Month: May 2021

Authored by Mark Hendrickson via The Mises Institute,

To most people, “inflation” signifies widespread rising prices. Economists have long argued, as a matter of technical accuracy, that “inflation” denotes an increasing money supply. Frankly, though, most people don’t care what happens to the supply of money, but they care a lot about the prices they pay, so I’ll focus primarily on the numerous rapidly rising prices Americans are paying today.

Following are several examples of the current inflation:

Corn, soybeans, and wheat have been trading at multi-year highs, with corn having risen from around $3.80 per bushel in January 2020 to approximately $6.75 now. Chicken wings are at all-time record highs. It is getting more expensive to eat.

Copper prices have risen to an all-time high. Steel, too, recently traded at prices 35% above the previous all-time set in 2008. Perhaps most famously, the price of lumber has nearly quadrupled since the beginning of 2020 and has nearly doubled just since January.

Naturally, with raw materials prices soaring, prices of manufactured goods are jumping, too. That is especially noticeable in the housing market, where the median price of existing homes rose to $329,100 in March—a whopping 17.2% increase from a year earlier.

The cost of driving is soaring, too.

According to J.D. Power, cited in The Wall Street Journal, the average used car price has risen 16.7% and new car prices have risen 9.6% since January.

So, are you depressed yet? Perhaps you can take some comfort in Uncle Sam’s official price indexes where the price increases seem (at least at first glance) less jarring. But remember that the most commonly cited inflation indicator, the Consumer Price Index (CPI), is computed on the basis of a mythical “urban basket of goods” that often bears little relation to what you and I actually buy. The CPI, excluding food and energy, rose “only” 0.9% in March. That doesn’t sound like much, but it was the biggest one-month increase since 1981 when, for those of you too young to remember, annual inflation was 10.32%. As for the Producer Price Index (PPI), which generally precedes increases in consumer prices, it is increasing at the highest rate since 2010, according to the Department of Labor.

The Federal Reserve (Fed) has assured the public that the current inflation is transitory and that they have it under control. I don’t know the future any more than Fed officials do, but I do not share their confidence. I am skeptical because: first, the Fed since its inception has had a terrible track record accomplishing any of the tasks assigned to it by Congress; second, it’s impossible for the Fed or any other entity to control millions of prices and therefore to control the rate of inflation (to believe otherwise is a central planner’s conceit).

Tragically, the Fed has been trying for years to boost inflation to 2% annually. How bizarre that our central bank would deliberately strive to reduce the value of our money. At 2% per year, money loses half its purchasing power in 35 years. That would be half of your nest egg, Millennials!

Today’s inflation is already problematical. A higher cost of living falls hardest on the poorest Americans. Given the present uncertainty about future prices, numerous businesses are struggling to determine how much to produce, and thus are more likely to over-produce or under-produce. Furthermore, if inflation causes foreigners to lose confidence in the dollar, there could be an exodus from the dollar that could end its status as the principal global reserve currency, thereby triggering an even steeper decline in the dollar’s purchasing power.

The quantity of dollars already has risen 32.9% in the last 17 months (mostly due to the federal government’s mind-boggling spending binge). It’s possible that we have passed a tipping point where prolonged inflation higher than the hoped-for and already-objectionable 2% is unavoidable.

Hang on tight, folks. We could be in for a rough ride in the months ahead.

Belgium has recalled its ambassador to South Korea after his wife allegedly assaulted two employees of a shop in Seoul, an incident that elicited widespread public anger in South Korea.

According to the AP, the Belgian Embassy said Foreign Affairs Minister Sophie Wilmès had decided that it was in the best interest of bilateral relations to terminate Ambassador Peter Lescouhier’s tenure as Belgium’s ambassador to Seoul, a position he has held for three years. It’s been said that he will depart this summer, but an exact date hasn’t been released.

Although Lescouhier served his country with dedication, “the current situation doesn’t allow him to further carry out his role in a serene way,” the embassy said Monday. The Belgian government also waived diplomatic immunity for Lescouhier’s wife, Xiang Xueqiu, to allow her to be investigated by the South Korean police. However, her immunity remains partially intact, protecting her from criminal trials or punishment.

