Federal Reserve chair Janet Yellen said on Wednesday that the central bank could begin shrinking its $4.5tn balance sheet “relatively soon“, and while she demurred on a specific date, some analysts have now pegged that announcement for September — although others aren’t so sure.
Over the past few months, analysts have tried to piece together a clearer picture of the Fed’s timing for moving on the three expected interest-rate increases this year, as well as when it intends to start the process of unwinding its massive balance sheet.
On Wednesday, the Fed moved forward with its second rate rise of 2017 and unveiled some details of its plan to shrink the balance sheet that has grown to a massive size in the wake of the financial crisis. That has left analysts to ponder when to expect the Fed’s next moves at its four remaining meetings of the year.
In a note following today’s announcement, Bank of America Merrill Lynch analysts said in a report that they now expect the balance sheet normalisation to begin in September, with the third rate increase of 2017 penciled in for December:
The Nikkei Stock Average has regained 20,000 points and Japan’s jobs-to-applicants ratio is improving, yet Prime Minister Shinzo Abe’s reluctance to tackle reforms needed for the country’s growth raises questions about the leader’s commitment to his signature economic policy.
“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013, about six months after Abe took office as prime minister for a second time.
The three “arrows” of Abenomics — aggressive monetary policy, flexible fiscal policy and a growth strategy that promotes investment — grabbed the market’s attention and drew investors to Japan.
Two of out three arrows
That was four years ago, and the government approved the fifth iteration of the plan Friday. But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.
The government and the central bank have focused on the first two arrows. The BOJ’s total assets have topped 500 trillion yen ($4.53 trillion), while long-term interest rates remain around zero. In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.
“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas. Monetary and fiscal tools were only supposed to serve as a Band-Aid until growth ignited. But by relying too heavily on them, Japan neglected to lay out an effective growth strategy.
will run QE until inflation path has sustainably adjusted
stands ready to increase size duration of QE if needed
net purchases will be made alongside reinvestments
EURUSD dipped to 1.1221 on the rate hold news but found some support on the headline here as it omits guidance on rate cut.
At today’s meeting, which was held in Tallinn, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.
The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.
The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.
“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.
Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.
The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.
Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…
… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.
That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.
The US dollar will almost certainly remain the world’s most important reserve currency for the foreseeable future, as no other offers the same set of advantages to money managers, including central banks, or is as deeply embedded in the global financial system. The primary cost to the US is surrendered competitiveness due to dollar appreciation, but lower interest rates and unrivalled government access to funding bestow considerable benefits, ultimately supporting the sovereign’s ‘AAA’ rating.
As the Fed tightens, expect calls for an alternative to US dollar dominance, but no real change.
Congress is the most plausible medium-term threat.
Pickup and economists research note from the past month and it’s likely to say the same thing — the Fed is going to hike in June.
Everyone is singing from the same hymnbook. The problem is that the Fed is the piano player and yesterday changed its tune. This is the line in the FOMC Minutes:
“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.”
That can’t be misunderstood.
What it says is that if economic data continues to be soft, they’re not hiking in June.
That doesn’t mean that a hike is off the table but it certainly means that it’s not a sure thing.
Here are a few data points since the May 3 meeting:
The US dollar’s downside momentum faded today. While one should not read much into it, it could be an early sign that the market has discounted the recent news stream, which includes the fear that the political turmoil in the Washington will adversely impact the President’s economic program, and the continued above trend growth in the eurozone.
The Fed funds futures continue to discount a strong change of a June Fed hike. Bloomberg puts the odds at 95% of a hike, while the CME’s model says it is about 83% discounted. Our calculation puts it at 81%. A June hike would put the Fed funds target range at 1.00%-1.25%.
Although the two-year note is trading a few basis points through the top of the presumed new range, the odds that the Fed funds target range will be 1.25%-1.50% by the end of the year is also rising slowly. Bloomberg sees a 45% chance, up from about 28% a month ago. The CME sees the odds at 39% compared with about 30% a month ago.
European growth remains above trend and the flash May PMIs today suggest another strong quarter. However, price pressures remain elusive. Prices in the PMI fell for the first time in 15 months. To suggest the ECB could hike rates if it weren’t for the low inflation , is like asking, “Besides that Mrs Lincoln, how was the play?”