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China is now firmly in stimulus mode when PBOC announced on Sunday to cut the reserve-requirement ratio by 1% to 18.5% effective April 20. This is the second reduction this year and the largest since November 2008 during the global financial crisis. The reserve-requirement ratio represents the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves in cash.
The new 18.5% ratio required by China is still higher than the typical global standard and than the current 10% cap by the U.S. Federal Reserve. The PBOC also announced an additional 100 bps cut for rural credit cooperatives and village banks, as well as a 200 basis point cut for the China Agricultural Development Bank.
|Graphic Source: WSJ, Feb. 2015|
1Q15 The Darkest Period
Bloomberg quoted Larry Hu, head of China economics at Macquarie in Hong Kong call 1Q15 the “darkest period” this year for China's economy. GDP was 7% in Q1, the slowest since 2009, while industrial production in March rose at the slowest rate since November 2008, and inflation turned negative for the first time since 2009.
Hu now expects further easing with an interest-rate cut within a month (PBOC has already cut interest rates twice since November), increasing infrastructure spending and a relaxation of home-purchasing rules.
My connections in China and Hong Kong indicated that the new crackdown by Xi on corruption and state largess has put a fairly large portion of the nation's businesses (in mainland and Hong Kong) once catering to the 'elite' rich class in China out of commission. This is one of the major contributing factors to the nation's slowing growth.
$100 Billion Liqudity
WSJ estimated that the reduction in bank reserve-requirement-ratio could freed up more than $100 billion for China's banks to lend. This suggests increasing liquidity compounding the social economic issue of wealth gap (which should be Beijing's primary concern), similar to the 3 QE programs by the U.S. Fed.
|Chart Source: Yahoo Finance|
Economists think this decision could be a prelude to more easing measures to counter further slowdown in growth this year, which could only lead to a bigger bubble, and a more disastrous crash somewhere down the road.
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Chile's central bank maintained its monetary policy rate at 3.0 percent, as expected, and said inflation remains high and it "will continue to monitor developments with particular attention."
The Central Bank of Chile, which has kept rates steady this year after cutting them by 150 basis points last year to stimulate economic activity, acknowledged that total inflation in March turned out to be lower than expected but not the underlying inflation rate.
Chile's consumer price inflation rate eased to 4.2 percent in March from 4.4 percent in February while the core inflation rate only declined to 5.5 percent from February's 5.7 percent.
The central bank targets inflation of 3.0 percent within a tolerance range of 2.0 to 4.0 percent, and medium-term inflation expectations remain around 3.0 percent.
"Future changes to the MPR will depend on the implications of the internal and external macroeconomic conditions on the prospects for inflation," the bank said.
In its latest monetary policy report, the central bank raised its inflation forecast for this year to 3.6 percent from a previous estimate of 2.8 percent, and the core inflation forecast to 3.4 percent from 2.8 percent, with the depreciation of the peso the main reason for high inflation.
The central bank maintained its forecast for Chile's economic growth this year in a range of 2.5 to 3.5 percent, saying the recovery should accelerate towards the end of the year.
Chile's Gross Domestic Product expanded by 0.9 percent in the fourth quarter of 2014 from the third quarter for annual growth of 1.82 percent, up from 1.0 percent.
The central bank said today recent data are consistent with its baseline policy report, and as expected, investments are less dynamic but the unemployment rate has falling slightly although job creation is low.
The central bank also noted that prices of basic products were mixed, with prices of copper, petroleum and petroleum products rising.
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Sri Lanka's central bank cut its main policy rates by 50 basis points, a surprise to financial markets, and said a "relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behavior of market interest rates are addressed sufficiently to facility the economic growth further in a low single digit inflation environment."
The Central Bank of Sri Lanka, which had maintained rates since a cut in October 2013, said inflation is projected to remain in low mid-single digit levels this year but the current market interest rates are inconsistent with low inflation and investments needed to boost economic growth.
"Therefore, there is a further leeway to continue relaxation of monetary policy," the central bank said in a statement on April 15, adding that it has a mix of monetary tools available to fine-tune its policy if there is any worrying impact from the rate cut on other economic variables.