Lescouhier issued an apology on behalf of his wife earlier this month, saying she “might have had her reasons to be angry at the way she was treated in that shop but committing physical violence is totally unacceptable.” Xiang met privately with the two shop employees and apologized, the embassy added.

According to South Korean media, Xiang reacted angrily when a shop employee asked about the jacket she was wearing, suspecting that it might have been stolen. Security camera video captured her response, which included shoving and slapping an employee in the face and hitting another on the head.

In the wake of the incident, the video was leaked to the South Korean press and it prompted thousands of citizens to sign petitions to the presidential website calling for the wife of the ambassador to be expelled from the country. However, since SK is a signatory to the Vienna Convention, it grants diplomats and their families protections against criminal prosecution, although immunity can also be voluntarily waived.

Authored by Janita Kan via The Epoch Times,

Texas Democrats abandoned the House floor on Sunday night in an effort to prevent the passage of a sweeping election overhaul bill that had already passed the state’s Senate.

The Democrat lawmakers managed to defeat the bill temporarily by breaking the quorum needed to hold a final vote on the bill. According to the state’s House rules, at least 100 members were required to be present for the chamber to conduct business.

Gov. Greg Abbott, a Republican who supports the bill, responded to the Democrat’s move in a statement on late Sunday, vowing to call a special session to revisit the bill.

“I declared Election Integrity and Bail Reform to be must-pass emergency items for this legislative session. It is deeply disappointing and concerning for Texans that neither will reach my desk. Ensuring the integrity of our elections and reforming a broken bail system remain emergencies in Texas. They will be added to the special session agenda. Legislators will be expected to have worked out the details when they arrive at the Capitol for the special session,” Abbott wrote.

State Rep. Chris Turner (D), the chair of the House Democratic Caucus, appeared to be the main impetus for the walkout.

According to several media outlets, Turner had sent a text message informing other Democrats to “leave the chamber discreetly” ahead of the midnight deadline.

The Democrat lawmakers then confirmed their move following the walkout saying that on Sunday, they used their “last tool” to kill the bill.

“We denied the quorum that they needed to pass this bill and we killed that bill,” Turner told reporters.

“One of the many great traditions of the African American church in this country is ‘Souls to the Polls.’ … Republicans were determined to take that away.”

The Texas House Republican Caucus responded to the move, condemning the actions of their colleagues.

“The Texas House Republican Caucus condemns the actions of their colleagues in the Texas House who chose to vacate their Constitutional responsibility and leave millions of Texans without resolution on key issues in the final hours of the legislative session,” the statement said.

“These individuals quit on their constituents and they quit on Texas. The Caucus is fully committed to taking all necessary steps to deliver on election integrity and bail reform, two issues flagged by our governor as emergency items.”

The bill was approved in the Senate largely along party lines after an overnight debate stretched into the morning of May 30, according to local media.

The measure would grant more power to poll watchers by giving them more access inside polling areas, while creating new penalties against election officials who restrict poll watchers’ movements. The proposal would also allow a judge to void the outcome of an election if the number of fraudulent votes could change the result.

Officials who send mail-in ballots to people who didn’t request them may also face criminal penalties, according to the bill.

President Joe Biden has also weighed in on the bill, characterizing the voting integrity law as an “attack” against the right to vote.

“It’s wrong and un-American. In the 21st century, we should be making it easier, not harder, for every eligible voter to vote,” Biden said in a statement.

“I call again on Congress to pass the For the People Act and the John Lewis Voting Rights Advancement Act. And I continue to call on all Americans, of every party and persuasion, to stand up for our democracy and protect the right to vote and the integrity of our elections.”

Florida and Georgia have both passed a bill that adds additional measures that seek to protect the sanctity of the ballot box and to add security to other methods of voting. The laws have faced significant pushback from Democrats who say that the bills represent voter suppression.

It was anything but “sell in May”…

With US markets closed for Memorial Day, Emini futures traded virtually at 4,200 amid light volumes as world stocks were firmly on track to post a fourth straight month of gains on Monday.  MSCI’s index of world stocks drifted 0.1% higher, putting the gauge on track for a 1.4% gain for May. It is the longest monthly rising streak for the index since August 2020, when it marked a five-month run of gains, according to Reuters.

