Global Daily – China cuts policy rates further

by: Arjen van Dijkhuizen , Maritza Cabezas , Aline Schuiling

  • Chinese authorities react to ongoing weak data with another round of policy rate cuts
  • Impact of lower oil prices on US labour market manageable
  • ECB steps up the pace of asset purchases somewhat


Ongoing weak Chinese data …

After economic growth fell to 7% yoy in Q1-2015 from 7.3% yoy in the second half of 2014, recent data show that Q2 started quite weak as well, despite recent easing measures. Early this month, the manufacturing PMIs pointed to ongoing weak domestic demand, although the services PMIs were more resilient, highlighting the rebalancing from industry towards services. Recent trade data do not bode well either, with both exports and imports contracting further. Meanwhile, CPI inflation rose marginally to 1.5% yoy in April (from 1.4% in February/March), remaining far below the 2015 target of 3%.


… trigger further rate cuts by the PBoC

In reaction, the Peoples Bank of China (PBoC) cut policy rates further last weekend, aiming to drive bank lending rates down. The 1-year best lending rate was reduced by another 25bp to 5.10%, following similar moves in November and February. The PBoC also cut the benchmark deposit rate by 25bp to 2.25%, but left banks’ room to manoeuvre unchanged as the “variation margin“ was raised to 1.5 times the bench-mark rate. The latest policy cuts, which followed a 100bp drop in banks’ overall reserve requirements last month, did not surprise us, as our baseline scenario assumes ongoing ‘measured’ monetary easing and targeted (fiscal) stimulus to prevent growth from falling significantly below the 2015 target of 7%.


Impact lower oil prices on US job market manageable…

On Friday, the US released April’s job market report (see US Watch – US employers shake off winter effects). Looking at the details, the mining & logging industry saw employment decline to -15K, of which -3K was oil & gas extraction. Since the beginning of the year, employment in mining has declined by 49K, with losses concentrated in support activities for mining. This is not significant and represents around 0.03% of total nonfarm payrolls.


…knock-on effects modest

It is difficult to estimate the knock-on effects of lower energy prices on the job market in other industries. However, during the energy price collapse of 1986, which saw the largest decline in oil prices, the Dallas Fed calculated that for every job lost in the oil & gas sector, 2.6 jobs were lost in various non-energy sectors. This suggests that lower job growth in energy related activities will not derail  overall job growth in any meaningful way. We think that the US labour market will remain solid in the coming time.


The ECB stepped up the pace of purchases somewhat

The ECB reported the amounts of settled purchases under its PSPP programme during the week of 4-8 May yesterday. These include purchases of euro area government bonds as well as securities issued by national and European agencies. The total amount outstanding came out at EUR 108.7bn at the end of last week, implying that the ECB settled EUR 13.6bn of purchases, which compared to EUR 10.1bn the week before. This implies that the central bank bought around EUR 2.7bn a day, which slightly higher than the amounts of the previous couple of weeks. By doing so, the ECB is still running ahead of schedule. We have estimated that the ECB needs to buy EUR 2.4bn a day in order to reach its announced target. So, currently, the central bank has bought around EUR 4bn above target.