BOJ and Fed Leadership Stake Out Contrasting Monetary Policy Stances

September 21, 2017

FOMC officials still expect to hike the fed funds rate one more time in 2017 and three times next year. The current range of 1-1.25% was not changed, but balance sheet reduction begins next month. Lower-than-expected inflation has been a mystery, but the economy and U.S. labor markets are behaving well enough not to deter policy normalization.

The Bank of Japan, in contrast, kept a negative short-term interest rate of 0.1% and its target for the 10-year JGB yield at around zero percent, enforced by quantitative stimulus. The BOJ is buying JGBs at a pace of 80 trillion yen a year. Governor Kuroda stressed that unlike the United States, expected inflation in Japan remains well below the central bank target. Underscoring the Policy Board’s dovish bias, the new member of the committee, Kataoka, dissented in favor of even more stimulus, while two previous hawks on the Board have left it.

The Central Bank of the Republic of China (Taiwan) retained a 1.375% discount rate. That’s been the level since four straight quarterly 12.5-basis points cuts, the last of which was implemented in June 2016.

The Bank of Norway maintained an unchanged policy interest rate of 0.5%. That’s been the level since a 25-basis point reduction in March 2016. Unused capacity suggests that inflation in Norway will be lower than 2.5% for quite a while longer.

The Filipino central bank overnight reverse repo rate was left at 3.0%. The last changes were a pair of 25-bp hikes in July and September of 2014, and in 2012 the central bank had lowered the rate by 100 basis points. Monetary officials at this latest review did not change projected CPI inflation, which they expect to be at 3.2% this year and in 2018 and 2019. This is manageable and within the 2-4% target boundaries. Expected inflation is steady.

Japan’s all industry index dipped 0.1% in July after only a 0.2% rise in June. The 12-month rate of increase slowed to 2.0% from 2.5% in the second quarter.

Japanese department store sales growth accelerated to 2.0% on year in August, but the on-year change in supermarket sales, which had been zero in July, swung to a drop of 0.5% in August.

Swiss authorities lowerd projected 2017 GDP growth by a half percentage point to 0.9%, which would be its weakest performance since 2009. The Swiss trade surplus in August, CHF 2.17 billion, was smaller than in any of the prior three months.

GDP in New Zealand climbed 0.8% in the second quarter, slightly more than a revised 0.6% increase in 1Q and twice as much as in the final quarter of 2016. On-year growth stayed at 2.5%.

Consumer confidence slowed in Turkey to a 6-month low.

Consumer sentiment in Denmark fell further, printing at 7.3 in September after 7.6 in August and 10.5 in July. Danish retail sales dipped 0.3% in July and recorded on-year growth of just 0.3%.

Dutch consumer confidence also dropped in the latest reported month, September. But a 2.8% on-year rise in Dutch consumer spending in July was the most in 33 months.

CPI inflation in Hong Kong slowed to 1.9% from 2.0% the month before.

Commodity prices are lower today, with drops of 0.4% in oil, 1.4% in gold and 1.0% in copper.

The dollar continued to strengthen following Yellen’s press conference. The dollar advanced overnight by 0.3% against the yen (to a 2-month high), loonie and peso. The greenback strengthened 1.1% versus the Australia and dollar and 0.7% against the kiwi, and it’s up 0.2% relative to the Swiss franc. But the euro has edged up 0.1%.

European equities rose 1.7% in Greece, 0.6% in Italy, 0.5% in France, 0.4% in Switzerland, and 0.3% in Spain and Germany. Stocks in the Pacific Rim closed mixed, with rises of 0.6% in Taiwan and 0.2% in Japan but drops of 0.9% in both New Zealand and Australia and 0.2%  in China and South Korea.

Ten-year German bund and British gilt yields rose four basis points.

U.S. weekly jobless insurance claims and the monthly Philly Fed manufacturing index and FHFA housing price index will be released today. South Africa holds a monetary policy review.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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