Mizuho daily – Fret or Fed? China’s Dual Circulation Challenges, RBA Minutes: No novelty, just nuances

By Vishnu Varathan, Head of Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

Fret or Fed?

Moods darkened on Wall St, denting equities fractionally (down 0.2% to 0.4%), and for all appearances, investors once again fret the ravages of inflation; even as the Fed soothes. The plethora of data thrusting conspicuously promiscuous cost pressures is unnerving investors; accordingly, 10Y UST yields crept higher towards 1.7% (break-evens towards 2.6%).

Fed Vice Chair Clarida assuaging concerns with allusions to economic recovery “not made substantial further progress” appears to have had limited effect on lifting spirits. Possibly as markets now fret the cost pressure squeeze on margins and erosion of consumer budgets rather than dismiss cost ramifications on the Fed’s policy accommodation fix.

Softer real yields nudged USD lower, but EUR and AUD checked ahead of 1.22 and 0.78 while USD/SGD dips below mid-1.33 are clearly shallow on caution. USD/JPY slip towards 109 supported.

China’s “Dual Circulation” Challenges

To be fair, China’s activity data were not outright disappointing; especially in the context of larger regional misses amid resurgent Covid (and attendant restrictions imposed). In fact, supply-side production activity continues to hum away nicely (even if flattered by base effects), while investments remain robust; even if still tilted to the property sector.

And it was not the pinpointed miss in retail sales in and of itself that is the cause of worry. The miss could imaginably derive from a shift to online consumption not fully captured in comparable retail sales data and/or reflect some caution in response to Covid resurgence.

But what is indeed worrying as trend is the inertia in shifting over to the “dual circulation” model. Specifically, rebalancing growth to domestic consumption, away from exports and non-productive investments (such as property).

Arguably, the biggest worry is that tweaks to credit policy to promote “dual circulation” (dissuading property investments to nudge consumption) may have unintended adverse effects on (cross-) default risks and sentiments; insofar it is misconstrued as indiscriminate tightening.

It is the nuances of execution in, not the novelty of, “dual circulation” that challenge.

RBA Minutes: No Novelty, Just Nuances

Nothing ground-breaking expected from RBA Minutes given all signs point to policy thinking is for a prolonged hold, consistent with a longer assessment required for a bumpy recovery. And sure enough, the RBA has set the stage to comfortably sit on its hands for a while, having;

i) extended QE (by another A$100bn) to last through Sep 2021;

ii) committed to YCC (with 3Y AGBs target at cash rate of  0.10%), and;

iii) cash rate committed to prolonged (almost ZIRP) 0.10%.

Moreover, RBA speakers all appear to align on the bottom-line that policy stimulus will not be withdrawn prematurely without first assessing whether the economic recovery holds up into, and beyond the fiscal fade.

So much so that property bubble risks are discounted. That being the case, and with the development in global Covid outbreaks tilting towards retarding the pace of recovery outside of the US and UK, the RBA is even more likely to hunker down to wait and watch for more.

So really, no novelty in RBA Minutes for May.

But three nuances will be of interest if revealed. First, how much AUD upside/volatility may be overlooked amid boost from buoyant commodities.

Second, the options and preferences for the RBA in bracing for and insulating against any yield volatility spilling over from USTs in this climate of heightened inflation concerns.

Finally, appetite for QE ramp-up if yield volatility turns too disruptive for YCC’s single anchor.

To be fair, none of these nuances may be elucidated. But truly the devil lies in the details.

Source: Mizuho Bank Ltd