Interns Luo Songwen and Feng Yanning have contributed to this article.
01 Market Outlook: Why the Japanese Yen Depreciated
In 2022, the US dollar entered a strong cycle, and major non-US currencies around the world weakened to varying degrees. Focusing on East Asia, the yen depreciation has exceeded 30% and the South Korean won depreciation has exceeded 20%. Compared with the two developed economies, , the depreciation of the onshore RMB 14% is relatively moderate. In addition to cultural factors, the common point between China and Japan in this round of strong US dollar cycle is that they are both moving against the wind and "mainly me". This article focuses on the performance and driving factors of the yen this year, and try to get some inspiration from it.
Overall, in addition to the strengthening of the US dollar, the driving factors for the depreciation of the yen include: (1) The high crude oil prices have deteriorated Japan's trade conditions since last year; (2) Japan's fundamentals of are slow to recover after the epidemic; (3) The Japanese government and the Bank of Japan (hereinafter referred to as BOJ) firmly implement the combination of loose monetary policy and fiscal policy. These three points make the depreciation of the yen more obvious than that of other countries in the G10 and other countries in East Asia. At the same time, when comparing, you should pay attention to: (1) Differences in the Sino-Japanese Exchange Rate System: Although both of them have nominal floating exchange rate systems, the degree of floating is different, and the degree of management of the yen has increased significantly after 2022. (2) China-Japan monetary policy framework differences: Although both of them were "mainly me" on the 2019 day, China's monetary policy has gradually become neutral since June, while Japan's easing in order to maintain YCC is astonishing; (3) China's economic scale and economic stage differences: China's huge size can digest part of the impact after the epidemic, but Japan's various stimulus measures after the epidemic have little effect.
1. The depreciation of the yen within the year
Overall, the driving factors for the sharp depreciation of the yen within the year can be attributed to: (1) The Federal Reserve 's continuous strengthening of the rate hike expectations : market expectations Fed rate hike path may be "short, flat, fast", but the continuous correction of interest rate hike data based on inflation and employment data has made the interest rate hike characteristics only retain "fast"; (2) The high crude oil prices since last year have deteriorated Japan's trade terms : Japan's energy imports account for 93% of energy consumption, and the surge in global bulk prices has caused Japan's trade difference to be transformed into an deficit and continued; (3) Japan's fundamentals recover slowly after the epidemic; (4) The Japanese government and the Bank of Japan (hereinafter referred to as BOJ) firmly implement a loose monetary policy and fiscal policy combination: BOJ President Kuroda Haruhiko and cabinet officials have repeatedly stated that inflation is unsustainable and fundamentals are weak. Continuous loose monetary policy is needed, and the yield curve control (YCC) framework is continued.
Specifically: (1) The Federal Reserve continues to strengthen the expectation of interest rate hikes and has become an external condition for depreciation of almost all non-US currencies: from January to mid-May, the Federal Reserve's expectation of interest rate hikes has continued to increase, and the market's expectation of interest rate hikes has gradually adjusted from 100BP to 125BP to 200BP to 275BP, and the USD index broke through 100 from 95. From mid-May to mid-June, concerns about the US recession emerged, and the situation in Europe eased. From mid-June to mid-July, the U.S. inflation data remained high, and the employment data continued to be better than expected. The Federal Reserve began to pay more attention to inflation suppression investment. In June FOMC, Powell overturned his previous statement and stated that despite his reluctance, he may continue to raise interest rates of 75BP in July. After mid-August, the stickiness of US inflation triggered further aggressive interest rate hikes by the Federal Reserve, the intensified European energy crisis dragged down the European economy, and the UK launched a large-scale fiscal stimulus plan to promote the rapid appreciation of the US dollar to 110 new platform. The inflation data in September exceeded expectations again. The US dollar index of is currently stable in the range of 112-114, and the yield of 2-year US bond fluctuates in the range of 4.45-4.65. The market expects that the target interest rate of the Federal Reserve in the United States will be adjusted to 4.75%-5.00% next year. The upward trend of the US dollar index combined with the expanding short-term spread can explain the external conditions for depreciation of all non-US currencies except rubles .
(2) Crude oil prices have deteriorated Japan's trade terms. Unlike 2009-2011, a large part of the European orders squeezed out by the impact of the epidemic in 2020 were taken over by China, while Japan has not received this part of the order due to energy problems and high domestic labor costs. This is also the core reason why China's exports can still maintain a high growth rate since 2022 and the trade difference between Japan and South Korea and other developed economies turned negative.