Sri Lanka's consumer price inflation rate fell to 0.1 percent in March from 0.6 percent in February while the Average Weighted Prime Lending Rate (AWPR) was 7.14 percent on April 10.
The central bank cut the benchmark Standing Deposit Facility Rate (SDFR) to 6.0 percent from 6.50 percent and the Standing Lending Facility Rate (SLFR) to 7.50 percent from 8.0 percent.
The decision by the central bank's board was taken while its governor, Arjuna Mahendran, is on leave during an investigation by a committee over allegations that one of his family members benefitted unduly from a sale of treasury bonds.
The Central Bank of Sri Lanka issued the following statement:
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WTI surged to close at $56.01 a barrel on Wednesday, while Brent closed at $62.86 after the US crude oil inventories showed a 'less-than-expected increase'. The latest weekly inventory (week ending April 10) from EIA showed an increase of 1.3 million barrels, much less than the 10.9 million barrels of build from the previous week. The report also showed that total motor gasoline inventories decreased by 2.1 million barrels, while distillate stockpiles rose by 2.0 million barrels.
|Chart Source: Nasdaq.com Apr. 15, 2015|
Inventory Build Is A Buy Signal?
I'm not sure exactly when and how market players started equating a 'less-than-expected oil inventory build' with a buy signal. This to me merely suggests a slowdown of crude oil production increase, hardly a reason to buy up the market.
Furthermore, the inventory build in distillate, which is used primarily in industrial activities, seems like a sign of weaker broader U.S. economy, which could mean the gasoline inventory would start to build again.
Shale Output To See Its First Decline in 4 Years
Indeed, the U.S. shale oil industry is starting to feel the pinch from lower oil price, down ~60% since 2H14. Another EIA report already predicted U.S. shale will see its first monthly production drop in 4 years this May.
Among the five major U.S. shale oil regions, the Niobrara formation, northeast of Denver CO, will lead the month-over-month decline, followed by the Eagle Ford shale in Texas and the Bakken formation in North Dakota, while output from the Permian in Texas and the Utica in Ohio is expected to rise in May.
Oil rig count has been dropping like a rock since 2H14 when oil market turned bearish , and it looks like well inventory has been sufficiently depleted to finally make a dent on production.
|Chart Source: BofA via Business Insider, April 14, 2015|
Shale Drillers Are More Resilient Than Expected
However, the advance in oilfield and oil and gas upstream technology has brought tremendous increase in productivity and efficiency in the U.S. shale industry, which means shale drillers, now in survival mode, are more resilient than most people (including Saudi) originally thought. If oil prices stabilize at or above current levels, expect drillers to move in again, rig count and production would quickly recover.
OPEC Still Flooding The Market
So overall, the signs are mixed in the U.S. oil market. Outside of U.S., geopolitical tension is still high in the Middle East -- escalating fighting in Yemen, and Iran nuclear deal is still pending. Meanwhile, almost like repenting the oil geopolitical premium put on by a Saudi-led campaign of air strikes against Iran-allied Houthi rebels at Yemen, OPEC pumped 31.02 million barrels per day in March, near a two-year high, pressuring any positive sign from demand or anywhere, for that matter. In a way, Saudi is trying to delay or put a stop to the ongoing energy switch and substitute due to decades of high oil prices.
Iran Could Replace U.S. Shale Cutback
The production cutback by U.S. shale could be interpreted as a positive sign for oil prices in the short term, but the loss from U.S. shale could easily be offset by the increase in Iranian oil export since Iran nuclear deal is expected to have a formalized plan by mid-year.
For the longest time, China's has been one popular excuse cited by Oil Bulls. Yes, China was on its way to replace the U.S. as the world's largest oil consuming nation, but the growth engine is now sputtering which was confirmed when China saw its economic growth slow to 1.3% in 1Q15, compared with growth of 1.5% in the previous three quarters.
$900 Bn Wealth Transfer by Cheap Oil
Lower energy prices means lower energy costs for the net oil importing countries while many oil exporting countries inside and outside OPEC are hurting. The IMF estimated in December that the oil price crash could bring in 0.7% GDP growth worldwide. Bloomberg crunched the numbers and came up with a map (above) so we know who gets what and how much. According to Bloomberg,
Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices. The Middle East and Russia are the ones getting stuck with the bill.
