Goldman Takes Spin To New Highs: China Rate Hike Should Be "Welcomed By The Market"

When all else fails, just make stuff up. That appears to be the Plan B for Goldman analyst Helen Zhu, whose take on the faster than expected Chinese rate hike over the weekend is beyond incredulous: "even though our economics team believes that rate hikes are more of a signaling tool rather than the most effective way to curb inflation, we believe this move will be welcomed by the market." So now we know that according to Goldman, rising mortgage rates are good for the economy (that dropping mortgage rates were good is beyond obvious), and the removal of excess liquidity (we have yet to check on where the 1 week Chinese repo rate is) is just as good if not better than the endless pumping thereof. H.M.M.M.M. Fair enough: does Goldman also provide free lobotomies to those clients who followed its FX trading advice in 2010 and are now wanted by the Feds for involuntary manslaughter by way of insanity? Incidentally, we attribute the current drop in ES by 0.5% only to the fact that Brian Sack has been precluded from reaching his Bberg terminal due to snow, and hit the "any key", which on his keyboard just happens to be Buy. And since there is no POMO today, the momo crew may be about to hit a Panic button of their own.

The hilarious "it's funny cause it's retarded" Kool Aid from Goldman's Helen Zhu:

The shoe falls’ – market should not react negatively to the rate hike

PBOC announces rate hike on Christmas, similar format to Oct hike. PBOC announced that as of Dec 26, China’s deposit and lending rates will be hiked – the second such announcement in 2010. The format of the rate hikes is fairly similar to the mid-October hike: a) no changes to deposit rate at 0.36% (same as last time); b) 3-months and above deposit rates raised by 25-35 bp (vs 20-60 bp last time); c) lending rates raised by slightly less at 25-26 bp (vs 20-25 bp last time); d) 1 year rates are raised by 25 bp symmetrically for deposit rate (to 2.75%) and lending rate (to 5.81%).

No major negative surprises, so market should not react adversely. Although the market’s anticipation of a rate hike may have been highest in mid-Dec post the Central Economic Working Conference (PBOC only announced a 50bp RRR hike that Friday), we do believe that this rate hike is not unexpected. As highlighted in our economics team’s recent notes, more significant monetary tightening is much needed near-term to keep inflation under better control (and there is improving consensus in this regard by decision makers). As also mentioned in our strategy report of Dec 2 2010, ‘Hibernate for winter, re-awaken for spring’, our marketing feedback indicates that investors already widely expect a combination of policies to be implemented including multiple interest rate hikes, RRR hikes, administrative measures and lending control. In fact, we think market sentiment has quickly been evolving from concerns over over-tightening to concerns over insufficient or not prompt enough counter-inflationary moves. We note that the 25 bp size and the fact that the hike was not deposit-rate only should remove some near-term concerns as well. As such, even though our economics team believes that rate hikes are more of a signaling tool rather than the most effective way to curb inflation, we believe this move will be welcomed by the market. That said, the market may still remain range bound in the near-term given volatile policy news / data point releases and uncertainty regarding the speed and effectiveness of policy measures. We remain medium-term positive on China equities on mid-to-high-teens earnings growth in 2011E and reasonable valuations.

Paging Nurse Ratchett: lobotomy in flow trading aisle 4.


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