At the same time, since energy imports account for a very high proportion of Japan's manufacturing consumption (according to BP, Japan's total energy consumption in net energy import stations in 2015 was 93%), the crude oil prices that began to soar last year have continuously deteriorated Japan's trade conditions, which has made Japan's trade deficit this year more lasting.
(3) Japan's fundamentals recover slowly after the epidemic. Although the domestic asset prices in Japan rose significantly after the implementation of " Abenomics ", inflation was no longer obvious after the "three arrows" were shot out. The epidemic in 2020 has a greater impact on its fundamentals. "Soft fundamentals" and "unsustainable inflation" are the main reasons why officials such as Kuroda Haruhiko do not interfere in the exchange rate and continue to maintain the loose monetary policy of .
(4) The Japanese government and the Bank of Japan (hereinafter referred to as BOJ) firmly implement a combination of loose monetary and fiscal policies: Since 2013, the Abe cabinet and the reinflationist central bank officials jointly implemented "Abe economics": that is, (i) ultra-loose monetary policy, (ii) flexible adjustment of fiscal policy, and (iii) structured industrial policies to stimulate inflation, among which the ultra-loose monetary policy boosts the system In 2016, Japan implemented yield curve control (YCC), which used asset purchase methods such as treasury bonds to maintain the 10-year treasury bond yield at +/-0.25% level (previously +/-0.10%). Since 2022, Japan's 10-year treasury bonds have been testing the +0.25% boundary. BOJ has maintained this commitment by unlimited purchases of 10-year treasury bonds many times this year. In addition, BOJ has a certain obsession with the 2% inflation level. The cost of maintaining the current loose monetary policy and YCC framework is the continuous excessive currency issuance, the future lasting inflation and the rising macro leverage ratio. However, most Japanese officials currently believe that foreign debt and leverage levels are controllable, and inflation is not high and unsustainable. 7-8 Abe was assassinated on July 8, the market once suspected the sustainability of "Abe economics". Although the basic market of Kishida cabinet hates inflation, judging from the actions of Kishida Fumio himself and many cabinet officials to continue to support BOJ's operation, BOJ's loose combination punch may continue before the re-inflation faction Kuroda Haruhiko resigns in April 2023, but the cost of maintaining ease is constantly expanding for the Japanese government. In terms of intervention in exchange rates by
, BOJ conducted many oral interventions this year, but the effect was not great. Finally, on September 22 and October 21, a publicly announced intervention and a non-public intervention were conducted respectively. According to market estimates, the scale of this intervention on the evening of October 21 may exceed 5.5 trillion yen. In addition, from the perspective of interest arbitration transactions, the space for interest arbitration transactions has been narrowed after the depreciation of the yen enters the deep water zone. On the one hand, Japanese institutions continue to sell US bonds, which proves this, and on the other hand, it also makes the "slope" of the depreciation of the yen larger in the short term. Judging from the scale of foreign exchange reserves, whether it is the Japanese yen or RMB, there is still room for exchange rate intervention. The degree of subsequent intervention depends on the "slope" of the exchange rate, and on the other hand, it depends on the hidden goals of the central bank. This goal for the central banks of the two countries may no longer be a specific point mark (150 or 7.35), but more comprehensive indicators such as inflation targets and foreign exchange reserves.
2, short-term trend outlook of RMB
Recently, the RMB depreciation has been rapid, and has broken through the 7.35 resistance level twice in recent times. However, it should be noted that the US dollar index and short-term US bonds are in a relatively stable range. The driving factor of this round of depreciation is the outflow of funds caused by disturbing market expectations. On the morning of the 25th, the central bank announced that it would raise the macro-prudential adjustment parameters from 1 to 1.25. This move is aimed at this point. Currently, the central bank's goal of intervention in the market may not be just a specific RMB point. If the exchange rate is still above 7.35, the possibility of the central bank's intervention in the market will increase. You can pay attention to the exchange rate that will remain around 7.35 within a week. Although the moderate depreciation of the RMB will help hedge against the depreciation impact of other East Asian countries in , for the market, the depreciation of exchange rate may have certain constraints on the price of funds. Currently, both domestic USD/CNY forward quotations and offshore NDF forward quotations have reached historical lows. On October 25, 1M domestic forward quotations were -124pips, and the NDF was 7.1925 in one month. The expectation of may not necessarily be realized within one month at present, but the United States re-discussed the issue of weakening the rate hike. As expectations continue to stabilize, the trend of rapid depreciation of the RMB in the short term is expected to be calmed down.
