With the Fed expected to further tighten financial conditions following its now guaranteed March 15 rate hike, and the ECB recently announcing the tapering of its QE program from €80 to €60 billion monthly having run into a substantial scarcity of eligible collateral, the third big central bank – the BOJ – appears to have also quietly commenced its own monteary tightening because, as Bloomberg calculates looking at the BOJ’s latest bond-purchase plan, the central bank is on track to miss an annual target, by a substantial margin, prompting investor concerns that the BOJ has commenced its own “stealth tapering.”
While in recent weeks cross-asset traders had been focusing on the details and breakdown of the BOJ’s “rinban” operation, or outright buying of Japan’s debt equivalent to the NY Fed’s POMO, for hints about tighter monetary conditions and how the BOJ plans to maintain “yield curve control”, a far less subtle tightening hint from the BOJ emerged in the central bank’s plan released Feb. 28, which suggests a net 66 trillion yen ($572 billion) of purchases if the March pace were to be sustained over the following 11 months. As Bloomberg notes, that’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year.
Some more details: the central bank forecast purchases of 8.9 trillion yen in bonds in March, based on the midpoint of ranges supplied in the operation plan. Maintaining that pace for 12 months will see it accumulate about 107 trillion yen of debt. At the same time, 41 trillion yen of existing holdings will mature, leaving it with a net increase of 66 trillion yen, well below the stated goal of 80 trillion yen.
The European Central Bank meet Thursday, some really quick preview action from a few banks
- Main financing rate currently at 0%, expected to be left unchanged
- Marginal lending facility rate currently at 0.25%, expected unchanged
- Deposit facility rate currently at -0.4% and expected 9go on, have a guess) to be left unchanged
- The truce between hawks & doves will be reflected in a dovish Draghi
- Draghi will use extended QE as intended
- Expect that policy likely to be unchanged
- Watching for any sign forward guidance on rates could be dampened
- Despite likely much higher 2017 HICP they see no change to rates, nor to the size of QE, nor to forward guidance
- Perhaps the balance of risks changes to neutral
- European Central Bank is in a holding mode, assessing incoming data
- Will be no change to policy or statement
- September will bring tapering announcement
A novel dilemma for the European Central Bank to contend with: above target inflation.
Prices in the single currency area have climbed by 2 per cent on the year for the first time in over four years, posing a fresh headache for the ECB’s dovish policymakers who will mark their two-year quantitative easing anniversary next week.
At the ECB’s latest meeting next Thursday, president Mario Draghi will face the task of convincing his more hawkish colleagues that the current leap in annual prices – from 1.8 per cent in January – is unlikely to be sustained having been driven by volatile energy costs. The central bank, which has been battling with more than three years of low prices, targets inflation of just under 2 per cent.
Despite the recent upsurge in inflation driven by higher oil prices Pete Vanden Houte at ING thinks inflation will begin to stabilise over the coming months. If anything, he says the ECB will opt to let inflation run above target to compensate for years of weak prices:
There is little doubt that the ECB will continue to be criticized for its loose monetary policy, especially in the core countries. But the bank will no doubt recall that the inflation target has to be reached over the medium term and for the whole of the Eurozone. If anything the ECB is more likely to err on the side of inflation, to compensate for the fact that consumer price increases have significantly undershot the ECB’s target for now 4 years in a row.
We therefore don’t see any change in monetary policy this year. However, in the third quarter, the ECB might announce its exit strategy, which in our view will probably entail a new extension of the QE program until mid-2018, but with some tapering included.
The odds of a March rate increase jumped to 70 per cent on Tuesday after the influential head of the New York Federal Reserve said the case for policy tightening had become “a lot more compelling”.
Bill Dudley said in a interview with CNN International, the television network, that data released over the past couple of months have shown that the US economy is on a solid trajectory, and the central bank is more confident now that it will continue to brighten.
“It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased,” he said, according to a transcript posted by CNN.
John Williams, president of the Federal Reserve Bank of San Francisco, says that an interest-rate increase is “very much on the table for serious consideration” by the central bank at its upcoming meeting in March.
The remarks — which came in the text of a speech set to be delivered on Tuesday to business leaders in California — sent investors’ expectations climbing. Fed funds futures signalled that investors are now pricing in a 56 per cent chance of an increase at March, up from 52 per cent earlier on Tuesday, and 36 per cent a week ago, according to Bloomberg calculations.
Mr Williams cited a strong outlook for the economy, which he said was in its eighth year of expansion with the workforce at full employment and inflation zeroing in on the Fed’s 2 per cent target. A rate increase would be one tool Fed policymakers could consider to help keep that momentum going, he said, according to a text of his prepared remarks.
Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.
The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.
Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.
The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.
Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.
Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.
The Bank of Japan’s holdings of Japanese government bonds has topped 40% of the outstanding balance for the first time, the central bank said Wednesday.
The BOJ has been snapping up JGBs in large quantities since it implemented drastic monetary easing measures in April 2013.
Last September, the BOJ switched its policy focus from quantity to interest rates, aiming to keep long-term rates at around 0% to achieve its inflation target. Nevertheless, its JGB holdings continue to rise, with the bank sticking to its annual target of 80 trillion yen for JGB purchases.
With the amount of such bonds circulating in the market declining, “the bank will reach the limits of its bond purchase program as early as the first half of 2019,” said Takenobu Nakashima of Nomura Securities.
Minutes from the Bank of Japan December 19 & 20 meeting
- Most members shared view momentum for Japan’s inflation to reach 2 pct inflation was being maintained
- Some members said factors that would support rise in prices going forward had been increasing
- One member said recent yen depreciation might push up prices in short run but would not raise underlying trend in inflation
- Many members said yield curve control had been functioning as intended, JGB yield curve had been formed smoothly despite global yield rises
- Many members said BOJ must pursue powerful monetary easing as still long way to go to hit 2 pct inflation target
- A few members pointed to market views that BOJ wants to guide 10-yr JGB yield at range of -0.1 to 0.1 pct, said it was inappropriate to set such “uniform standards”
- One member said it was uncertain whether amount of JGB purchases would decrease going forward under yield curve control
- One member said BOJ should set amount of its JGB purchases as operating target and make sure to reduce it incrementally
- One member said BOJ should allow for natural rise in long-term rates if they reflect prospects for improvement in Japan’s economy, prices
The Bank of Japan is poised to upgrade its three-year economic growth outlook in the final days of January in light of strong recent indicators, though stronger inflation forecasts will be a harder sell.
The central bank will compile its quarterly outlook on economic activity and prices at a two-day policy meeting beginning Monday. The report will outline the BOJ’s forecast for each of the three years through fiscal 2018,
Signs for an upgrade are strong. The BOJ in December boosted its outlook for Japan’s economy as a whole for the first time in 19 months. Such goods as smartphone parts and automobiles are driving up exports and industrial production, while consumer spending on durable goods such as cars is on the rebound as well. Changes made late last year to the GDP calculation method will also give the figure a boost: companies’ research and development spending, which has shown consistent growth over the years, now counts as investment.
BOJ Gov. Haruhiko Kuroda said at a World Economic Forum panel discussion Jan. 20 that he expects Japan’s economy to grow by around 1.5% in fiscal 2016 and fiscal 2017, significantly exceeding the country’s potential growth rate.