S&P 500 and Nasdaq 100 futures swung between small gains and losses amid shortened trading hours due to the Memorial Day holiday in the U.S. The dollar was steady against a basket of peers.

The dollar continued to struggle ahead of a slew of European and U.S. data this week that will provide a clearer picture on the global economy’s recovery path, while Brent was trading just shy of $70 after OEC

With US traders out, European stocks struggled for direction as markets awaited fresh catalysts, with the US payroll data later this week set to provide further clues on the outlook for the biggest economy. Europe’s Stoxx 600 index fluctuated in a narrow range. Spain’s Endesa SA dragged the utilities sector lower following reports the Spanish government is preparing to rein in windfall profits for power producers. Deutsche Bank AG dropped after the Federal Reserve warned that its compliance programs aren’t adequate. U.K. markets were closed for a holiday. Here are some of the biggest European movers today:

• Cattolica jumped as much as 14% in Milan trading after Assicurazioni Generali offered to buy all the shares it doesn’t already own in the Italian insurer at EU6.75 apiece in cash.
• Norwegian Air gained as much as 13% after the battled airline resumed flying in Sweden on Monday. The company said it will offer 31 destinations from Stockholm and two from Gothenburg in the summer.
• Spanish utilities fell Monday with Endesa down as much as 5.4% after reports during the weekend that the government is preparing to rein in so-called windfall profits from nuclear and hydraulic energy plants.
• Solutions 30 shares slumped as much as 14% after the technology-services company said it will hold its annual shareholder meeting and a special meeting on June 30 although it hasn’t yet chosen a new accounting firm, while the company’s auditor refused to certify 2020 accounts.

Earlier in the quiet session, Asian stocks rose with the benchmark gauge on track to outperform the S&P 500 Index for the first month since January. The MSCI Asia Pacific Index went up 0.3%, buoyed by shares in Indonesia and Taiwan. China’s CSI 300 Index closed 0.2% higher Monday, extending gains after its best weekly surge since February on the back of record foreign buying of local stocks. Meanwhile, Malaysian stocks were among the day’s biggest decliners, with the benchmark index sliding 0.7% after the government imposed a two-week nationwide lockdown to curb a surge in Covid-19 infections. Shares in Japan and the Philippines also fell. Still, the Asian gauge is poised to gain more than 1% in May, in its second straight monthly advance as inflation concerns ease globally and the dollar weakens. The MSCI Emerging Markets Index, in which China has the largest weighting, climbed 1.1% Monday to its highest level since March 4. “We expect equities to nudge higher on strong earnings,” Nomura Holdings Inc. strategists led by Chetan Seth wrote in a mid-year outlook report on Asia Pacific equities. “Modest tightening of global liquidity in 2H implies multiples remain constrained and thus earnings growth/revisions will be the key to take stocks higher.” The brokerage has a year-end target of 900 for the MSCI Asia ex. Japan Index, implying a 1.8% upside from its Friday’s close.

Japanese stocks fell as investors took advantage of Friday’s rally to trim holdings as they assess the economic impact of the state of emergency for the nation’s major cities. Electronics makers and machinery companies were among the heaviest drags on the Topix, after being some of the biggest boosts to the gauge’s jump at the end of last week. SoftBank Group was the top contributor to the decline in the Nikkei 225 Stock Average after a report said Credit Suisse Group AG will no longer do any new business with the Japanese firm. Shares of Renesas Electronics Corp. slid after the Japanese automotive chip maker announced that it will raise $2 billion from a stock sale to fund its purchase of Apple Inc. supplier Dialog Semiconductor Plc. “Japanese equities are prone to a selloff” given the gain on Friday, said Hajime Sakai, the chief fund manager at Mito Securities Co. in Tokyo. Whether the Nikkei 225 can head back toward 30,000 “will depend on how soon the country can go back to normalizing economic activity,” he said. Shares are underperforming the broader MSCI Asia Pacific Index after economic figures illustrated the pandemic’s impact. While factory output increased at a faster pace in April, retail sales dropped last month. Domestic demand remains subdued amid another virus wave and a third state of emergency the government extended last week until June 20. Shoji Hirakawa, the chief global strategist at Tokai Tokyo Research Institute, said the Nikkei 225 may waver near 29,000, a key psychological level for the market. The blue-chip gauge closed above that level for the first time in almost three weeks on May 28, while the Topix climbed the most since March 1

