15 March 2022
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PBOC keeps rates on hold

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By Emirates NBD Research

  • The PBOC kept the rate on its 1y medium term lending facility unchanged at 2.85% this morning, against expectations for a 10bp rate cut as economic data for February came in ahead of expectations. However, the PBOC injected a net 100bn yuan of funds into the financial system. Industrial production in the first two months of the year grew by a faster than expected 7.5%, with fixed asset investment up 12.2% y/y.  Retail sales in the year-to-February also rose more than forecast at 6.7% y/y. Unemployment rose to 5.5% in February from 5.1% previously.
  • China is experiencing its worst outbreak of Covid-19 since early 2020, with 5154 new cases of Omicron reported yesterday, mostly in the region of Jilin which was locked down yesterday. Tech hub Shenzhen was locked down on Sunday, raising concerns about supply chain disruptions again, and a city close to Beijing was locked down today as China continues to pursue a zero-Covid strategy.
  • With no significant economic data released yesterday, it was geopolitical developments and inflation concerns ahead of this week’s Fed meeting that appeared to drive markets. The US and China held their first high-level talks on Russia/ Ukraine yesterday where China said it was committed to a supporting peace talks and the US reportedly warned China there would be consequences for helping Russia evade sanctions. Ukrainian President Zelenskiy will address the US Congress tomorrow to ask for more aid.  
  • Markets are pricing a full 7 rate hikes this year going into this week’s Fed meeting, up from 5 rate hikes at the start of this month. CPI inflation could reach 9.5-10% in the coming months on higher food and energy prices, with the latter also feeding through to core CPI. PPI data due today is expected to show an acceleration to 10.0% y/y in February from 9.7% in January.
  • Foxconn is reportedly considering constructing a USD 9bn factory in Saudi Arabia, according to the Wall Street Journal.  The company is looking at siting the factory in Neom to produce microchips, electric vehicle components and other electronic parts as it looks to expand its manufacturing capabilities outside Taiwan.  Foxconn is also in talks with the UAE about building a factory there according to the WSJ.        

Today’s key economic data releases and events

11:00 UK ILO unemployment rate (Jan) forecast 4.0%

14:00 GE ZEW survey expectations (Mar) forecast 5.0

16:30 US Empire Manufacturing (Mar) forecast 6.1

16:30 US PPI (Feb) forecast 0.9% m/m and 10.0% y/y

Fixed Income

  • US treasuries declined yesterday as markets once again focused on inflation risks. The 10y yield jumped almost 14bp to 2.14 while the 2y yield rose 11bp to 1.86.  Yields have traded higher this morning in Asia.  The market is now pricing seven 25bp rate hikes this year, up from five at the start of March.
  • Russia has started the process of paying two bond coupons due tomorrow but it is unclear if the payment will be in USD or RUB according to Bloomberg. The Russian central bank’s USD accounts are frozen and it’s unclear if they will be debited for the payment. A payment in RUB may be considered a default. 

FX

  • The dollar index was little changed yesterday, dropping just -0.1% to 98.99 at the close, and is down by the same amount so far this morning. This stability is a marked change of pace from the previous week when there were far more volatile swings by the index. The Euro closed up 0.3% to 1.0940 against the greenback, while GBP dropped –0.3% to 1.3002.
  • The biggest moves were by the commodity currencies as some of the sharp gains in oil and metals over recent weeks were unwound. The AUD dropped -1.4% against the dollar and the NZD -0.9%.

Equities

  • Chinese technology stocks underwent heavy selling yesterday, weighing on the Shanghai Composite index which lost -2.6% over the day. The index remains under pressure this morning, trading down a further -1.7% at the time of writing. Other Asian equity markets were more positive yesterday as the Nikkei added 0.6%, while Indian markets continued their strong run with the Nifty and the Sensex adding 1.5% and 1.7% respectively.
  • In Europe, markets were buoyed by traders’ hopes regarding peace talks in Eastern Europe. The CAC added 1.8% and the DAX 2.2%, with the FTSE 100 bringing up the rear with a 0.5% gain. In the US, the S&P 500 dropped -0.7% and the NASDAQ -2.0% but the Dow Jones closed flat.
  • Local markets sold off on the first day of the week. The Tadawul dropped -0.9%, the ADX -1.0% and the DFM -1.4%. Markets could be buoyed later following the announcement that Dubai Electricity & Water Authority is to sell a 6.5% stake in an IPO, the latest in a series of planned major sales.

Commodities

  • Oil prices fell on Monday, as Brent crude dropped -5.1% to USD 106.9/b, while WTI fell -5.8% to USD 103.0/b. Both benchmarks are down again this morning, with Brent futures currently trading at USD 102.4/b and WTI back below 100, levels last seen at the end of February.
  • The ongoing Covid-19 pandemic in China, where the major city of Shenzen has been locked down, has raised questions over demand growth, while traders continue to look for any positive news with regards the conflict in Europe – especially given that in terms of fundamentals at least, oil is still available.
  • Nickel trading is set to resume on the London Metal Exchange tomorrow. Trading was suspended last week amidst massive volatility.

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Written By

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Emirates NBD Research Head of Research & Chief Economist


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