Chinese stock reaction to Loan Rate Cut and US banking sector concerns

Markets

US markets were closed for President’s Day yesterday. The outcome was an uneventful trading session in absence of European eco drivers. Main equity benchmarks ended mixed. Changes on the German yield curve were small apart from a minor outperformance at the very long end (30-yr: +2.4 bps). EUR/USD closed virtually unchanged at 1.0780, remaining withing the YTD downward trend channel. The pair is bumping into the upper bound of that channel with resistance today at 1.0787.

Chinese stock markets fail to profit from the biggest cut in the 5-y Loan Prime Rate since the 2019 revamp of the system (see News & Views). The likes of the Shanghai and Shenzhen composite gain only 0.25% with the CSI 300 flat. USD/CNY is again testing the 7.20 resistance area. The Financial Times runs a story on a significant decline in average reserves at the biggest US banks against bad commercial real estate loans. According to filings to the FDIC, they have fallen from $1.60 to $0.90 for every dollar of commercial real estate debt on which a borrower is at least 30 days late. Early February, US regional banking shares took a blow after New York Community Bank reported huge potential losses on its commercial property loan book, bringing back nasty memories to the SVB collapse about a year ago. Last week, regional bank shares (KBW index) recovered somewhat but we closely monitor any potential impact on the index and on risk sentiment in general from today’s article.

Today’s eco calendar is again extremely thin. The ECB publishes an in-house forward-looking tracker of wages, calculated on the basis of micro data on wage agreements provided by several national central banks. The tracker continues to signal strong wage pressure, but latest agreements indicate some levelling off (slightly above 5%). Wage growth is projected to have peaked in H2 2023 with wage pressures for 2024 hinging particularly on the outcome of ongoing and upcoming negotiation rounds that affect a large share of EMU employees covered by collective wage bargaining. The ECB specifically wants to see the outcome of Q1 data, which will only be available after the May policy meeting, ruling out any policy rate cuts ahead of that gathering.

News and views

Minutes of the February RBA meeting showed that members still considered the option of raising the cash rate by 25 bps with inflation still well above target. Especially service prices inflation remains high. The case to leave the cash rate target unchanged (4.35%) centered on the observation that the risk of inflation not returning to the Board’s target within a reasonable timeframe had eased. Inflation was expected to take a further two years or so to return towards the midpoint of the target range under the central forecast. The RBA staff still sees aggregate demand above the economy’s supply potential. Members noted that an increase in the cash rate target now could slow the growth of demand further and reduce the risk of inflation not returning to target in an acceptable timeframe. Markets currently see a 75% chance of a first rate cut in June. The Aussie dollar this morning trades marginally weaker at AUD/USD 0.653.

The People Bank of China today announced that lenders will reduce the 5-y prime loan rate by a record 25 bps to 3.95%. The reduction was bigger than the market expected. The 1-year prime loan rate was left unchanged at 3.45%, while markets were divided on a possible small reduction. Reducing this 5-year reference rate is another step of Chinese authorities to support the ailing property market, which also weighs on overall economic activity. Today’s action could support demand for long-term corporate loans as well. For now, there is not really an euphoric reaction on Chinese markets. According to sources with knowledge of the matter, Chinese lenders were reportedly selling dollars this morning, to prevent further CNY losses in the wake of the interest rate reduction.

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