Despite the popular mantra that this is the month to sell, May has proven to be a decent month for asset markets but that may not last as policymakers are increasingly faced with the dilemma that inflation is running hot while the underlying structural economy is still struggling to gain traction. The Fed is facing growing pressures to taper between record usage of its reverse repo facility (as half a trillion dollars are now parked at the Fed earning nothing due to a monster liquidity glut), and surging inflation which may or may not be transitory.

Until then, however, sentiment is bullish with global stocks trading near a record, lifted by the ongoing economic recovery from the pandemic and injections of stimulus. The rally has so far weathered concerns that price pressures could force an earlier-than-expected reduction in central bank support. But investors remain sensitive to the risk, and Friday’s U.S. non-farm payrolls report could buffet markets if it changes perceptions of the rebound’s strength.

“Policy makers have committed to accepting a higher level of inflation, higher volatility in inflation and as that happens you will see inflation moving structurally higher,” Mixo Das, JPMorgan Asia equity strategist, said on Bloomberg TV. “I don’t think this is in the prices yet.”

“The question is, therefore, whether by September the Federal Reserve will be in a position to announce a tapering of its bond purchases starting next year, and the odds are quite decent though it might be delayed to December,” said Sebastien Galy, a strategist at Nordea.

There’s no Treasuries cash trading today, after the 10-year yield closed just below 1.6% on Friday. Among central banks debating inflation trends, the European Central Bank is perhaps the outlier with both policymakers and investors on the same page when it comes to expecting a return to below-target inflation, according to Ulrich Leuchtmann, head of FX and commodity research at Commerzbank. That was evident in the bond markets too, where yields on benchmark German debt remained well below recent highs.

In FX, the yuan was the big mover in global currency markets after policymakers directed financial institutions to hold more foreign exchange in reserves, a move that analysts say was aimed at curbing yuan strength. In the offshore markets, the yuan currency weakened 0.23% versus the U.S. dollar with analysts at ING arguing that Beijing’s latest move will slow the currency’s rise but won’t halt it completely.

In commodities, crude oil rose with Brent approaching $70 as the market focused on an OPEC+ supply policy meeting early this week, while gold headed for the biggest monthly advance since July and most industrial metals gained. Concerns about global inflation and slowing growth have proved to be a boon for gold, with prices for the yellow metal rising 8% this month, vaulting comfortably above $1,900.

Unusually quiet cryptocurrencies showed some signs of volatility in holiday-stricken trading with bitcoin rising 4% to $37,000 while its smaller rival Ethereum climbed 8% to $2,578. Crytpos recovered Friday and weekend losses after Bank of Japan Governor Haruhiko Kuroda became the latest central banker to bash bitcoin and its peers amid fears the capital outflow will spoil the central bankers’ digital currency plans.

The main event of the week will be U.S. payrolls on Friday with median forecasts at 650,000, but the outcome is uncertain following April’s unexpectedly weak 266,000 gain. Although U.S. inflation data last week was above estimates, another big miss on the jobs front would heap pressure on the Fed to postpone plans to wind down its stimulus. On the other hand, a 1MM print or higher and taper talk speculation will return.  The Fed next meets on June 16, and this week will be the last chance for members to discuss policy before a pre-meeting blackout period starts on June 5.

