The Macro Muse — Monetary Policy Shifts to the opposite pole (Jan 2022)
This column “The Macro Muse”, is dedicated to market themes surrounding the political economy, macroeconomics, and financial markets. Knowledge of geopolitics, the micro/macro economy, and institutional investing decisions are part of my profession. Reflecting on market highlights: the closely intertwined ecosystem of politics, economics, and finance… is a luxury, as retrospective moments and deep reading are rare on the trading floor. Ideally, I’d like to write short market commentary entries, along with reviews on articles that I found interesting. Let’s see how the column evolves!
This week has been a hectic one in central bank decisions. The pair of Central Banks going opposite ways: FED tightening monetary policy and China PBOC’s loosening of monetary policy…both at a faster than expected pace sent jitters through global markets. For the US, the continued elevated CPI readings (0.4% MoM for more than 4 weeks, and the 7% YoY inflation — the highest in decades) and the strengthening labor market led FED to tighten earlier. FED’s hawkish stance: balance sheet drawdowns and a March 2022 25 bps rate hike has been well priced in by markets, and some even call for a 50bps hike — and such expectations were manifested by battered US stock markets (Nasdaq officially entered correction territory since Nov 2021) and volatile US Treasury markets.
Across the globe, China has been confronting global challenges of (1) Elevated oil and gas prices: WTI and Brent ($88/barrel) are at highest level since 2014, due to geopolitical tensions (Russia-Ukraine-Iran), omnicron concerns easing and demand optimism; (2) Supply Chain bottlenecks, (3) Asia electronic supply chain growth slowing down; as well as domestic woes of (1) A softer economic growth, (2) Credit crunch in the China Real Estate (CRE) sector, and (3) Omnicron variant flaring up in multiple provinces, just before CNY. With China’s soft 4Q 2021 GDP reading (4%) released this week, PBOC made a decisive loosening in its monetary policy. PBOC (1) cut its MLF rate (on policy loans) by 10bps (along with $500B worth of MLF funds maturing; led to $200B RMB loan injections), (2) lowered 7 day reverse repo rate by 10bps, and (3) lowered the 1yr/5yr LPR (loan prime rate, associated with mortgages; and a gauge of authority’s attitudes towards the housing market) by 10/5bps respectively.
The opening up of China’s monetary tool box was not unprecedented. Since China’s “3 red lines” policy implementation, the biggest home builders in China have been battered down along with strict leverage rules. Since 2021, many of the China’s home builders have faced payment difficulties (Evergrande, Kaisag, Guangzhou R&F, Fantasia…have default histories onshore and offshore), and many are in dire situations in extending loan/ Wealth Management Products/ Bond maturities.
In addition to PBOC’s monetary loosening, Reuter’s reported a key article (Jan 20th, 2022) of Chinese authorities looking to loosen local restrictions on developers’ access to escrow accounts, enabling them to have easier access to pre-sale funds. This was a game-changing sentiment boost to institutional investors, who have been sidelined when investing into China’s HY bond market for a while…as recent downgrades, onshore/offshore defaults, liquidity crunch, and opaque private placement financings have kept investors at bay.
The plunge in iBoxx AeJ China Real Estate Index manifests the battered investor sentiment, as benchmark HY bonds which have traded at par ($100) dropped to distressed levels (of mid $30s). Such regulatory relaxation, if really implemented in the local level, may ease developers’ liquidity challenges and enable faster cash collection to service debt.
This was a day that would stay long in memory for me, as the news report changed market sentiment in the China Real Estate sector drastically, manifested both in the equity and the bond market. In the bond markets, we saw immediate price response, with one-way buying (but offers remain scarce) sending prices rocketing. We were bombarded with inquiries in those 2–3 hours, with all types of investors looking to trade. **s covered short (some setting up new shorts), ******* **** ******traded 2-way, **clients looked to add, and **investors (***, *****) were finally dipping their feet into the market once again. In a few hours, we amassed positive investor feedback, brought it forth to our trading team, and ended the day with sentiment U-turned.
One of the captivations of global markets is the immediate feedback from loop– from economic cause, policy implementation, market sentiment change, asset class performance, to investor feedback. The prolonged credit crunch in the real estate sector, authorities’ decision making and policy implementation, financial markets rebound, to investor sentiment change…are closely interlinked.
