What’s the Story? First China then Bernanke?

by CC June 7, 2012 9:15 am • Commentary


China’s central bank lowered benchmark interest rates on loans and deposits, and moved to allow rates to float more freely, in a bid to support growth and advance reform of the financial system.

The People’s Bank of China said in a statement on its website it will lower benchmark one-year lending and deposit rates by 0.25 percentage points, effective Friday.

The PBOC on Thursday said in a statement it would cut the one-year yuan lending rate to 6.31% from 6.56%, and the one-year yuan deposit rate to 3.25% from 3.50%.

In addition, the PBOC will allow deposit rates to rise to 110% of the benchmark rate, and the lending rate to fall to 80% of the benchmark.

The PBOC had raised rates three times in 2011, with the last move announced July 6. It raised rates twice in 2010.


Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 377,000, the Labor Department said on Thursday. That was spot on the median forecast in a Reuters poll.

The government revised the prior week’s figure up to 389,000 from the previously reported 383,000.

Prior to last week, claims had risen in four consecutive weeks, adding to concerns over several months of lackluster hiring data. While the country emerged from a deep recession three years ago, the jobless rate last month was 8.2 percent, well above its long-term historical average.

Still, most of the recent increases in new jobless claims were marginal and the overall level of claims has held at levels consistent with a modest recovery in the labor market.

Calculated Risk


Meanwhile, the most important central bank is banging the drum. A number of Fed speakers have called for new measures. Last night, Fed Vice Chair Janet Yellen added another call for easing.

Now the clean-up hitter comes to the plate. There are two outs, the bases are loaded, and a shaky reliever’s on the mound. Bernanke’s Congressional testimony starts at 10 a.m. Eastern Time. He could hit it out of the park if he wanted to. We’d expect him to be a bit more even-handed, reiterating his usual line that the Fed will do anything that’s necessary to maintain the recovery, but not announcing any big plans.

The market continues to expect a big, global, coordinated rescue, which you see reflected in lower yields on Spanish bonds. It’s something we talked about yesterday.

In the first quarter, the stock market was rising at least in part on seemingly better economic data. It proved to be a head-fake, but at least it was a fundamentally based bet. Now you just have the markets playing the headline game.

It should be clear by now that central bank easing, from any or all of them, is a short-term solution to a long-term problem. The market, which is all short-term all the time, doesn’t care about that. Lower rates mean it’s easier to play the markets, and that’s enough for Wall Street.

Just don’t be fooled into thinking that anything’s been fixed because stocks are rallying.