IGM FX and Rates
27 Mar 2020
China Insight: Bond inflows pick up amid weak economy
Let's take a step back from the carnage seen early today from the RBNZ leaving it's OCR projections unchanged. For our RBNZ review, click here.
Looking past today's violent slump in the Kiwi and NZ 2yr swaps, the question is whether the market has over-reacted.
Even more pointedly, the question needs to be asked of whether the RBNZ is correct in being so downbeat about inflationary pressures ahead.
Gov Wheeler said earlier that for an OCR hike, inflationary expectations would need to rise.
In the cold light of day, we doubt the market will significantly drive down odds of a hike in Q1/Q2 2018, with most still forecasting tightening from May 2018.
If upcoming data were to prove the RBNZ wrong, there is significantly more room now for the market to drive up NZ's 2yr swap rate and the NZD. JH
IGM Credit, IGM FX and Rates
By Tim Cheung 23 Mar 2020
China's activity growth data for February were much weaker than expected, suggesting there is a very good chance the Q1 GDP y/y will fall into negative territory. Among forecasts from major investment banks, the most pessimistic ones for China's Q1 growth y/y are now in the -7/-9% range instead of +2/+3% territory seen a month ago, while that for the 2020 full-year growth are in the +1/+3% area rather than +4/+5%. To avoid the economy worsening further in the aftermath of the COVID-19 outbreak, Beijing inevitably has to ramp up fiscal spending substantially over the rest of the year. Given the postponement of the National People’s Congress (NPC) meeting which was initially scheduled for early March, we so far have no official data on how much the government will spend in 2020. However, with the onshore CNY IRS curve steepening sharply recently (chart 1), we doubt the potential increase in government expenditure will be small. Meanwhile, we reckon most (if not all) of the extra spending will be financed by the issuance of special bonds, in particular, the long-term ones. As per chart 2, special bond issuance increased substantially in Jan and Feb, which may be setting a trend for most of the year.
Topics Industry News