Is it that time again ? Already ? Fed and BoJ policy decisions this week ......

Tuesday 26th April 2016

Is it that time again? Already? Fed and BoJ policy decisions this week ......

ref :- "BoJ under pressure to act as yen surges", The Financial Times

ref :- "Yellen caution signals rates staying on hold" , The Financial Times

These things come around pretty quickly, don't they ? Once again the markets are hanging on just what might emerge from the Fed tomorrow and the Bank of Japan on Thursday. It's not exactly a surprise by now but is yet more evidence of just how reliant markets have become on central bank policy decisions. Generally speaking it's not an ideal situation for the central banks, who would prefer a much larger input from governments in terms of fiscal measures and structural reform. Rather that than having the fate of markets hingeing almost entirely on their monetary policy decisions. Still, that's just the way it is these days so they'll just have to get on with it ......

As far as the Fed goes, there is effectively zero expectation of a rate rise tomorrow. The focus is on how wide they leave the door open for a hike at the next meeting in June. Futures markets suggest that there is only about a 20% probability of a June move, but contrasting noises from Fed members point to the decision being a closer call than that. Doves will concentrate on how a US rate hike might damage the global economy (emerging markets etc) , and therefore by extension the economy at home. They might also be pondering some recent disappointing data that suggests that the solid forecasts of a month or so ago for both growth and upward moves in inflation cannot be taken for granted. The very last thing that Fed Chair Janet Yellen would want is to have to reverse any premature rate rise.

The hawks will be focussing on the continuing strength in the labour market. Traditional logic has it that this must translate into inflationary pressure sooner rather than later and for them, it is a "sine qua non" that the Fed must be ahead of the curve in dealing with it.

As so often, the language used in the Fed statement will be crucial. Look out for reference to the balance of risks facing the US economy. Because of the so-called global headwinds that have forced their way into Fed thinking, this phrase has been absent from the last two Fed statements. If it should be re-inserted it would suggest that in their eyes things are nearly balanced once more, and the prospects of a June hike would be seen as more likely. Also, the last statement included the wording  "global economic and financial developments continue to pose risks". If there should be any watering down of  Fed concern on this front, then that too would seem to suggest that the Fed is keen to at least have the option of a June increase. Of course, one could argue that a rally in stock markets and a recent calming of anxieties over all things China don't necessarily convince as evidence of any great diminution of risk, but that's another matter.. ..

** Incidentally, there's some speculation that even if the Fed wanted to hike in June (still odds against, remember), they might be tempted to postpone things until July to avoid acting one week before the UK's Brexit referendum. If the vote should be to leave, it is likely to be pretty destabilising for markets on a global scale but as a reason to put off a hike in US rates, don't expect that plan of action to hold much water with some of the more hard-line Fed members.

The signals put out by the Fed may well play a part in the Bank of Japan's  decision, even though it will take place only hours later. The impression is that control is largely in the hands of one man, governor Haruhiko Kuroda, rather than myriad committees and thus any decision could be tailored to suit developments even at the eleventh hour. If it seems that the Fed are seriously considering tightening in June, that would reduce the pressure on the BoJ to ease..... a welcome scenario for sure since the pressure is considerable. In a Bloomberg survey, 23 of 41 analysts expect action of some description (though there is no consensus on what form it might take  --  lowering the benchmark interest rate from minus 0.1% ? Expanding asset purchases ?).

One can't help feeling that in their hearts the BoJ would like to give the measures already taken more time to work before having to introduce further stimulus, despite stubbornly unconvincing data regarding growth and inflation. They might be able to buy some time for themselves if it was only about the data, but the strength of the Yen is a different matter. This year, the Japanese currency has strengthened from Y120 to the USD to Y110. This is hugely detrimental to business confidence (crucial in an economy that has been stagnating for so long), and by driving down import prices only increases deflationary anxieties.

Who knows ? They may take the view that if the move to negative rates in January failed to weaken the Yen, why should a move from minus 0.1% to minus 0.2% (say) be any different ? Yen strength this year has largely been about reduced expectations regarding the pace of US rate rises, and safe-haven buying .... neither of which the BoJ can do much about. Top of their wish-list would presumably be some hawkish noises from the Fed on Wednesday evening, something to reawaken an element of the dollar-buying divergence plays that were discarded so quickly this year.