* * *

A quick look at global markets courtesy of NewsSquawk

Asian equity markets began the week subdued with risk appetite sapped amid holiday closures for key global markets, month-end factors and as the region also digested mixed Chinese PMI data. ASX 200 (-0.2%) traded marginally lower with the index pressured by underperformance in energy, tech and financials although downside was cushioned by strength in metal-related stocks, especially gold miners after the precious metal reclaimed the USD 1,900/oz status and domestic producers came close to topping China in terms of the world’s largest gold output during Q1. Furthermore, Australia’s tensions with its largest trading partner continued to linger with the government readying to launch a second WTO action in its trade dispute with China after finalising consultation with wine exporters in recent weeks. Nikkei 225 (-1.1%) underperformed after the extension of the state of emergency for Tokyo and several other prefectures on Friday in an effort to slow COVID-19 infections and as the Olympic games remain on the line, with mild currency inflows and weaker than expected Industrial Production and Retail Sales figures adding to the headwinds for the Japanese benchmark. Hang Seng (-0.5%) and Shanghai Comp. (-0.2%) conformed to the uninspired mood after mixed Chinese PMI data in which the headline Manufacturing PMI slightly missed expectations but Non-Manufacturing PMI topped forecasts. The factory activity data was seen as a stabilization which was said to support analysts’ views that China’s economic activity could be peaking in Q2, while reports late last week added to the China crackdown narrative with the securities regulator paying greater attention to fluctuations in commodity prices recently and vowed to take action on future market violations. Finally, 10yr JGBs were flat despite the risk averse tone in Japan as price action was constrained amid the similar lacklustre trade in T-notes and following weaker demand at the 2-year JGB auction.

Stocks in Europe trade without a firm direction (Euro Stoxx 50 -0.2%), as the tentative sentiment reverberated from APAC amid low volumes as UK and US participants observe domestic holidays. That being said, some money could be funnelled into crypto markets in the absence of cash stocks. Back to Europe, sectors are mixed with no overarching theme or bias and narrow breadth of the market. Travel & Leisure resides as a narrow outperformer alongside Construction and Financial Services, whilst Telecoms, Healthcare, and Banks reside on the other end of the spectrum. Of note for the auto sector, Stellantis (+0.2%) has been forced to reduce more operations amid the chip shortage. Food and Beverages saw a firm start to the week, potentially as Danone (+1.1%) and Nestle (+0.1%) cheered China’s child policy relaxation whereby it will permit up to three children from the prior of two. Nestle, however, drifted lower thereafter as reports suggested that 60% of its mainstream good and drink products do not meet the “recognised definition of health”. In terms of other movers, Deutsche Bank (-1.6%) is pressured following source reports that the US Federal Reserve has warned the Co. that it is failing to address shortcomings in anti-money-laundering controls – with the central bank’s frustration reportedly escalating to the point a fine could be issued. One to keep an eye on the broader inflationary narrative – UK homebuilder Travis Perkins has warned customers of “considerable” cost increases due to rises in raw material prices. It said the increases could affect its other brands, which include Keyline and BSS. Travis Perkins said the price of bagged cement would rise by 15%, chipboard by 10% and paint by 5% from Tuesday.

In FX, the Dollar and index have lost momentum after their pre-weekend short squeeze that was likely exacerbated by the fact that the final trading day of the month coincides with US and UK market holidays. However, most Greenback vs G10 pairs remain relatively rangebound and in familiar territory, as evident in the DXY rotating in a tight range around the 90.000 level (between 90.123-89.961) that has been pivotal for so much of May, following the Buck’s decline from peaks early on. Looking ahead, external factors look set to dictate on Memorial Day for obvious reasons, but there could be some last minute rebalancing left to do or late fine-tuning of positions, and to recap this should mildly favour the Dollar against the Yen especially.

• AUD/NZD – Having failed to sustain momentum when last within striking distance of 0.7800 vs its US counterpart and losing out to the Kiwi in wake of last week’s hawkish RBNZ rate guidance, the Aussie is holding comfortably above 0.7700 and has rebounded further from near 1.0600 lows awaiting Tuesday’s RBA policy meeting that may be more upbeat given recent economic developments. Nevertheless, the Aud/Usd and Aud/Nzd rebounds look more corrective at this stage amidst somewhat mixed credit data and Chinese PMIs, while Nzd/Usd is consolidating either side of 0.7250 in wake of comments from RBNZ Assistant Governor Hawkesby stressing conditionality surrounding the revised OCR path and warning markets not to pre-empt a hike. Next up for the Antipodeans, AIG’s manufacturing PMI and NZ building consents.
• JPY/EUR/CHF/CAD/GBP – All narrowly divergent vs their US rival, with the Yen firmly back over 110.00 irrespective of Japanese ip and retail sales falling short of consensus, the Euro straddling 1.2200, Franc rotating around 0.9000, Loonie meandering from 1.2087-36 and Pound hovering under 1.4200. Meanwhile, Sterling is also marginally lagging the single currency circa 0.8600 in late May UK Bank holiday trade and with the Euro weighing up latest dovish ECB commentary via Visco against firm Eurozone inflation data. Elsewhere, not much independent direction from latest weekly Swiss sight deposits as domestic bank balances dipped, but Canadian PPI and current account data may Usd/Cad some impetus later.

