- The PBoC cut the 1Y MLF rate by 10bps to 2.75% this morning.
- The latest batch of macro data in July is discouraging.
- (i) We expect another 20bps of 1Y-LPR and MLF cut in this year only. The RRR will be cut by 50bps.
- (ii) 2Y and 10Y CGB yields will hover around 2.2% and 2.7% in 2022 respectively.
Related insights_tr
Macro: Weakening fundamentals (Samuel Tse)
The PBoC cut the 1Y MLF rate by 10bps to 2.75% this morning. Accordingly, the 1Y LPR will likely be cut from 3.70% to 3.60% next week. These are largely a combined result of modest economic recovery and lingering mortgage boycott. This is, however, unlikely the beginning of an aggressive rate cut cycle because this will exert downward pressure on the CNY. In fact, the impact of such a mild cut on multiple fronts was muted this morning. 10Y CGB yields fell 6-7bps; USD/CNY held stable at 6.75; the Hang Seng Index and Shanghai Composites indices saw limited movements. We expect there another 20bps of 1Y LPR and MLF cut in the next four months. The PBoC could also cut the RRR by 50bps.
The latest batch of macro data in July is discouraging. Retail sales decelerated from 3.1% YoY in June to 2.7% in July. Sales growth of automobiles eased from 13.9% to 9.7%, while necessities such as daily used goods, cosmetics and clothing saw decreases of different magnitude. F&B continued to contract by 1.2% compared to a year earlier. Furniture fell by 6.3% amid the housing mortgage boycott. The latest COVID lockdowns in Hainan and Tibet negatively impacted recovery momentum during the summer season.
Export-led industrial production also edged down to 3.8% YoY in July from 3.9% in June. The textile and medical production drop extended to 4.8% and 10.3% from 3.9% and 8.5%, respectively. The domestic supply chain is still far from wholly normalized, as indicated by the highway traffic of major ports. Exports volume fell by 4.6% YoY in July, compared to 18.0% growth in value terms. Looking ahead, external demand will moderate amid rate hikes. US GDP contracted for the second quarter in a row in QoQ terms. Tariff reduction negotiation with the US has remained inconclusive.
Fixed asset investment fell visibly from 6.1% YoY YTD in June to 5.7% in July. Manufacturing investment slowed from 10.4% to 9.9% from a decline in total social financing to 10.7% from 10.8%; and a fall in loan outstanding growth to 11% from 11.2% New corporate mid-loan term loans fell by 7.7% YoY YTD. Meanwhile, real estate investment plunged further from -5.4% to 6.4% amid extended mortgage boycotts. Overall property price declined further by 0.11% MoM, with floor space started and sold falling 45.4% YoY and 30.3% respectively. Source of funding for real estate enterprises recorded double-digit drops for 6 months in a row. Amongst all, mortgages account for 15.8% of the total funding. In fact, new mid-long term household loans fell by 55% YoY in January-July.
On a brighter note, infrastructure investment accelerated from 7.1% YoY YTD to 7.4%. Planned investment year to date has increased by 10.8%. Improvement in import growth also indicates stronger infrastructure investment ahead. This could help counter the shortfall of real estate investment.
On the inflation front, CPI rose to 2.7% YoY in July from 2.5% in June. The rise in CPI was attributed to rising food costs. Pork price rose by 20.2% after recording 21 months of decline due to decreasing supply due to sows culling since last year. Excluding food and energy, the consumer price eased to 0.8% from 1.0% amid weak consumption sentiment. As the economic outlook remains cloudy, the propensity to save is heightened. 58.3% of respondents would like to save more based on a PBoC survey.
CNY Rates: Liquidity to stay supportive for longer; We revise lower our CGB yield forecast (Duncan Tan)
This morning's 10bps cut to 1Y MLF and 7D reverse repo (OMO) rates certainly surprised markets. Onshore IRS curve parallel-shifted lower by 10bps. Longer-tenor IRS declined as much as the shorter tenors, reflecting reduced growth expectations on the back of the underwhelming economic data releases. 12M CNY/CNH forward points dropped 100 pips as markets reprice for policy divergence between US and China to persist for longer. 10Y CGB yields also fell 6-7bps.
It has become increasingly clear that the economic recovery will be slow and bumpy. And therefore, markets should expect monetary support to be in place for some time rather than being unwound. We expect CNY rates and CGB yields to stay low in the near term until we see more positive economic data. The rebound in rates and yields that we had been expecting is likely to be pushed further out now and consequently, we revise lower our end-22 CGB yield forecast.
7D repo fixing rates have been in a 1.55-1.85% range over the last 3 months, significantly below PBOC's OMO rate of 2.0/2.1%. Liquidity will likely stay very supportive in the near term until the recovery appears to be on a firmer footing. We think that the IRS curve should bull-steepen over the next few days.
Today's rate cut should encourage market participants to discount the possibility of rate hikes and expect 7D repo fixing to stay low for an extended period. Positioning is likely already heavy, but we expect even more interest to receive 1Y and 2Y CNY IRS/NDIRS to monetize the associated attractive carry.
To read the full report, click here to Download the PDF.
Topic
Explore more
E & S FlashThe information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.