02 High-frequency data tracking: production differentiation, demand is sluggish
(I) Production: steel recovery, chemical automobile repair slows down
(1) Steel production recovers. In the week of October 21, the blast furnace operating rate of Tangshan Steel Plant rebounded by 3.2% compared with the previous week, and the weekly value was 58.7%. After falling for two consecutive weeks, turned positive on the previous month; the capacity utilization rate of Tangshan steel plant rose slightly by 0.7pct to 75.1%, 8.7pct higher than the same period last year. The recent epidemic has been further controlled, the pace of steel mills shipped out has accelerated, and production conditions have improved. rebar -week production turned from a decline to a rise, up 2.0% week-on-month to 2.9919 million tons, ending the previous three consecutive weeks of decline.
(2) Chemical production continues to slow down. In the week of October 21, the load rate of the PTA factory load rate increased by 0.7pct month-on-month, the load rate of the Jiangsu and Zhejiang looms rebounded by 0.3pct, and the operating rate of the polyester filament decreased by 1.4pct week-on-month, falling for four consecutive weeks; the operating rate of the Zhejiang looms also decreased slightly by 0.1pct compared with last week, pointing to the continuous slowdown in chemical production speed.
(3) Automobile production is inconsistent. In the week of October 20, the operating rate of automobile semi-steel tires was 64.8%, up 0.4pct on the weekly basis, 9.9pct higher than the same period last year; the operating rate of automobile all-steel tires was 52.1%, down 6.8pct on the weekly basis, 6.3pct lower than the same period last year.
(II) Demand: Infrastructure construction is weakly restored, real estate is cold
(1) Infrastructure: Steel prices continue to fall. Last week, the prices of rebar, high-line, hot coil and cold coil all fell month-on-month, down 3.13%, 2.88%, 2.50% and 1.10% week-on-month, respectively. Rebar inventory continued to decline, with inventory being -5.24% on a week-on-week basis, an increase in the decline from last week, pointing to the acceleration of rebar destocking. On October 14 (latest data), the cement shipment rate fell by 0.7pct, and the operating rate of mill also turned from rising to falling, down by 3.1pct on the weekly basis. Last week, the weekly average of the cement price index continued to rebound by 0.7pct on the month-on-month, with a weekly average of 154.0%.
(2) Real Estate: Real estate sales are still sluggish. Last week, the average daily transaction area of commercial housing in 30 cities decreased by 2.8% on the weekly basis, and the weekly was 7-40.21% year-on-year. Judging from the weekly year-on-year growth rate, among which third-tier cities (-3.12%) first-tier (-31.5%) second-tier (-64.%) were in the third-tier cities (-3.12%) first-tier (-31.5%) second-tier (-64.%). In terms of land acquisition, the land transaction area in the week of October 16 was 19.06 million square meters, an increase of 9.9 million square meters from last week, and the land premium rate of 2.93%, down from last week.
(3) Consumption: Car sales performance is stable. From October 8 to 16, the passenger car market sold 477,000 vehicles, and increased 13% year-on-year, down 11% month-on-month last week; the passenger car market wholesale 472,000 vehicles, up 14% year-on-year, down 27% month-on-month last week. Since October, the retail sales of the passenger car market have decreased by 3% year-on-year, and the passenger car wholesale market has increased by 6% year-on-year. The national passenger car market has performed stably. Since some of the previous consumption has been released, automobile consumption from September to October is lower than expected, but there is still room for improvement in the future.
last week's movie box office and the number of viewers continued to decline on a week-on-month basis, down 23.5% and 23.0% respectively, with a decrease of significantly narrowing compared with the first week after the holiday; this month's cumulative year-on-year decrease of 63.6% and 60.1% respectively, with a larger decline, and the level of film consumption was lower than the same period last year.The average congestion delay index in 100 cities fell by 4.7% month-on-month, with a slightly narrowing decline; the subway passenger volume in 13 key cities fell by 4.2% month-on-month last week, among which the subway passenger volume in Shanghai, Beijing, Guangzhou and Shenzhen increased by 9.6%, 15.8%, 3.7%, and 15.5% month-on-month respectively. Due to the epidemic, passenger volume in Guangzhou has dropped significantly, and the disturbance of the epidemic is still the main influencing factor in travel.
(4) Foreign trade: The shipping index is sluggish. last week's Baltic dry bulk index (BDI) continued to fall, down 1.4% month-on-month, with a narrowing decline; the CCFI index and SCFI index fell 3.3% and 1.9% respectively, with a narrowing decline, but it shows that foreign demand is still weak; since October, the average monthly average of the CCFI and SCFI indexes were -39.44% and -60.92% year-on-year, which is still significantly lower than the same period last year, indicating that the current demand for European and American routes has decreased, and freight rates are still under pressure.
