US Fed Sees No Rate Hike Through 2022

US Fed Sees No Rate Hike Through 2022
June 11, 2020


The Chinese yuan strengthened slightly against the greenback yesterday after the PBoC (People’s Bank of China) set the onshore rate at 7.0703. Notably, the US dollar saw a broader sell-off ahead of the conclusion of the FOMC (Federal Open Market Committee) meeting yesterday. As anticipated, the policy setters left the interest rate unchanged. The yuan, notably, gained despite the release of worse than expected producer price index data. Even the annual inflation declined on a m-o-m basis.

According to China’s National Bureau of Statistics (NBS), the consumer price index increased 2.4% y-o-y in May, following a 3.3% gain in the earlier month. Analysts had anticipated a consumer price inflation of 2.7%.

Dong Lijuan, an NBS official, pointed out that the situation is improving. Lijuan said, “As the domestic pandemic control situation was overall stable in May, production and commercial activities were restarted in an orderly fashion, which helped improve market demand and supply.”

Within the CPI, food prices surged 10.6% y-o-y in May, but down 3.5% on a m-o-m basis. The price of pork, China’s staple meat, increased 81.7% y-o-y, but down 8.1% from April. Excluding volatile (food and energy) goods, core inflation rose 1.1% in May. Pork prices are recovering after African swine fever caused supply interruptions.

Lijuan issued the online statement: “As the domestic pandemic control situation was overall stable in May, production and commercial activities were restarted in an orderly fashion, which helped improve market demand and supply.”

Dong revealed that consumer inflation increased 4.1% y-o-y in the first five months of this year, above the government target of 3.5%. Martin Rasmussen, a China economist at Capital Economics, anticipates food price inflation to decrease further in 2020 and pull down the headline CPI.

In a separate news release, the NBS stated that the producer price index (PPI) decreased 3.7% y-o-y in May, reflecting the sharpest decline since March 2016. In the previous month, the PPI decreased 3.1%. Economists had anticipated the PPI to decrease by 3.2%. The statistics organization stated that the decline in the PPI was mainly driven by a 57.6% y-o-y drop in petroleum and gas prices in May, a decrease of 9.1% from April.

According to the PBoC, banks granted 1.48 trillion yuan (~$209.50 billion) in fresh yuan loans in May, a decrease from 1.70 trillion yuan in the prior month. Economists had anticipated new bank loans would decline to 1.60 trillion yuan.

While corporate loans declined to 845.90 billion yuan, from 956.30 billion yuan, household loans, primarily mortgages increased to 704.30 billion yuan, from 666.90 billion yuan in April.

The overall broad M2 money supply increased 11.1%y-o-y, below forecasts of 11.3% but nearly unchanged from last month. As anticipated, outstanding yuan loans increased 13.2% y-o-y in May, inching up from 13.1% in the earlier month.

Julian Evans-Pritchard at Capital Economics expects credit growth to increase in the months ahead. He said, “We think credit growth will continue to accelerate in the months ahead given loose monetary conditions, political pressure on banks to lend more and plans for a further ramp-up in government borrowing.”

In the US, the Bureau of Labor Statistics stated that the consumer price index decreased 0.1% m-o-m in May, after declining by 0.8% in the earlier month. Economists did not anticipate any change in consumer inflation. Fall in the indices for energy, motor vehicle insurance, and apparel more than negated an increase in food and shelter indices to cause an overall decline in the seasonally adjusted all products index.  While the gasoline index fell 3.5% in May, the food index rose 0.7%.

Excluding volatile goods, core CPI decreased 0.1% m-o-m in May, compared with a 0.4% decrease in the earlier month. Economists did not anticipate any change from last month.

The data published by the US Energy Information Administration indicated that crude inventories rose 5.70 million barrels from the week ended June 6th, 2020. In the previous week, the inventories declined by 2.10 million barrels. Economists had anticipated a further decline in the crude inventories by 1.80 million barrels. The US now holds 538.10 million barrels of crude oil, roughly 14% above the five-year average.

Following the inventories report, Brent crude lost 2.23% or $0.93 to trade at $40.80, while WTI crude lost 2.55% or $1.01 to trade at $38.59.

The US Fed, in its monetary policy meeting, decided to maintain benchmark short-term rates near zero. Furthermore, the US central bank has stated that it will continue to purchase bonds to ensure low borrowing rates and back the US economy amid the recession. The Fed also made it clear that there is no possibility of an interest rate hike through 2022. The policymakers believe that the economy will contract 6.5% in 2020 before expanding 5% in 2021. By the end of this year, the Fed expects a decline in the jobless rate to 9.3%, from the current level of 13.3%.

The weak data from both countries, the fall in crude prices, and the Fed’s gloomy outlook are expected to keep the USD/CNY pair range-bound with a slight bearish outlook.

yua - technical analysis - 11th June 2020

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Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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