March 27, 2017

Policy announcements in China and Japan were similarly nuanced

The toning down of hawkish sentiments following the U.S. Federal Reserve’s widely-anticipated rate hike of 0.25% last week reveals an appropriate dovish outlook for the economy. Christian Nolting, Global CIO, Deutsche Bank Wealth Management, commented, “Despite a cautious ‘hawkish’ tone from Fed members in recent weeks, Janet Yellen was careful to remind investors last week that the FOMC has not changed its ‘views about economic risks,’ that monetary policy remains ‘accommodative’ and that the interest rate hike does not ‘reflect a reassessment of the economic outlook.’ This was apparent in the minimal changes to its outlook for economic growth and the accompanying dot plots.” Initial reactions to Yellen’s comments appear to reflect investor expectations that the Fed would adopt a more hawkish tone. On the day of the announcement, the 10YR Treasury yield fell ~12 bps from the start of the day (to an intraday low of 2.48%), while the U.S. Dollar Index fell ~1% and gold rallied ~2%. However, Deutsche Bank Wealth Management believes dampened sentiments are a welcome development. Nolting added, “U.S. economic data has come in better than expected, job gains have been solid and inflation is gradually rising. However, with tepid growth in consumer spending and looming political risks this year, we think that the Fed’s less aggressive tone may have been appropriate. Our base case remains that the Fed raises interest rates twice more this year, with the next hike coming in June.”

Japan

The Bank of Japan (BoJ)’s announcement on March 16 reaffirmed its dovish sentiments, with another commitment to expanding the monetary base until inflation (ex-fresh food) “exceeds 2% and stays above the target in a stable manner”. The BoJ’s rhetoric on its economic outlook also remains optimistic, expecting a “moderate expansion”. It is also confident that the improving labor market will boost consumer spending and it expects export growth expansion. The BoJ stated it will continue to keep an eye on Fed monetary policy, mentioning that this remains a key risk to its outlook.

China

In contrast, the People’s Bank of China (PBoC) unscheduled policy announcement on the same day saw China’s central bank hike 14- and 28-day reverse repo (money market) interest rates by 10bps each. During the meeting, the PBoC announced that it wants to maintain liquidity in the banking system, with RMB 303 billion having been injected into 17 mainland financial institutions via its medium-term lending facility. At the same time, China kept the main policy rates on hold, presumably concerned about the risks to domestic leverage if it tweaks them. The announcement followed the release of strong overall economic data for January and February, which showed that industrial production growth accelerated to 6.3% YoY, faster than the 6% achieved for the whole crude oil and steel industries saw notably stronger growth. Tuan Huynh, CIO APAC and Head of DPM APAC, Deutsche Bank Wealth Management, commented, “The data from China shows that overall economic momentum looks strong, boosting prospects that GDP growth in the first quarter will not deviate too much from the 6.8% YoY reported for the fourth quarter of 2016. However, property market risks continue to loom in the background.” Fixed asset investments grew 8.9% YoY in January and February, higher than the 8.1% growth last year, with infrastructure and property investments having boosted overall growth. This was a

In contrast, the People’s Bank of China (PBoC) unscheduled policy announcement on the same day saw China’s central bank hike 14- and 28-day reverse repo (money market) interest rates by 10bps each. During the meeting, the PBoC announced that it wants to maintain liquidity in the banking system, with RMB 303 billion having been injected into 17 mainland financial institutions via its medium-term lending facility. At the same time, China kept the main policy rates on hold, presumably concerned about the risks to domestic leverage if it tweaks them. The announcement followed the release of strong overall economic data for January and February, which showed that industrial production growth accelerated to 6.3% YoY, faster than the 6% achieved for the whole crude oil and steel industries saw notably stronger growth. Tuan Huynh, CIO APAC and Head of DPM APAC, Deutsche Bank Wealth Management, commented, “The data from China shows that overall economic momentum looks strong, boosting prospects that GDP growth in the first quarter will not deviate too much from the 6.8% YoY reported for the fourth quarter of 2016. However, property market risks continue to loom in the background.” Fixed asset investments grew 8.9% YoY in January and February, higher than the 8.1% growth last year, with infrastructure and property investments having boosted overall growth. This was also supported by a surge in petroleum and natural gas investments (95% YoY).