(III) Prices: Food prices rise overall, international oil prices fall
(1) Pig prices continue to strengthen, and vegetable prices turn down. Last week, the wholesale price index of agricultural products rose by 1.1% month-on-month (the previous value rose by 2.0%), and the increase of expanded; among them, pork (up 4.9%), eggs (up 3.2%), fruits (up 1.3%), vegetables (down 0.7%), vegetables rose continuously for many weeks, and pork prices remained at historical highs. The country requires all localities to increase efforts to continuously release pork reserves in multiple batches in accordance with the provisions of the pork reserve adjustment plan, and the rise in pork prices may be suppressed.
(2) Crude oil prices continue to fall. On October 21, Brent was 91.6/barrel, with a weekly average drop of 4.2% month-on-month, WTI crude oil spot price was 85.1/barrel, with a weekly average drop of 4.3% month-on-month. The United States once again announced the release of crude oil reserves, and oil prices were suppressed. Last week, the CRB commodity price index and the Nanhua Industrial Products Index turned negative again month-on-month, with weekly declines of 2.9% and 2.7% respectively. The average weekly price of thermal coal in Bohai Rim remained the same for four consecutive weeks, with a weekly average of 735 yuan/ton, and the settlement price of thermal coal futures rebounded, with a weekly decline of 3.8%.
(IV) Epidemic: Data continues to decline, affecting the regional scope narrowing
In the week of October 23, a total of 1,221 new confirmed cases of new coronary pneumonia nationwide, and a total of 4,590 asymptomatic infections in , and a total of 4,590 new cases of . The data continues to decline rapidly, with weekly and month-on-month, respectively. There were 18 provinces with more than 100 confirmed cases and asymptomatic infections within the week (22 last week), and the impact was narrowed. Among them, the epidemic situation in Inner Mongolia improved significantly, and the epidemic data in Sichuan also fell significantly, but the epidemic situation in Guangdong and Shaanxi was severe. There are 3 provinces with more than 500 confirmed cases and asymptomatic infections within the week, namely Xinjiang, Guangdong and Inner Mongolia. The total number of GDP and retail sales account for about 14% and 12% of the country, respectively.
03 Tuesday strategy review
weak economic recovery + tight funds: Hua Venture Capital Advisory Department bond market strategy (2022-10-25)
[Hua Venture Capital Advisory Department Market Tracking] US stocks rose on Monday, with the Dow Jones Industrial Average rising by 1.34%, S&P 500 Index rising by 1.19%, and Nasdaq rising by 0.86%. The three major European stock indexes also rose by more than 1.5%. The 10-year U.S. Treasury yield rose 2bp to 4.24%, and the 2-year U.S. Treasury yield rose 3bp to 4.50%. Crude oil futures closed slightly lower. The US dollar index fluctuated around 112, and the offshore RMB depreciated to 7.32.
Overseas: (1) The initial value of the US Markit manufacturing PMI in October was 49.9, a new low since June 2020; the initial value of the service industry PMI was 46.6, lower than expected, shrinking for four consecutive months; the initial value of the comprehensive PMI was 47.3, which was lower than expected and the previous value. Eurozone October manufacturing PMI hit a 29-month low, service industry PMI hit a 20-month low, and comprehensive PMI hit a 23-month low. The UK's comprehensive PMI hit a 23-month low in October, further falling below the boom and bust line . (2) It was reported on Monday that Japan may have launched the third round of foreign exchange market intervention, but the actual effect is relatively limited, and the US dollar remained at around 148 against the Japanese yen.
Domestic, the economic data for September and third quarter was released: (1) The added value of industrial enterprises above designated size in September was 6.3 year-on-year, expected 4.5%, and the previous value was 4.2%; the service industry production index was 1.3% year-on-year, and the previous value was 1.8%; (2) The cumulative urban fixed asset investment in September was 5.9% year-on-year, expected 6.0%, and the previous value was 5.8%; (3) The total retail sales of consumer goods in September was 2.5% year-on-year, expected 3.3%, and the previous value was 5.4%; (4) The urban surveyed unemployment rate in September was 5.5%, expected 5.2%, and the previous value was 5.3%; the average in the third quarter was 5.4%, down 0.4 percentage points from the second quarter. (5) China's exports (denominated in US dollars) increased by 5.7% year-on-year in September, expected to be 5.8%, and the previous value increased by 7.1%; imports increased by 0.3%, expected to be 1.3%, and the previous value increased by 0.3%; (6) GDP in the third quarter increased by 3.9% year-on-year, expected to be 3.4%, and the previous value increased by 0.40%.
