by 0.3 percentage points to 8.3%.
"We expect China to increase policy support, including the second RRR cut by 50 basis points, as well as increasing the total scale of social financing and fiscal expenditures." Weller told reporters.
Ding Shuang, chief economist of Standard Chartered China, also told reporters that the LPR (loan market quoted interest rate) may also fall in the fourth quarter.
However, there are still controversies in the outside world regarding monetary policy.
Lu Ting, chief economist of Nomura China, told reporters: “After the 50 basis point reduction that took effect in mid-July, we believe that the possibility of another RRR cut does not seem to be high, or less than 50%. Even if it does. , It is also likely to be a targeted RRR cut.” He also believes that the probability of a rate cut is not high, and the central bank may choose to use lower-key open market operations and other tools to inject long-term liquidity into the market.
In terms of fiscal policy, the outside world has a consensus that there is room for force in the second half of the year.
For example, Lu Ting said: “We estimate that in the first seven months of 2021, the central and local governments will only complete 2.7 trillion yuan in net bond financing, and there will be 4.3 trillion yuan in the remaining five months. Therefore, local governments are expected to The rate of bond issuance will accelerate in the coming months."
Wang Qian, chief economist of the Asia-Pacific region of the Investment Strategy and Research Department of Investment Pioneer, also told a reporter from CBN: "China's fiscal policy should be more dominant in the second half of the year, because this is the source of credit demand. There are still 2/ 3 The local debt quota has not been used up, and debt issuance is expected to accelerate. I believe that monetary policy will continue to inject liquidity into the financial system in conjunction with fiscal policy, which may be through MLF (medium-term lending facility), reverse repurchase, or through a RRR cut We don’t think this is a large-scale policy easing. Its main purpose is to keep market interest rates stable and avoid liquidity shortages or credit crunch.” (Author: Zhou Ailin)