Next week is slow on major economic releases, but central bankers will be making up for the lack of major economic releases. Here is the run down:
Fed Speak. There are no fewer than 12 Fed member speaking next week. Part of me says, “Who cares?”. We heard enough from the Yellen on Wednesday. Then again you have to start somewhere with the opinions and projections. So might as well be sooner rather than later. Note that because many are speaking, does not mean they will be talking about policy, their views on policy, where they fit in with the current consensus, etc.. We do know that George, Rosengren and Meister voted to raise rates. What day will each speak? Chair Yellen speaks on Wednesday to the House Panel on Bank supervisor. We already know her opinion Plus the topic is not exactly focused on Monetary policy. Vice chair Fischer, who spoke of possibly two tightenings not to long ago, will speak on Tuesday. As for the others, Tarullo and Kaplan speak on Monday. Mester and George, two dissenters, both speak on Wednesday along with Bullard and Evans. Feds Lockhart, Harker, Powell and Kashkari are scheduled to speak on Thursday.
ECB President Draghi, Monday at 10 AM ET.1400 GMT. The ECB president is scheduled to testify before the Committee on Economic and Monetary Affairs of the European Parliament.
BOJ Kuroda speaks. Thursday 2:35 AM ET, 0635 GMT. Due to speak at the National Securities Industry Convention in Tokyo.
US Durable goods order. Wednesday 8:30 AM ET/1230 GMT. The August reading is expected to show a headline decline of -1.4% vs 4.4% increase in July. The Ex transportation is expected down -0.5% (vs +1.3%).
US Conference Board consumer confidence Tuesday, 10 AM ET, 1400 GMT. US consumer confidence from the conference Board for the month of September we released with expectations of a decline to 98.7 from 101.1.
The yield on the 10-year Japanese government bond briefly rose above zero Wednesday for the first time since March after the Bank of Japan said it would introduce a 10-year interest-rate target, part of a new policy framework aimed at stoking inflation.
In its latest monetary-policy assessment, the BOJ said it would aim to keep the 10-year rate around zero. It also said would keep its annual bond-buying target unchanged at 80 trillion yen ($785 billion) and left its deposit rate unchanged at -0.1%.
Japanese stocks rose after the decision, led by shares in major banks, whose profit margins should benefit from higher long-term rates. The yen was down after the announcement.
The dollar was recently at Y102.50 after falling ahead of the BOJ decision to as low as Y101.00, the lowest since Sept. 7, according to EBS. That compared with the dollar at Y101.72 late Tuesday in New York. The dollar has fallen 15% against the yen so far this year.
Stocks moved slightly higher Tuesday ahead of Wednesday’s interest rate decision from the Federal Reserve.
The Nasdaq rose 0.1%, while the Dow Jones industrial average and the S&P 500 climbed by lesser amounts, the broad S&P 500 ending just fractionally positive.
With the Fed’s two-day meeting underway, Wall Street’s focus is on the Fed and its chairperson Janet Yellen. The question is whether the U.S. central bank, which has held off on interest rate increases this year, will stand pat again or surprise markets and increase borrowing costs. Low interest rates from the Fed are designed to boost growth, bolster employment and provide a lift to risk assets, like stocks.
A rate hike tomorrow, however, is not expected by Wall Street, although investors expect the Fed to signal that one rate hike is still on the table for 2016. Futures markets are pricing in just a 15% probability that the Fed will hike rates Wednesday, according to CME Group, although the market is pricing in 50%-plus odds of a rate increase at the Fed’s December meeting.
Investors are also gearing up for a meeting of the Bank of Japan Wednesday. The BoJ is still struggling to jump start growth and boost inflation in Japan. Investors are split on what the BoJ’s next move will be, as they debate whether the BoJ will cut short-term rates, currently at -0.1%, further into negative territory. Investors will also watch to see if the BoJ boosts or tweaks its asset-purchase program or announces any fresh ideas to stimulate the economy.
In our age of disparity, it may be easy to accept that all time is not equal. Touch a hot surface; time seems to move slowly. Time doing an enjoyable activity goes by lickety-split.
Another inequality of time are inflection points. These are non-linear jumps, breaks in time series or investors’ reaction function–how they respond to news. Is bad fundamental news good for stocks and bonds? Is a stand pat Fed bad for the dollar? Is easing by the BOJ positive or negative for the yen?
It is similar but different from Stephen Gould’s “punctuated equilibrium.” Recall that the traditional understanding of evolution is slow, incremental changes, which over time can lead to startling and profound changes. Gould’s innovation was to recognize that, at least sometimes, there are long periods of stasis (equilibrium) disrupted by a sudden change (punctuated) in over a short time.
The capital markets may be at such an inflection point. The relationship between fundamental news and investors’ response may be changing. The backing up of interest rates, despite unspectacular real sector data, no particular impulse on measured inflation, and a retreat in commodity prices, including oil, warns that something may be different now.
Many argue that monetary policy is reaching its political and/or ideological limit, even if theoretically interest rates can go deeper into negative territory that the ECB or BOJ have gone (see the SNB, for example). Similarly, more assets could be bought, but the trade-off between risk and reward appears to be shifting in a more adverse direction. At the same time, the perceived toxicity of fiscal policy has diminished.
