Global Daily – Bundesbank dismisses operation twist

by: Nick Kounis , Fouad Mehadi , Arjen van Dijkhuizen

ECB View: Bundesbank view consistent with ECB policy on PSPP up to now – Reports suggesting that the ECB was considering skewing its re-investments to more long-term securities over the last few days have supported the long-end of the eurozone government bond market. However, a Bundesbank official dismissed such a policy. Board member Joachim Wuermeling said that aim of re-investments was to maintain the stock of securities, which would preserve monetary policy stimulus. He said that there was no question of ‘giving an additional, own monetary policy impulse by designing the reinvestments’, adding that the ECB’s purchases needed to maintain ‘market neutrality’. Indeed, this has been the ECB’s policy so far with regards to its PSPP purchases. In a Q&A on the PSPP (see here), the ECB notes that its intention in weighting different maturity buckets for its purchases is to be ‘market neutral’. In particular, ‘purchases are in principle weighted by nominal outstanding amounts, with eligible remaining maturities at the time of purchase ranging from 1 to 30 years, also taking into account the issue and issuer limits as well as potential distortions in certain maturity buckets’. It is difficult to see the ECB making a complete departure from the policy of ‘market neutrality’ in its re-investment policy, while for core country government bond markets that are close to the issuer limit, there is limited room for manoeuvre in any case. (Nick Kounis & Fouad Mehadi)

China Macro: PMIs indicate resilience, despite rising external risks – Over the past week, China’s PMIs for June were published. The official manufacturing PMI, with a stronger coverage of the larger SOEs, dropped to 51.5 (May: 51.9). Caixin’s PMI – focusing more on smaller, private firms – dropped marginally to 51.0 (May: 51.1). The picture presented by these manufacturing PMIs are in sync with the May activity data, which also pointed to only a gradual slowdown of activity. Meanwhile, the services PMIs published by Caixin rose back to a four-month high of 53.9, bringing the composite index back to 53.0 (also a four-month high). Meanwhile, NBS’s non-manufacturing PMI remained solid at 55.0, marginally up from May’s level. That suggests that services are picking up again, offsetting the moderation in the industrial sectors. All in all, the PMIs suggest that the Chinese economy remains solid, despite the escalation of trade and investment tensions with the US (on Friday, the US is about to impose Section 301 25% import tariffs on a first tranche of USD 34bn of Chinese exports) and the financial deleveraging campaign contributing to a rising number of credit defaults. These risks have also been reflected in recent market developments, with the CNY weakening by around 4% versus the USD since mid-June and stock markets having entered bear market territory. All in all, we still expect the Chinese economy to resume its gradual slowdown, with the Chinese government having sufficient tools and commitment to stabilise the economy and markets if needed. Note that since verbal intervention by PBoC officials yesterday, the CNY has recovered somewhat again versus the USD. (Arjen van Dijkhuizen)