By Ye Xie, Bloomberg macro commentator
Three things we learned last week:
1. Major central banks prefer the status quo, for now.
The Fed and BOJ joined other major central banks, including the ECB, to stay put as the global economy recovers. The Fed signaled that rates will remain near zero through at least 2023, but stopped short of adjusting its QE program. Only the Bank of England bucked the trend, giving the strongest signal yet that it may wade into negative interest rates in preparation for a potentially messy Brexit.
Besides the BOE, the other central banks are following in the footsteps of China, which is a global leading indicator given that its economy emerged from the pandemic first. The PBOC’s policy stance has shifted to neutral since May, leading to a bond selloff. On Monday, it is expected to keep the benchmark loan prime rate steady for a fifth month.
Without additional monetary support, risky assets are left on their own now. It’s worth noting that China’s stock market has stood still since July. The lack of fiscal stimulus in the U.S. underscores the risk heading into the presidential election.
2. China’s bond flows have come into focus.
Chinese regulators decided last week to increase the flexibility for bond settlements, increasing the chance that FTSE adds China’s debt to its World Government Bond Index on Sept. 24. Goldman Sachs estimates that the inclusion would add $140 billion of inflows to the Chinese bond market over time. There’s likely to be a grace period of 12 months, so the immediate flow impact would be limited, even if FTSE decides in China’s favor this week.
Foreign inflows have been a key pillar for the appreciation in the yuan over recent months. Much of the argument for a strong yuan, including the growth and rate differentials, is still there. So far, the PBOC opted to not stand in the way of appreciation, but the yuan fixing will be closely watched to see if there’s any change in attitude.
3. Soybean futures show an olive branch from China.
The U.S. moved to expel WeChat and TikTok from U.S. app stores last week, a reminder that the “getting tough on China” rhetoric is likely to get louder. For its part, China launched a fresh round of military maneuvers in the Taiwan Strait, including a rare incursion across its median line, in response to a top U.S. diplomat’s visit to Taiwan. Despite the deafening political noise, the real signal is that China’s been working hard to keep its commitment to the trade deal. China purchased a record amount of soybeans in the season that started Sept. 1. At least for soybean futures traders, the trade war is so 2018.