In commodities, WTI and Brent futures trade higher but off best levels at the time of writing as volumes are dry amid the absence of UK and US players, and against the backdrop of the JCPOA meeting in the run-up to tomorrow’s back-to-back JMMC/OPEC+ confabs, slated for 13:30BST/08:30EDT. Sources via EnergyIntel have suggested that it is more likely that the current quota (through to July) will not be altered. Still, the return of Iranian oil is said to be one of the main topics at the upcoming meeting – with the situation contingent on developments in nuclear negotiations, which are said to have persisting sticking points. Note, participants expect the official announcement of a deal last week. Nonetheless, the Iranian oil minister hit the wires this morning and suggested that Iran, under specific requirements, could ramp up output 6.5mln BPD (vs last reported 2.5mln BPD). As a reminder, reports earlier this month citing the National Iranian Oil Corp suggested that under the most optimistic scenario, Iran could return to pre-sanctions levels of almost 4mln BPD in around three months. Iran has stated that it will not accept an OPEC quota until production levels return to pre-sanction levels. In terms of price action, WTI July has reclaimed a USD 67/bbl handle (vs low USD 66.41/bbl), and Brent Aug trades on either side of USD 69.50/bbl (vs low USD 68.75/bbl) – with some potential tailwinds from China widening its child policy and the OECD upgrading its 2021 forecasts across the board for major economies. Elsewhere, spot gold and silver tread water in tight ranges around USD 1900/oz and USD 28/oz amid a lack of fresh drivers and ahead of key risk events later this week, including the US jobs report and US ISM surveys. Turning to base metals, with the absence of LME, Shanghai copper overnight rose amid threats from the Chilean strikes at BHP mines, solidifying supply woes. Meanwhile, steel and iron ore futures in China rebounded, with traders citing a robust supply/demand balance despite jawboning from China.

By Jack Phillips of The Epoch Times

A Black Lives Matter chapter founder in Minnesota has resigned, claiming that the organization isn’t concerned about helping black communities or helping improve the education quality in Minneapolis, according to a video published last week.

Rashard Turner, the founder of a Black Lives Matter chapter in neighboring St. Paul, said he started the branch in 2015 but became disillusioned roughly a year after becoming “an insider” within the left-wing organization, according to a video released by TakeCharge—a group that rejects various provisions promoted by Black Lives Matter, including critical race theory-linked claims that the United States is inherently racist.

“After a year on the inside, I learned they had little concern for rebuilding black families, and they cared even less about improving the quality of education for students in Minneapolis,” Turner said in the video.

“That was made clear when they publicly denounced charter schools alongside the teachers union. I was an insider in Black Lives Matter. And I learned the ugly truth. The moratorium on charter schools does not support rebuilding the black family. But it does create barriers to a better education for black children. I resigned from Black Lives Matter after a year and a half. But I didn’t quit working to improve black lives and access to a great education.”

Representatives for Black Lives Matter didn’t respond to a request for comment by press time.

Approximately a year after George Floyd’s death in Minneapolis, support for the group has plummeted in the United States, according to a recent poll from Morning Consult. Only 48 percent hold favorable views about the organization, down from 61 percent last May.

A USA Today survey found that 36 percent of Americans now would describe Floyd’s death as a murder, down from 60 percent last summer.

A poll in May conducted by the newspaper revealed that the Black Lives Matter call to “defund the police” has even less support, with only 18 percent of respondents supporting it.

