In this briefing:
- Macro Debt Risks in China According to the PBOC
- FLASH: UK’s No-Confidence Vote in May Day
- China’s A-Share Market Comes of Age, Slowly
- China PPI: Food Prices and Steel
- US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct
1. Macro Debt Risks in China According to the PBOC
If there is one thing China is acutely aware of it is the debt risks. For many years, I questioned whether China even understood the enormity of its debt risks. Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks. It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later). However, they do clearly grasp the underlying risks of the debt buildup.
2. FLASH: UK’s No-Confidence Vote in May Day
- The threshold for a confidence vote in UK Prime Minister Theresa May has been triggered and will be held at 6pm GMT, with results available at about 9pm. I expect Conservative MPs to oust May now rather than be bound to keep her as Leader for another year.
- It is likely to be a close vote. Either way, the political outlook will change. Replacing Theresa May would take a few weeks and would raise the risk of a managed “no deal” Brexit, as candidates compete for the Eurosceptic membership.
3. China’s A-Share Market Comes of Age, Slowly
- The Shanghai-London Stock Connect is set to launch in December
- These new investment channels and MSCI inclusion transform a market long viewed as a casino
- Beijing’s distrust of markets still leaves shares subject to political whim
- Sheer size means China’s markets could dominate EM portfolios for years to come
- First-rate trading and settlement systems, but idiosyncratic listing procedures
- Institutional investors and foreigners still play a limited role
- High leverage has put wider economy at risk in event of a market crash
4. China PPI: Food Prices and Steel
The falling CPI and PPI matters for important reasons in that Chinese analysts are talking about potential deflation in 2019 absent stimulus. Overall the CPI increased 2.2% in YoY comparison. Food prices have slowed an overall increase, but some key sectors in food are sluggish and as a result a concern for us.
5. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct
Bond investors have recently joined their equity counterparts and raised the ante on the Federal Open Market Committee (FOMC) to pause further increases in the federal funds rate.
Despite the lack of sufficient evidence that economic growth has reverted to a more sustainable footing, bond investors have reverted to playing the long-standing game of chicken with the FOMC about the economy’s ability to withstand members’ estimate of the neutral federal funds rate.
Concerns about yield curve inversion have recently returned, but investors are struggling to adjust to a more normal environment where short-term interest rate volatility is no longer being artificially suppressed by Fed policy.
The persistently low term premium demanded by bond investors has boosted financial accommodation at any given policy rate level, thereby raising the risks that the FOMC may still increase the federal funds rate even after the yield curve has become inverted in order to achieve sustainable growth.
East Asian economies have imparted a downward bias on US inflation and bond yields over the past 25 years and have consequently pushed the Fed into adopting more accommodative policy settings over the aforementioned period.
The FOMC needs unambiguous evidence of slowing jobs growth towards levels that alleviate downward pressure on the unemployment rate before contemplating a pause in hiking the federal funds rate at the March FOMC meeting.
