Fed/ECB/BOJ Monetary Policy In Shambles. How To Play It?

WEEK AHEAD | 19 OCT 2014
Fed/ECB/BOJ Monetary Policy In Shambles. How To Play It?
Our quick geopolitical matrix on oil prices
At start of 4th CC Plenum, China steps up "targeted easing"
Fed/ECB/BOJ monetary policy in shambles. How to play it?
What to do when easy no longer does it?
Source: Yahoo.com
Source: Irishtimes.com
Source: WSJ
From the US Fed's website: Economic research at the Federal Reserve Board is conducted primarily within the
Division of Research and Statistics, the Division of Monetary Affairs, and the Division of International Finance.
Together, the three divisions have approximately 450 staff members, about half of whom are Ph.D. economists. ...
Board economists produce a wide variety of economic analyses and forecasts for the Board of Governors and the
Federal Open Market Committee.
The 12 regional Federal Reserve banks employ an additional 200 Ph.D economists.
The geopolitics of oil prices - a quick and dirty matrix: OPEC, of course, is a cartel. A cartel, by definition is about
fixing prices. Saudi Arabia is the most powerful OPEC member. So, why has Saudi Arabia not only permitted but
abetted the drop of oil prices below $85?
Cui bono?
Source: Bloomberg
The answer is straightforward: The opportunity for political and economic gain created for the Saudis and parties
aligned with their interests by USD strength and a supply glut to engineer a sharp and sustained oil price drop was
simply too good to pass up. Simply take a look at the winners and losers of the move.
Losers: The IS "caliphate," Russia, Iran, US shale oil producers. Winners: US consumers, Western Europe, Japan, oil
net importers generally.
And the Saudis, you might ask? - Well, they lose a bit on the income side. But they surely love to see IS and Iran take
it on the chin. More importantly, they please their allies, Western Europe and the US, by mauling Russia and, as a side
benefit, contain the progress of US shale producers. As for the stance of the Obama administration, hurting IS and
Russia is good; helping the US consumer ahead of a difficult election is good; hurting shale oil producers is a matter of
indifference at best.
Any more questions? -- For now and "as long as it takes" (to borrow a famous phrase), $85 oil is here to stay
and dips lower are eminently possible.
Markets, strategy: Global markets tanked last week, Japan's the most as the yen added nearly four big figures. Look
no further than principal central banks' cluelessness and fickleness for an answer. Let's start with fickleness, i.e.,
uncertainty. James Bullard, head of the St Louis Fed, said the US Federal Reserve should carry on with its asset
purchases in October, instead of halting them as scheduled. Andy Haldane, Bank of England chief economist,
indicated he was "minded" to keep interest rates “lower for longer” to ensure the BoE did not damage the recovery. Of
course, as recently as June, Mark Carney, Bank of England governor, had led market participants to expect the central
bank would raise interest rates from their 0.5 per cent floor as early as November.
Markets, naturally, rose on Friday on such pronouncements ... and as Fed funds futures indicated that a first Fed rate
hike would not come in June of 2015 as the FOMC had led markets to believe prior to its September meeting, but in
November 2015 at the earliest.
US 5y breakevens surely don't support early rate hike expectations
Source: Bloomberg
But the policy scandal (and fraud visited upon US taxpayers who pay US$100 mn a year for nearly 500 (!!!) Federal
Reserve System Ph.D. economists) is that central bankers, whether in the US or Europe or Japan, simply can't get
their numbers right, make one overly optimistic economic forecast after another, apparently have no clue about the
relationship between their unconventional monetary policies and the real economy, and therefore time again mislead
How do you play this mess? - The US economy is growing by about 2%; numbers higher than that are plain
nonsense, lower is possible. Europe is not growing. Japan is growing by 1%. China is growing by 7.3% (our
3Q forecast). None of this is great. But none of it is disastrous. Now, after rescinding its idiotic optimism, the
Fed is thinking again about rescinding QE. Pay no attention. Go by the growth numbers. Go by the realistic
notion that interest rates will be low and liquidity adequate to high. With that, moderate stock market gains
remain quite feasible ... and China is your best bet.
China -- as we go into the October 20 - 23 CC 4th plenum: After injecting RMB500 bn into the country's five largest
banks last month, China's central bank is continuing its "targeted easing" approach by injecting RMB200 bn into 20
smaller banks and by guiding interbank rates lower. The expected effect of the injection is the equivalent of a 20bps
cut in RRR and will deliver a reassuring stimulus to the economy, notably the property market. It is clear that the
government does not want to go into the Communist Party Central Committee plenum having to face inconvenient
questions on economic growth when there will be plenty of questions - at least behind the scenes - on the anticorruption campaign, on Hong Kong and on the overall economic reform process.
Another reason for the stabilizing PBOC fund injection is to assure financial stability and adequate liquidity to underpin
the success of the Shanghai - Hong Kong through train (officially now Stock Connect) stock market project.
We will report details of the CC plenum "live" over the coming 4 days.
Corporates Received Bulk of New Loans
Bank lending in China ended the 3Q on an upbeat note as regulators boosted credit supply to the corporate sector in a
bid to enhance support to the real economy. Business borrowing has rebounded significantly in the past two months
and accounts for the lion’s share of September’s larger-than-expected RMB857 bn in new loans as personal lending
continued softer from a year ago. That and the concurrent contractions in trust loans and undiscounted banker’s
acceptances drive home our view that Beijing is willing and capable of expanding the banking sector’s balance sheet
in order to thwart shadow financing.
Chief Strategist
Head of Research
T +852 2843 1474
uparpart @reorientgroup.com
Research Director
Chief China Economist
T +852 2843 1464
[email protected]