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Hawkish Fed Pauses CNY Slight Rebound

Contributed by Jeff Cheah, Strategic Sales Manager


Fed’s Hawkish Pause Expected in FOMC Meeting this Week | skip to SGD/CNY

U.S. Labor Department data showed that core CPI excluding food and energy rose 0.3% m/m in August, slightly higher than the 0.2% increase expected by economists surveyed by Dow Jones. The figure increased 4.3% from the same period last year, in line with expectations. Overall data rose 0.6% last month, in line with Dow Jones' forecasts. The prices rose 3.7% y/y, higher than economists' expectations of 3.6%. The core consumer price index accelerated m/m for the first time in six months. The y/y growth rate of the U.S. CPI rebounded for the second consecutive month and hit the largest m/m increase in 14 months. This is expected to affect the judgment of the upcoming FOMC meeting this week, which is now increasingly divided, on the direction of future interest rate policy.

The retail sales and producer price index (PPI) data released by the U.S. last Thursday were both higher than expected, while the number of initial jobless claims also continued to remain at a low level, indicating that while the U.S. economy continues to show strong resilience, the possibility of a return of high inflation risks in the future still lingers.

Sales at U.S. retailers rose 0.6% in August, with much of the increase tied to rising gas prices, data showed, despite sluggish sales at internet stores following Amazon.com Inc.'s Prime Day promotions. Retail sales account for about one-third of all consumer spending, so the performance of the U.S. retail sales indicator, known as the "horror data", often provides cues about the strength of the economy.

In terms of prices, the U.S. Producer Price Index (PPI) rose 0.7% from the previous month in August. Gasoline prices soared by 20%, which was the main reason for the increase in PPI. These reports, coupled with last Wednesday’s CPI prints indicate that U.S. households and businesses are still feeling the impact of rising price costs.

Separate data released last Thursday showed that the number of people filing for unemployment benefits remained low last week, indicating that companies are still reluctant to lay off workers. After adjusting for seasonal factors, the number of initial jobless claims in the United States for the week ending September 9 was 220,000, in line with market expectations.

Is the Fed expected to repeat the "hawkish pause" this week? It will be a key event risk this week. In fact, with the recent series of hot economic data prints released, signs are indicating that the "last mile" of the Federal Reserve's anti-inflation battle may become extremely bumpy. Many industry insiders have predicted that at this week's interest rate meeting, Federal Reserve Chairman Powell and his colleagues may avoid giving a signal that the current rate hike cycle is over.

This will be in sharp contrast to the European Central Bank's interest rate decision last Thursday - although the latter announced a 25 bp interest rate hike overnight, and President Lagarde refused to say whether interest rates have peaked. However, based on the content of the interest rate statement, investors have judged that the bank's interest rate hike cycle has ended.

At this juncture, we opined that the message conveyed by the Fed this week is more likely to be similar to the "hawkish pause" at its June meeting, rather than the "dove-like rate hike" of the ECB this week.

PBOC’s RRR Cut

The PBoC suddenly announced that it would lower the deposit reserve ratio for financial institutions by 0.25% on September 15, which does not include financial institutions that have implemented a 5% deposit reserve ratio. After this reduction, the weighted average deposit reserve ratio of financial institutions will be approximately 7.4%. This is the second time the PBoC has cut the reserve requirement ratio (RRR) this year. The first time was the central bank's announcement on March 18 that it would cut the reserve requirement ratio on March 27.

On one hand, this RRR cut will release more than RMB 500 billion of liquidity, which will further increase the scale of funds that banks can lend to the market and enterprises. On the other hand, it is worth paying attention that this is the first time in history that there is only one day between the PBoC's announcement of the RRR cut and the actual implementation date. It deviates from the approximately one-week interval between the decision and implementation of previous interest rate cuts. This reflects the maturity of the PBOC's policy and the firm confidence it brings to the market.

We see the PBoC's RRR cut, as an effort to enhance and coordinate the effects of other policy combinations. Since mid-July, many ministries and commissions have issued many policies, either individually or jointly, including measures to boost consumption, specific plans to continue to support small, medium, and micro enterprises and private enterprises, and measures to maintain the stability of the financial market.

We note that this move came after multiple policies have hardly supported economic recovery. After all, it can hardly be argued that China's economic recovery has met expectations after the epidemic was relaxed, and economic distress is even increasing. The performance of the economic troika of exports, investment, and consumption is relatively poor. On one hand, the economic recovery of various countries around the world is different from the decline in demand in developed countries, especially the United States, which is at the middle and tail end of corporate inventory reduction. This is a key factor in the recent decline in foreign trade, one of the core pillars of China’s economy.

On the other hand, China is in a period of economic distress due to internal factors. The manufacturing industry has declined significantly, and corporate profits have dropped significantly. Consumption was briefly stimulated but then declined significantly. Resident and corporate confidence continues to be relatively pessimistic.

Combined with other previous policies, the RMB liquidity released by the central bank's second RRR cut will promote the full-cycle lending scale of financial institutions and banks to the market and enterprises, thus supporting the recovery of enterprises and consumption. In particular, social financing data in August showed a recovery. RMB loans increased by RMB 1.36 trillion that month, an increase of RMB 86.8 billion y/y. This was not only a significant increase of more than RMB 1 trillion in new credit in July but was significantly stronger than the seasonal pattern. It also refreshed the historical peak for the same period in August last year. The central bank's timely RRR cut again will give the market another shot in the arm and can also enhance the viscosity of other announced policies.

We note that since September 11[1], the exchange rate of RMB against the US dollar has risen for five consecutive trading days, with a cumulative increase of 1% as of 16:30 on September 15. Recently, fiscal and taxation, real estate, capital market, and monetary policies have been implemented one after another, and the domestic economy has shown an obvious trend of stabilization and recovery. In August, social retail sales increased by 4.6% y/y, and the m/m decline in housing prices in most cities also narrowed.

Industry insiders said that as the effects of the policy gradually emerge, economic fundamentals will continue to improve in the future, giving support for the RMB exchange rate. Source:

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