First the BOJ and Now onto the Fed

September 21, 2016

The Bank of Japan Board reconfigured its monetary policy framework, switching the policy’s anchor from quantitative stimulus with a negative marginal policy deposit rate to an orientation that aims to manipulate the yield curve, making such slope upward, and to raise expected inflation through plans to overshoot the inflation target. Details of the new approach are laid out in a released statement. The monetary base growth target was scrapped by plans for such to rise in the long run were retained. The central bank will continue to buy 80 trillion yen per year, and a 3-tiered interest rate including -0.1% policy deposit rate were left unchanged, too.

Japan’s customs trade position in August was a deficit of JPY 19 billion, versus an expected surplus but still 97% smaller than the August 2015 deficit.  Exports and imports posted on-year declines of 9.6% and 17.3%. The seasonally adjusted surplus widened to JPY 408 billion from an upwardly revised JPY 340 billion in July and JPY 346 billion in June. Exports were flat on month, while imports fell another 1.3%.

Japanese supermarket and department store sales in August were 2.9% and 6.0% lower than a year earlier. Both on-year comparisons were weaker than those recorded in July. Machine tool orders fell 8.4% on year in August, matching the preliminary estimated decline. Such had dropped nearly 20% on year in both June and July and by more than that in February through May.

In the year to August, consumer prices in South Africa rose 5.9%, a 20-month low. Malaysia’s CPI accelerated to a 12-month 1.5% advance in August from 1.1% in July and more than 2.5% in the first half of 2016. South Korean producer prices fell 1.7% versus a 2.5% on-year decline in July.

Britain had a GBP 10.1 billion net public sector borrowing  last month, but the net public sector cash requirement was only GBP 0.7 billion.

Canadian wholesale turnover increased 0.3% on month and 3.3% on year in July.

U.S. mortgage applications fell 7.3% last week, more than reversing a 4.2% rise in the prior week of September 9.

Market were not impressed by the reconfiguration of Japanese monetary policy. One undesirable result was a 1% rise of the yen against the dollar, which is trading under 101 again. The 10-year JGB, which officials want to be around 0.0%, is at -0.04%, up 4 basis points, and the Nikkei rose 1.9%.

Elsewhere in the marketplace,

  • The dollar is unchanged against the euro, sterling, kiwi and yuan and down 0.3% against the Swiss franc and Aussie dollar.
  • Share prices rose 0.7% in Taiwan and Australia, 0.6% in Hong Kong, 0.5% in South Korea, Germany and France.
  • WTI oil and Comex gold are up by 0.3% and 0.9%.
  • Ten-year German bund and British gilt yields are up two and one basis points.

Investors now await the FOMC statement at 18:00 GMT to be accompanied by new forecasts and followed by a Janet Yellen press conference at 18:30 GMT. Despite higher inflation and tighter labor markets, domestic U.S. money markets are not attaching a very high probability to the likelihood of an interest rate hike, so an increase would carry the element of surprise. As long as it’s going to be a surprise anyway, why not do a move of 50 basis points but include wording to suggest little chance of a third increase before late spring of 2017. While an increment of 50 basis points on the upside hasn’t been tried for more than a decade, it would demonstrate more definitively of what the U.S. economy is capable of handling. Remember, that the 17 consecutive 25-basis point increases between mid-2004 and mid-2006 did not work out well, promoting risk-taking that led to the Great Recession. So it would be good to break out of the habit of only moving in increments of a quarter of a percentage point.  The current low base of 0.50%, relatively calm financial market conditions this month, and reasonably good price and employment trends make this as good a time for a 50-bp experiment as any other.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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