One week after we explained not once but twice that next week’s main central bank event is not the Fed – which won’t do anything – but the Bank of Japan, even CNBC has finally figured it out, observing with about a 7 day delay that “Everyone’s waiting for the Federal Reserve in the week ahead, but the real action may be coming out of Tokyo.” Well, thanks for that.
But while it’s clear that Yellen won’t dare shock the market (which now trades with a 20% probability of a September rate hike and as we showed a year ago, the Fed has never hiked unless the market is already pricing in at lest 60% odds), the question remains – just what will Kuroda and the BOJ do, especially since as we wrote last week, not even the BOJ knows what it will do, and has instead flooded the market with news report trial balloons covering every possible, even contradictory, possibility. Which also makes the BOJ’s decision that much more important.
As DB points out, “this week will be the litmus test for whether central banks are in shift mode as regards ongoing accommodative monetary policy. Investor consensus revolves around the notion that monetary policy has run its course and it “needs” to be supplanted by fiscal policy or at least combined with fiscal policy, via helicopter money, to be effective. The potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve.”
Here is what DB’s Dominik Constam, one of Wall Street’s best credit strategists expects the BOJ will reveal on Wednesday:
The BoJ is conducting a comprehensive review of monetary policy. It is fair to say that there is substantial uncertainty as to what they may choose to do but recent policy speak has suggested that further cuts in the deposit facility rate are possible as well as a shift in the duration target away from the 7-12 year sector towards the 3-5 year sector. The proposed logic would be to steepen the yield curve, offering extra NIM to banks whilst also alleviating pressure on the entitlement industry. Some Fed officials meanwhile have also chimed in regarding the concern for financial stability that emanates from low long yields that in turn have compressed risk premia across asset classes as part of a “hunt for yield”. The implication is that if long rates stay artificially low, there may be a case for earlier moves higher in short rates to compensate even if the data itself was less compelling for such a move, all else equal. In both cases the potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve. Even the ECB could be added to this mix after the recent “disappointment” around not committing to an extension of its QE program nor adjusting the parameters.
One month ago, when we last looked at the Fed’s update of Treasuries held in custody, we noted something troubling: the number dropped sharply, declining by over $17 billion, bringing the total to $2.871 trillion, the lowest amount of Treasuries held by foreigners at the Fed since 2012. One month later, we refresh this chart and find that in the latest weekly update, foreign central banks accelerated their liquidation of US paper held in the Fed’s custody account, which tumbled by $27.5 billion in the past week, the biggest weekly drop since January 2015, pushing the total amount of custodial paper to $2.83 trillion, the lowest since 2012.
There is a growing conviction in the markets that for the world’s hardest pressed central banks there is no alternative to a helicopter money drop.
A last-ditch effort to channel purchasing power directly to people likely to spend a monetary windfall strikes many as the natural next step, as the effectiveness of unconventional central bank measures dwindles. Yet the authors of the latest Geneva report, published annually by The International Center for Monetary and Banking Studies and the Centre for Economic Policy Research, beg to differ.*
They argue that there is room to push interest rates further below zero. They see the potential to expand both the scale and scope of central bank asset purchases. And they believe that it would be possible to loosen the constraint on traditional interest rate policy in today’s exceptionally low interest rate environment by increasing central banks’ inflation targets.
The snag is that those prescriptions are a pretty good description of what the Bank of Japan has done since 2013 as its contribution to Abenomics. When Haruhiko Kuroda took over as governor he introduced the most radical programme of quantitative and qualitative easing the world has seen, encompassing not just government bonds but equities via exchange traded funds and even real estate investment trusts.
The inflation target was raised to two per cent, to be achieved over two years. In January this year negative interest rates were introduced. The programme has been ramped up, with a big increase in the size of government bond purchases in 2014 and a commitment this July by the Bank of Japan to raise its annual purchases of ETFs from Y3.3tn to Y6tn ($58bn).
Speculation that the Bank of Japan may start purchasing foreign bonds to counter the strong yen has resurfaced following a comment by Prime Minister Shinzo Abe Monday evening.
Foreign bond purchases “are not permitted under the Bank of Japan Act if their objective is foreign exchange intervention,” Abe said. This has spurred speculation that the central bank is considering this option as a means of monetary policy.
Abe’s remark is backed by Koichi Hamada, professor emeritus of economics at Yale University and an adviser to the prime minister. “BOJ buying of foreign bonds is an option,” Hamada told reporters, suggesting that such a move may serve as a tool in fighting the robust yen.
If the BOJ were to buy foreign bonds, it would purchase them from financial institutions either in yen or dollars, procuring the necessary greenbacks in the currency market. In either case, the central bank would sell the Japanese currency and buy dollars.
The idea of foreign bond purchases drew heated debate among BOJ policymakers when former policy board member Nobuyuki Nakahara proposed it back in November 2001. Nakahara argued that steady and sustained purchases would be different from an intervention aimed at specific exchange rates. The proposal was voted down in an 8-1 vote.