Chinese bonds rise modestly as Fed keeps policy steady

The Chinese bonds closed modestly firmer on Thursday as Federal Reserve Federal Open Market Committee voted to keep the rates unchanged. Also, weak sentiments among investors drove them towards safe –haven assets. The yield on the benchmark 10-year bonds which moves inversely to its price moved lower 0.30 pct to 2.951 pct and the yield on the 2-year bonds ticked down 0.50 pct to 2.597 pct.

Moreover, the United States Federal Reserve left policy rate unchanged in a 0.25-0.50% range, in line with market expectations. One key highlight of the statement was the removal of the note that inflation has picked up in recent months, something that was seen as a budding concern in the wake of the March statement. However, the statement noted that the Committee continues to closely monitor inflation indicators and global economic and financial developments (though seemingly treating these concerns with a milder degree of concern overall). Additionally, the statement continued to note that a range of recent indicators, including strong job gains, points to additional strengthening of the labour market (given a mildly upgraded assessment as it was previously described as growing at a moderate pace in March).

Yesterday, the China’s Westpac-MNI consumer sentiment fell to 117.8 in April from 118.1 in March. Today, the U.S. Federal Reserve will announce its policy decision at 1800 GMT; markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Moreover, focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates.

On the other hand, China's industrial profits rose by 7.4 pct y/y in March after 4.8 pct y/y in February. The People’s Bank of China is expected to begin easing policy less aggressively after property prices grew sharply and loan growth accelerated strongly in Q1, noted ANZ. Also, this is consistent with the assessment that recent economic data improved a bit - March Industrial production figures jumped to 6.8 pct y/y, higher than the market consensus of 5.9 pct y/y, as compared to 5.4 pct in the February. The March retail sales also climbed 10.5 pct y/y, more than the market expectation of 10.4 pct y/y, from 10.2 pct in February, manifested that Chinese economy is removing modestly.

"Monetary policy has already done its job after last year’s intensive easing and we expects rates on hold all year versus earlier predicting a second-quarter cut," said Harrison Hu, chief Greater China economist at Royal Bank of Scotland Plc in Singapore to Bloomberg.

"The central bank needs to save the bullets for more difficult times ahead. Fiscal policy should take over and play a larger role this year in buttressing the real economy," he added.

Meanwhile, Shanghai Composite (SSEC) fell 0.28 pct to 2,945.37 and Shenzhen Composite (SZSE) Index dipped 0.24 pct at 10,149.91.