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 Wednesday 21 September 2016

PM Bulletin: FOMC in focus

 

 

Overnight the Bank of Japan (BOJ) announced that it was keeping its key Policy Rate unchanged at minus 0.1%. In addition it has abandoned its 80 trillion yen per annum target for asset purchases and these could now expand until CPI inflation exceeds 2%. Bear in mind that inflation is currently running at minus 0.4%, so the BOJ may have to buy loads more assets before it hits, let alone exceeds 2%. The trouble is that it’s running out of stuff to buy.

The BOJ also introduced a target yield for the 10-year Japanese government bond (JGB) of zero, effectively taking control of the first 10 years of the bond market and yield curve. The idea is that as the BOJ has a short-term interest rate of -0.1% then it can achieve a positive yield curve by anchoring the 10-year at zero. Bear in mind that the 10-year yield was minus 0.035% ahead of the announcement. Now the BOJ can steepen the yield curve and so boost the profitability of the banking sector by taking its Policy Rate further into negative territory. The BoJ has branded the programme "Quantitative and qualitative monetary easing with yield curve control."

Banks rallied on the news. In fact, global stock index futures, the dollar, gold, silver and oil were all firmer in early trade while the yen weakened initially. However, by the time the US opened the Japanese currency had rallied sharply. It now seems investors are unimpressed by the BOJ’s latest intervention.

So now focus turns to the US Federal Reserve which will announce its latest policy decision this evening at 19:00 BST.  Unlike the BOJ, it appears that the Fed has a straightforward binary choice: to hike or not to hike. The market consensus is for the central bank to hold its base rate in the 0.25-0.50 percent range and not lift again until December. Not only has recent US economic data been patchy of late, but the Fed has done nothing to prepare the markets for a rate hike. If it announces an increase in its fed funds rate then we can expect market turmoil. While the Fed knows it has to push rates up from current levels, many analysts feel it won’t risk cratering the bond and equity markets with a shock move ahead of the Presidential Election. Earlier today the CME Group's FedWatch Tool put the probability of a rate rise at 15%. However, it’s worth noting that both Barclays and BNP Paribas have bucked the consensus view and predict that the Fed will hike tonight.

But there’s actually a lot more to consider than just the Fed’s rate decision. For starters, whether the Fed tightens this evening or indicates it could wait until December, it has to make sure that it communicates clearly to the markets that future tightening will happen at a very slow pace. Remember, if the Fed doesn’t raise rates tonight, it has to explain why it believes this is the correct decision. Does this mean “talking down” the state of the US economy, or will it be able to shift the blame to uncertainty over global conditions? This will be tricky, but this is exactly what  Fed Chair Janet Yellen will have to deal with when she begins her press conference at 19:30 BST. But even before then, analysts will be pouring over the FOMC’s latest Summary of Economic Projections. This is where the Fed gives its outlook for GDP growth, unemployment, inflation and the fed funds rate to 2018 and beyond. Back in December when the FOMC voted to hike rates by 0.25%, they also projected a further 100-basis points-worth of tightening for 2016. This was one of the reasons for the stock market slump at the beginning of this year. Hopefully the FOMC will be more circumspect this time round.

David : Unlike the BOJ, it appears that the Fed has a straightforward binary choice: to hike or not to hike.

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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