Central banks don't seem to want to release water

▣ Author: He Qing

▣ Source: Mino Fund (ID: minuojijin)

Because it is necessary to stabilize the yuan.

However, this is not determined by its economic needs!!

Since we released PMI, import and export and inflation data in November, calls for RRR cuts and even interest rate cuts have suddenly come out.

Brokerages, state media and semi-official media are all calling for RRR cuts.

For example, Guosheng Securities believes that the social finance in October is mixed, and the RRR and interest rate cuts are on the way, such as the Securities Times commentary, which is more direct, believing that there is room and necessity for another RRR cut before the end of the year...

The logical starting point says a lot, but almost all of them revolve around the following three points:

1. There are too many debts, which consumes too much ammunition from the bank, and if you have to do follow-up lending work, you must always replenish some ammunition to the bank, right? !

2. Recently, the cost of capital in the market is somewhat high, which is not conducive to the general tone of "reducing the cost of loans for enterprises and residents";

3. During the cross-month period on October 31, there was an extreme situation of 50% overnight interest rate, and the risk of insufficient water was vividly visible.

In short, the market almost unanimously believes that the next step is to cut the reserve requirement ratio and release water.

However, on November 15, the central bank's operation was the same as last month: there were enough water pipes for turnover, but "no replenishment"!

The following chart shows the central bank's release of water on the day:

Translated in the vernacular, it is:

Today, when the 474 billion yuan of short-term funds owed by banks to the central bank (the reverse repo operation of the central bank) expires, the central bank will renew 495 billion yuan to the bank, a net injection of 21 billion yuan in disguise, and the 850 billion yuan of long-term funds (one-year MLF) owed by the bank to the central bank today will expire, and the central bank will renew 1.45 trillion yuan to the bank, a net investment of 600 billion yuan in disguise.

In this operation, the central bank is obviously making up for the lack of water in the market. However, compared with the cheap funds released by the RRR cut, it seems that the central bank does not want to release water.

So, why is it different from the script expected by the market?

The author believes that the central bank's concern is likely to be the RMB!

Or, to be more precise, the central bank is more inclined to stabilize the renminbi than the depreciation of the renminbi.

Recently, the central bank has mentioned the renminbi in many speeches, "not to let the renminbi become hairy", "to prevent the unilateral renminbi ... Overshoot risk" and so on.

Now the Federal Reserve's monetary policy is finally running on the path of not raising interest rates, which is conducive to stabilizing the value of the RMB.

After all, the funds released by the RRR cut are 0 cost, which will slightly impact the market interest rate, while the MLF continuation bank still has to pay interest.

In addition, this operation also echoes the previous period of time when the central bank asked banks to reduce overseas RMB loans to prevent the depreciation of the yuan.

Therefore, the logic of the central bank's reluctance to release water through RRR cuts is likely to be as follows:

If you are short of money in the market (banks and other financial institutions), then I will replace the RRR cut with the continuation of MLF, which not only meets the requirements of you for water, but also avoids the impact on the RMB.

But is this the end of it?

No, certainly not!!

Remember, when "what the market wants" and "what the policy gives" are not consistent, please always trust the market!!

No, the rich are still betting on the bullish 10-year Treasury bond futures, which is essentially betting that the central bank will also "ease marginally".

Although the lack of money in the market is not a necessary condition for RRR cuts, it is when the economic pressure increases.

In 2018, the governor of the central bank described the central bank's monetary policy, which prioritizes the internal when there is an imbalance between the inside and outside.

In 2022 and 2023, we have been facing the problem of balancing internal and external imbalances, with monetary easing needed to support economic recovery internally and tight currency needed to stabilize the RMB exchange rate externally.

Whenever the high-frequency economic data in a single month is not ideal, the market will trade the expectation of RRR and interest rate cuts, and at this time, there are always people who use the RMB to refute that the central bank cannot do this.

But what is the result?

Every time an internal imbalance requires a RRR cut or interest rate cut, the central bank will act decisively.

Now that the market is short of water and the cost of borrowing money remains high - DR007 has been higher than the reverse repo rate for a month in a row, and the economy is still at a critical juncture of recovery, it is hard to believe that the central bank will let interest rates remain high?!

Therefore, even if the central bank is likely to continue to pass the MLF today, it still cannot eliminate the market's concerns - the cost of funds is too high, and there are still many tasks to be done to reduce debt and lending, which is not conducive to internal balance.

Perhaps betting on the marginal downward trend of the funding rate is still a very good choice to go long on interest rate bonds.

Of course, we don't expect too much, just deal with the calves in stages. When the policy is implemented and leave the market in time, then observe, if the problem has not been solved, you can continue to bet...

In fact, the probability that the debt cow is not over is extremely high!

Take monetary policy itself, if we follow the Taylor rule, then monetary policy should continue to lower interest rates and cut interest rates.

Monetary policy under Taylor's rule, policy rate = real interest rate + inflation expectations + inflation gap + output gap.

Nowadays, everyone can feel how inflation expectations are, and the CPI and PPI are hovering below the 0 axis, which is conducive to interest rate cuts.

The inflation gap is the central bank's judgment that future inflation will rise or fall as expected, and if it rises, interest rates will be raised, and if it falls, interest rates will be cut.

The output gap is closely related to employment, and if employment is full, interest rates will be raised, and vice versa, interest rates will be cut, which is obviously conducive to interest rate cuts at the moment.

To sum up, in addition to the central bank's judgment on future inflation, it is conducive to cutting interest rates.

The arrangement envisaged at the beginning of the year is the inflation target of 3%, which will definitely not be completed this year, and it is likely to affect the central bank's judgment on the inflation gap (essentially the judgment of domestic demand recovery) so as to run in the direction of interest rate cuts.

In addition, the most important thing is still fiscal policy!

Although the fiscal policy has been loosened and another 1 trillion yuan of national debt has been built, the stance of tightening the debt to local governments has not changed, which will make it difficult for the water to continue to flow downstream, and it will remain in the financial system.

After the end of this round of fiscal spending, it is inevitable that there will be an embarrassing phenomenon of no one borrowing money, and the problem will be thrown back to the central bank.

Then, from the perspective of the central bank, it can only continue to ease money, cut the reserve requirement ratio and cut interest rates to support the economy (or stabilize the economy).

Therefore, if the fiscal blockage caused by the debt is not solved, and the water cannot flow smoothly, domestic demand will still be under pressure, forcing the central bank to easing. The central bank needs to stabilize the renminbi and can only passively "drop a little" at a time, not in one step...

This was the case this year, and it is likely to be the case in the future.

This is all creating opportunities for the bond market!!

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