It comes amid recent controversies surrounding Patrisse Cullors, a co-founder of the organization who resigned after a series of reports about her real estate portfolio and finances. Following the reports’ publication last month, Cullors asserted that she didn’t misuse any donations to Black Lives Matter.

In a statement last week, Cullors—a self-described “trained Marxist”—said, “With smart, experienced, and committed people supporting the organization during this transition, I know that BLMGNF is in good hands … The foundation’s agenda remains the same—eradicate white supremacy and build life-affirming institutions.”

Cullors told The Associated Press that her departure was planned more than a year in advance and wasn’t related to the reports about her finances and her multiple homes, claiming they “were right-wing attacks” meant to defame her character.

The signs were clear last Thursday when China’s PBOC held an unexpected, improvised meeting with major forex market players after which the central bank published a statement that exchange rate can’t be used as a tool to stimulate exports via depreciation nor to offset impact of rising commodity prices via appreciation. While many had been looking in the rearview mirror, discussing the recent surge in the yuan, and speculating that the PBOC meeting was merely a warning from Beijing that the marcantilist nation (which in recent years has specialized in exporting deadly viruses in the pursuit of a grand reset) wouldn’t look too fondly on more appreciation…

… the reality is that the PBOC’s verbal jawboning against a stronger yuan (and by extension, against a weaker dollar) was a warning for more tangible action on Tuesday, when shortly after the offshore Yuan spiked above 6.36 a little after 4am ET, the PBOC unexpectedly announced that for the first time in 14 years, it would hike the required-reserve ratio on foreign currency deposits at financial institutions from 5% to 7% effective from June 15, in an attempt to slow the yuan’s appreciation, in line with official rhetoric.

This was the first FX RRR hike since May 2007, after its appreciation following yuan reform in 2005.

According to Bloomberg’s David Qu, “deploying a tool rarely used underscores the authorities’ determination to maintain yuan stability, a crucial factor for external trade. It signals the authorities are becoming less tolerant of yuan gains and have started to act, after verbal interventions.”

Banks will now have to hold extra dollars with the PBOC instead of making loans or selling the dollars for yuan in the interbank market, with the latter likely to pressure the PBOC to absorb it in the form of funds outstanding for foreign exchange. The central bank may be reluctant to do that in order to avoid explicit FX intervention and unnecessary yuan liquidity injections in exchange.

Predictably, the announcement hit the yuan, with the offshore yuan sliding from 6.355 to 6.375 before resuming its upward crawl…

… as traders realized that the RRR hike would have limited impact on the yuan’s exchange rate over the longer term, since it does not shift fundamental factors driving yuan strength, such as the difference in policy stances of the PBOC and the Federal Reserve, with China far tighter (for now).

Quantifying the move, Australia & New Zealand Banking Group head of Asia research Khoon Goh said that with total FX deposits at $1 trillion, banks will need to set aside an extra $20BN, which will tighten FX liquidity and prompt banks to buy dollars, weakening the yuan if not dramatically.  Which is why according to Goh, while the PBOC has sent a strong signal that it wants to slow down the pace of yuan appreciation by raising the FX reserve requirement, the actual impact of the move is likely to be small after the initial adjustment.

Meanwhile, banks will probably reduce USD interest rates they offer to offset the increased reserve requirement, pushing the yield advantage further in favor of yuan deposits. This may encourage corporates and households to convert existing FX deposits into yuan; exporters may also decide to convert more of their foreign currency receipts into yuan rather than hold them as FX deposits.

Commenting on the move, UBS FX strategist Rohit Arora said that the weekend commentary and the USD liquidity draining move was a signal of the PBOC’s discomfort with rising one-way yuan expectations.

“China’s cyclical support is peaking — so perhaps what’s looking like a one-way trend today will start looking different down the line when China growth is underperforming major DM economies.” And while UBS sees a possibility of a potential appreciation to low 6.20s in the near-term, the bank’s year-end forecast for USD/CNY is 6.40 with some downside risks.

“It’ll be a slow grind with sustained policy restraint”, said Arora adding that “while it might be tempting to believe that the elevated inflation may have catalyzed a policy shift, one week is too small a sample set to conclude a shift in a decades-long FX regime of a ‘managed float’.”