The first week of the month is usually devoted to data watching in the US as the world’s largest economy unveils purchasing managers’ indices and employment data. Mostly, data for May proved disappointing. Job creation slowed and those who were unemployed were left to “enjoy” that status longer than they would like. That is, the duration of unemployment rose in May rather sharply. Then, earlier this week, we had the Job Openings and Labor Turnover Survey. It fell sharply below three million mark in April. This has broken the improvement in the applicants/openings ratio in the US. It has crept up to 4.7 from 4.34. To cap it all, the Federal Reserve chairman sounded somewhat more downbeat in his economic assessment on Tuesday. This was the backdrop to the spate of central bank policy meetings held last week in Asia-Pacific and to the policy meeting of the Reserve Bank of India (RBI) to be held this week.
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Although the Reserve Bank of Australia (RBA) has been an exception to that Asian policy conduct, RBA left its policy rate unchanged at 4.75%. The bank might have been mildly troubled by the housing loan data released the day after it decided to stand pat on rates. Australian banks continue to extend loans for mortgages. The small comfort is that they are making less of them for investment purposes and more for owner-occupied homes. Finally, the May employment data must have vindicated the RBA standing pat on rates. Full-time employment dropped and the participation rate has come down. Australian labour market has clearly acquired and retains the soft tone now.
On Thursday, Bank Indonesia and the Reserve Bank of New Zealand followed RBA and left rates unchanged at 6.75% and 2.5%, respectively. Indonesian credit and money supply growth are running well above the desired level for a country that is experiencing nominal GDP growth of around 12%. Yet, Bank Indonesia has been leaving its nominal policy rate at 6.75% for the last several months even as inflation is held back by one-off factors. Indonesia might be testing the limits of investors’ romance with the nation.
The final estimate of South Korea’s first quarter GDP growth was little revised from the initial estimate. Annual growth slowed to 4.2% in the first quarter. Real GDP growth was double that in the first quarter of 2010. The Bank of Korea surprisingly raised the policy rate to 3.25% from 3.0%. Yours truly had little doubt that the Bank of Korea would leave the policy rate unchanged at 3.0%. Korea again has to battle the age-old scourge of excess debt held by Korean households. At the end of 2010, Korean household debt/disposable income ratio stood at 155%. Korea’s determination to gain control over inflation will be tested.
All told, Asian central banks are not preparing ahead for the eventual revisit of quantitative easing by Western central banks. Bare Talk hopes that RBI would prove him wrong. Estimates of capital required by European banks run into hundreds of billions of dollars, even without taking into account any restructuring of debt owed them by Greece, Spain, Portugal and Ireland. Across the Atlantic, US banks are trying to run rings around regulators since their post-crisis recovery in margins has peaked. Banks in both these regions are not in a position to handle higher rates. In his speech last Tuesday, Bernanke signalled that he is on hold for a long period.
Although the Bank of England monetary policy committee (MPC) meeting held on Thursday left the interest rate unchanged at 0.5% and did not add to its quantitative easing programme, the Bank of England needs to be watched in the months ahead. It was the intellectual precursor to the Federal Reserve on quantitative easing. In the months ahead, if the MPC decides to increase the quantum of its gilt purchases from the current £250 billion, it will send a strong signal to the investing community that the era of quantitative easing is not over. It will provide intellectual support for the Federal Reserve to launch a third round of quantitative easing later. The federal open market committee is due to meet for two days on 21-22 June. The committee might signal its willingness to provide additional monetary stimulus at a later date—for what it is worth.
That might set off a rally in risky assets including that of Asian stocks, bonds and currencies. Prices of commodities will climb again. With the rise in commodity prices, inflation expectations will rise, too. Not just in the US but in Asia, too. Asian central banks will again fall behind the curve with token rate hikes that would fall well short of the spike in inflation that is sure to come. Households will face a higher cost of living and small and medium enterprises will face higher costs of doing business. As things stand now, much as one tries, one fails to get excited about financial markets for the second half.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views.
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