Surprise Chinese Central Bank Cut Boosts World Markets

Given our expectations that the Federal Reserve Board is going to keep a low profile in 2020, promising no rate changes—probably—I will have to fill up these pages with something, won’t I?

Luckily with the rest of the developed world still looking to monetary easing to help revive their—for the most part—moribund economies—there promises to be plenty of monetary policy to chew on for investors in 2020.

Indeed, China opened up the year with a surprise bang by delivering another round of stimulus. Prior to the news Thursday of the killing of Iranian military leader Qassem Soleimani, world stocks got a boost when the People’s Bank of China said last Monday that it would further loosen monetary policy by reducing the amount of reserves banks needs to keep on hold at the central bank. That essentially allows banks more capital for lending and investment.

In particular, the People’s Bank of China said it was lowering the seven-day reverse repurchase rate to 2.50% from 2.55%, the first cut in more than four years. This move comes just two weeks after the PBOC cut the borrowing cost on its medium-term lending facility. It appears to be a signal to markets that policymakers are ready to act to prop up slowing growth.

Both reductions suggest the Chinese central bank could in the future reduce its new benchmark loan prime rate (LPR), upon which many lenders base their mortgage rates.

While on the subject of China, The Wall Street Journal reported that the Fed released an economic paper that effectively said the trade war was a net-net loss for the American economy in general, and manufacturing employment, output and prices, in particular.
The higher costs from tariffs swamped benefits to specific firms from import protection. The tariffs cost more jobs than they created, the WSJ wrote.

The New York Fed continues to inject hundreds of billions of dollars into money markets since a September spike in repo rates, in order to reduce volatility. More lately the infusions have moderated. Still, this continues to reverse the Fed’s shrinkage of its asset portfolio over the prior two years, of which the Fed has been adamant that it is not quantitative easing.

The CME fed futures market, which currently puts a rate change probability sometime next year at less than 50%. The U.S. Treasury 10-yr note yield was around 1.79%, down from 1.87% last week and below 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

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