In other words, cheaper oil has initiated a wealth transfer effect of about $900 billion a year between net oil importers and oil exporters reversing decades of historical trend. The U.S. along gets $180 billion, and Europe and Asia (i.e. China) are even bigger beneficiaries of this wealth transfer by cheap oil.
Lower for Longer?
So in the grand scheme of things, I agree that oil prices, just like rig count, should become 'lower for longer" until a supply or demand shock triggered by, for example, another financial crisis, or shale oil becomes depleted / dried-up (shale typically has accelerated declining production curve, so this scenario is quite plausible). Nevertheless, the wild card would be the OPEC meeting this June amid mounting pressures for some kind of coordinated production cut.
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Poland's central bank maintained its monetary policy reference rate at 1.50 percent, as expected, saying deflation will continue in coming quarters due to the sharp fall in commodity prices but stable economic growth, low interest rates, a good situation in the labor market and an expected recovery in the euro area should limit the risk of inflation remaining below target in the medium term.
The National Bank of Poland (NBP), which said it was concluding its monetary easing cycle when it cut the policy rate by 50 basis points last month, added that there was no demand pressure in the economy right now and combined with low commodity prices and very low inflation expectations, this was contributing to a continuation of deflation.
In February Poland's consumer prices fell by 1.6 percent, the eight consecutive month of deflation, and the steepest drop in at least 30 years due to the fall in fuel and food costs.
But economic growth remains stable, the NBP said, with Gross Domestic Product in the first quarter of this year probably slightly higher than the fourth quarter of last year as domestic demand continues to rise, fueled by good financial conditions and an improving labour market.
Poland's GDP expanded by 0.7 percent in the fourth quarter from the third quarter of 2014 for annual growth of 3.1 percent, down from 3.3 percent. The unemployment rate eased to 11.7 percent in March from 12.0 percent in February and January.
Last month the NBP forecast 2015 inflation of minus 1.0 to 0.0 percent and 2016 inflation of minus 0.1 percent to 1.8 percent. The NBP targets inflation at midpoint of 2.5 percent, within a tolerance range of 1.5 to 3.5 percent. Inflation has been below its lower bound since February 2013.
The National Bank of Poland issued the following statement:
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Canada's central bank maintained its target for the overnight rate at 0.75 percent, as widely expected, saying the "risks to the outlook for inflation are now roughly balanced," a slight chance in wording from last month when it said the risks around inflation were "more balanced" following the surprise 25 basis points rate cut in January.
The Bank of Canada (BOC) said the negative impact of the decline in oil prices on economic activity was now appearing even sooner than it expected in January though looking at the next two years the overall drag on the economy will be the same.
The forecast for economic growth this year was trimmed to 1.9 percent from January's forecast of 2.1 percent, mainly because investments will be lower, but for 2016 the growth estimate was revised up to 2.5 percent from 2.4 percent as exports jump. For 2017 the BOC forecast 2.0 percent growth.
"The Canadian economy is estimated to have stalled in the first quarter of 2015," said the BOC, adding that the shift toward stronger non-energy exports, rising investment and improving labor markets was fueled by easier financial conditions and improving U.S. demand.
With the effects of the oil price shock waning, Canada's economic growth is projected to rebound in the second quarter of this year. In the fourth quarter of 2014 Gross Domestic Product rose an annual 2.63 percent.
The BOC's forecast for 2015 is more pessimistic than that from the International Monetary Fund, which this week cut its 2015 growth forecast to 2.2 percent from its January forecast of 2.3 percent. However, for 2016 the BOC is more optimistic as the IMF only forecast growth of 2.0 percent, down from its January forecast of 2.1 percent.
Exports from Canada's manufacturing sector - such as aircraft, machinery and pharmaceuticals - are benefitting from the decline in the Canadian dollar against the U.S. dollar. However, the flip side of a lower Canadian dollar is that it costs more to borrow in U.S. dollars, hitting investments.
The Canadian dollar, known as the loonie, tumbled against the U.S. dollar in the second half of last year, not only reflecting the strength of the U.S. economy, but also confirming the Canadian currency's historical relationship with oil prices.