Bond market needs to pay attention to:
(1) In terms of overseas markets, the PMI of major overseas countries has declined, indicating that the economy's expectations are not good during the interest rate hike cycle. The key question now is whether the economic decline can lower inflation and inflation expectations. In terms of exchange rate, when the US dollar index fluctuates relatively little, the offshore RMB depreciates more, which may be more reflected in internal factors. In any case, the pressure of RMB depreciation may have an impact on stocks and bonds.
(2) Macro data shows that the economy improved steadily in September, and fixed asset investment maintained stability with the high support of infrastructure investment and manufacturing investment, while real estate investment still grew negatively in double-digits but stabilized; production benefited from the acceleration of physical workload in infrastructure investment, and the recovery slope increased; exports slowed down as scheduled but did not stall; the consumption and service industries were weak in recovery due to the spread of the epidemic, which led to an increase in unemployment rate. GDP in the third quarter was 3.9% year-on-year, higher than expected 3.4% and 0.40% in the previous value. Among them, the secondary industry grew by 5.2% year-on-year, and the tertiary industry increased by 3.2% year-on-year, which also shows that the service industry performed weaker than the industry and construction industries under the disturbance of the epidemic.
The economy is recovered within the expected range, the main driving factors are infrastructure and manufacturing investment, and the main constraints are consumption and real estate. This structural feature has not exceeded market expectations. Looking back, the opening of consumption improvement space requires waiting for the weakening of epidemic constraints, and further improvement of real estate on the basis of stabilization still needs to accumulate policy effects.
(3) Changes in the capital side. The tax payment period has recently entered, and funds have tightened marginally, paying attention to the sustainability of funds tightening and whether the central bank hedged.
tight funds + stock and bond seesaw: Hua Venture Capital Advisory Department bond market midday strategy (2022-10-25)
[Hu Venture Capital Advisory Department market tracking] On Tuesday morning, interest rates for all terms generally rose, short-term interest rates tightened downward and rose, long-term interest rates fluctuated slightly in the early trading, and were significantly affected by the stock and bond seesaw effect. As the afternoon session approached, the Shanghai Composite Index turned red, and T fell sharply, driving the current bond interest rate to rise by about 1bp. The central bank's OMO investment of 230 billion 7-day reverse repurchase , with an expiration of 2 billion today. The capital market was particularly tight in the early trading, and the central bank's investment was marginally eased. The Shanghai and Shenzhen stock markets fluctuated wide in the early trading, and the index fell several times and was instantly pulled back; the RMB exchange rate was running at a high of 7.3. In terms of
news, (1) The National Development and Reform Commission and six other departments issued the "Several Policy Measures on Promoting the Expansion of Foreign Investment with the Focus of Manufacturing to Stabilize Stocks and Improve Quality." It proposes to facilitate international business personnel exchanges. On the premise of doing a good job in preventing and controlling the new crown pneumonia epidemic, it will facilitate the entry and exit of the senior executives of multinational companies, foreign-invested enterprises, technicians and their families. (2) The People's Bank of China and the State Administration of Foreign Exchange announced that it would raise the macro-prudential adjustment parameters of cross-border financing of enterprises and financial institutions from 1 to 1.25, and once again use foreign exchange management tools to release a signal of stable exchange rate.
Afternoon follow:
(1) Funding situation. Today's tax payment deadline is overlapping across the month, and the capital market is very tight in the morning session. The central bank has increased its seven-day reverse repurchase marginally to alleviate the tension in funds, but does not change the overall tension. In addition, the central bank raised the macro-prudential adjustment parameters of cross-border financing, releasing a signal of stabilizing the exchange rate. Last time, the central bank raised the foreign exchange risk reserve ratio on September 26, while increasing the public market supply, and the capital side tightened. Exchange rate depreciation may also have an impact on the capital market.
(2) Stock and bond seesaw effect. The stock market fluctuated sharply this morning, forming a relatively obvious seesaw effect on the bond market.Pay attention to the changes in the afternoon stock market and its impact on the bond market.
At present, fundamental factors have not yet given clear direction guidance to the bond market. The market may trade more about changes in the capital market, exchange rate and stock market. The probability of the bond market maintaining range fluctuations is relatively high. Short-term strategy recommendations should not chase the rise, and you can gradually allocate when it is low.
Zhu Dejian SAC: S0360622080006
Disclaimer
This article is published for the purpose of investor education and does not constitute any investment advice. Investors should not replace their independent judgment with such information or make decisions based solely on this information. We strive to ensure the accuracy or reliability of the information in this column, but do not guarantee the accuracy or completeness of this information, nor do we bear any responsibility for any losses caused by the use of such information.
Risk warning: The above information is for reference only, and you are responsible for the risks of operating based on this. The market is risky, so be cautious when entering the market.
