China Eases Monetary Policy Further

Analisi Giornaliera - 02/03/2015

People’s Bank of China Lowers the Lending and Deposit Rates by 0.25% to Offset Slower Growth


Months of speculation have come to fruition as the People’ Bank of China moved to ease policy further by implementing 25 basis point cuts to the benchmark interest rates. Expectations of a reduction were high as slowing inflation, employment weakness, and slump in new orders contributed to the deteriorating outlook.

Asian Data Confirms Weakness

Even with the implicit stimulus of lower commodity prices for imports, the Chinese economy is still facing headwinds to the outlook as evidenced by the latest manufacturing data. As the Chinese Central Planners seek to meet growth targets of 7% annually, this situation highlights the difficulties being faced as the slowdown is not just regional, but global in nature. The hardships faced in the container shipping sector suggest that the Chinese export economy is stumbling. Sunday’s official Manufacturing PMI printed just below the expansionary threshold of 50 while the HSBC Flash PMI was marginally higher emphasizing the disconnect within the data. With investment falling and deflation in producer prices rampant, the move by the People’s Bank of China to ease monetary policy was inevitable to support higher levels of growth in the economy.


US Quarterly GDP Revised Lower

The optimism that heralded the end of the Federal Reserve’s quantitative easing program has vanished as the Fed lengthens its rate hike timeline. The latest GDP data points to slower economic expansion in the pipeline as quarterly GDP grew at an annualized pace of 2.2% versus 5.0% in the prior period. A drop in inventories coupled with a greater than expected trade deficit weighed on the latest GDP figures. Although the prior week saw better than expected wage growth via average hourly earnings, this upcoming week’s nonfarm payroll figures and unemployment number should give stronger confirmation of the recovery in the US labor market. However, this will likely not be enough to offset weakness in housing as pending home sales miss expectations for 5-straight months and consumer sentiment weakens in-line with consumer spending.


Oil Rig Count Decline Slows

WTI crude oil has been increasingly volatile over the past several weeks as traders reposition based on growing inventory levels and raised production. With both figures at record levels and the pace of drill rig decreases lessening over the past few weeks the confluence of factors pressuring prices to the downside has reemerged. Although comments from Saudi Arabia point to growing demand, evidence of a global slowdown from China to the United States shows this is merely jawboning and rhetoric. US producers continue to pump at new record levels each week as supply continues to outstrip demand by a wide margin. Adding to market volatility is the uncertain outlook for Greece which has seen deposit outflows accelerate as Government tax collections fall well below estimates. The upcoming IMF repayments will be problematic for the country as the nation faces an increasingly critical cash shortage.


GBPUSD Equidistant Channel Technical Pattern

GBPUSD has weakened substantially over the last 8-months as the Bank of England held off on raising rates and speculation was high that the US Federal Reserve would be the first Central Bank of developed markets to raise interest rates. The latest data is making it difficult to anticipate which of the two will be the first to increase benchmark rates from record lows. With UK data still robust and monetary policy expected to remain unchanged in the near-term, the probability for GBPUSD to tick higher is strong. Any more weakening of US macro data will also sap dollar momentum. The bounce has seen the GBPUSD pair trend in an upward equidistant channel for the past month. The prevailing strategy is to follow the trend, initiating long positions at the bottom of the channel and closing at the top of the channel. Higher risk and lessened reward make shorting from the top of the channel a less attractive option.


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