Week In Review
The PBOC daily rate set for official currency exchanges has been for a much stronger-than-forecast yuan each day for the past week. It appears that the PBOC is intervening in forex markets more and more in order to maintain the yuan’s stability in the face of concerns that deleveraging efforts are slowing growth.
China’s deleveraging efforts are very necessary but also deflationary. The PBOC and Chinese governments are actively working to limit the deflationary impact and especially to limit capital outflows in response to it. It will remain to be seen whether the PBOC can use this tool effectively to manage the deleveraging’s effect on capital flows, or if this will only cause greater imbalances that will mean greater adjustments when the PBOC is no longer able to maintain its efforts.
The Saudi Arabian and Russian oil ministers announced that the current production cut agreement should be extended into 2018 in order to reduce global crude inventories to the targeted levels. Crude prices rallied on this news. Later on in the week, many firms increased their forecasts for U.S. shale production growth, and inventory level reductions remain very slow.
Saudi Arabia and Russia continue to find that U.S. production growth with oil in the $40-$50 per barrel price range means that these two producers must cede market share even to maintain prices at the current level. Ultimately, these two nations’ governments will need to reduce their use of oil revenues to fund government spending.
Industrial production rose 1.0% in April. Mining output was up 1.2% for the month, while manufacturing increased 1.0% and utility output rose 0.7%.
The increase in mining was attributable to increased oil production. Manufacturing jumped on a 5% increase in auto production. Industrial production is unlikely to post such solid numbers going forward, as automobile manufacturing should slow. However, as long as U.S. oil producers are pumping, industrial production should remain positive.
S&P Global Ratings downgraded the state of Connecticut’s general obligation bond rating from AA- to A+ this week. S&P’s downgrade came after Moody’s Investors Service’s downgrade from Aa3 to A1 two days ago, and Fitch’s downgrade from AA- to A+ last week. Connecticut has recently experienced a decline in tax collections and has announced plans to use the state’s reserve fund to help close the budget gap.
The recent downgrades will likely lead to increased borrowing costs for Connecticut, which is something the state cannot afford. One time budget fixes and tapping into the rainy day reserve fund will not solve the state’s fiscal problems. Lawmakers should focus on spending cuts and other long-term solutions as they craft the next state budget, which is due to take effect on July 1.