In its monetary policy report, the BOC said the Canadian dollar was assumed to be close to its recent average level of 79 cents over the projection horizon compared with 86 cents assumed in January. Today the loonie was at 80 U.S. cents compared with 86 cents at the start of the year.
Weak economic activity in the first three months of this year has widened the economy's output gap, putting additional downward pressure on inflation. However, the expected recovery in growth means the output gap will be back in line with the forecast so the effect on core inflation from the lower dollar and the output gap will continue to offset each other, the BOC said.
In February Canada's headline inflation rate was unchanged at 1.0 percent but as the economy reaches full capacity around the end of 2016, the BOC expects total and core inflation to be close to its 2.0 percent target. Total consumer price inflation is forecast to reach 1.4 percent by the fourth quarter of this year and then 2.0 percent by the end of 2016.
The Bank of Canada issued the following statement:
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The European Central Bank (ECB) maintained its key interest rates, including the benchmark refinancing rate at 0.05 percent and a negative deposit rate of minus 0.20 percent, and said data to March continued to point toward further positive economic momentum since the end of last year.
The ECB, which embarked on full-blown quantitative easing on March 9 by starting its monthly purchases of 60 billion euros, added that the risks surrounding the economic outlook remain on the downside but had become more balanced due to its monetary policy, "the fall in oil prices and the lower euro exchange rate."
ECB President Mario Draghi's characterization of the risks facing the troubled euro area as more balanced is a slightly more upbeat view than in March when he said the risks had diminished following the recent easing by the ECB and the fall in oil prices.
Last month Draghi said exports from the euro area "should benefit from improvements in price competitiveness and from the global recovery," but today he was much more direct when speaking about the depreciation of the euro, saying "demand for euro area exports should benefit from improvements in price competitiveness."
The euro has been depreciating against the rising U.S. dollar since May 2014 and hit lows just below 1.05 in mid-March from around 1.40 before rebounding slightly in growing optimism over the prospects that the euro area exports and thus growth would benefit from the low euro.
Today it was quoted at 1.066 to the dollar, down 11 percent this year.
The euro area's Gross Domestic Product expanded by 0.3 percent in the fourth quarter of 2014 from the third quarter for a 0.9 percent increase from the fourth quarter of 2014, up from a 0.8 percent expansion in the third quarter of 2014. Unemployment was unchanged at 11.4 percent in February and January, a marginal improvement from 11.5 percent in the previous six months straight.
Consumer price inflation in March was minus 0.1 percent, an improvement from minus 0.3 percent in February and minus 0.6 percent in January.
The European Central Bank issued the following introductory statement to its press conference by its president, Mario Draghi"
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Namibia's central bank maintained its benchmark repo rate at 6.25 percent while assessing the impact of the February rate cut, but remains concerned over the high growth in installment credit that is being used by households to finance the import of unproductive luxury goods and thus putting additional pressure on the country's international reserves.
The Bank of Namibia, which raised its rate by 25 basis points on Feb. 18 following rate rises totaling 50 points in 2014, welcomed a recent decline in the growth of household overdraft loans.
However, it noted that installment credit to households was up by 18.7 percent on average over the last six months to February, only slightly down from an 18.9 percent rise in the second half of 2014.
Namibia's stock of foreign reserves declined to 15.7 billion Namibian dollars as of April 10 from N$16.0 billion at the end of January, but the central bank said this remained "adequate" to maintain the currency's one-to-one link to the South African rand.
"The MPC, however, remains concerned that the growing import bill is unsustainable; particularly the increase importation of unproductive goods, such as luxury vehicles," the bank said.
Namibia's current account deficit widened to N$9.6 billion in 2014 from 5.0 billion the previous year, rising to 6.7 percent of Gross Domestic Product from 4.0 percent in 2014, due to high imports.
Economic growth looks to have improved during the first two months of the year, driven by robust public and private construction, strong sales in wholesale and retail trade, and growth in diamond mining and manufacturing.
The central bank confirmed its forecast for 2015 growth of 5.6 percent, up from 2014's 5.3 percent.
Namibia's inflation rate continued to decline to 3.4 percent in March from 3.6 percent in February, mainly due to lower increases in transport prices along with housing, water, electricity and other fuel.
"Overall annual inflation is, however, expected to remain stable," the central bank said.
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