One down (Bank of Japan), and one to go (US Federal Reserve)

Wednesday 21st September 2016

One down (Bank of Japan), and one to go (US Federal Reserve) ...... that's if you don't  count policy decisions in New Zealand, Norway and South Africa ..... oh, and speeches from the heads of the Reserve Bank of Australia, the ECB and the Bank of England  --  all due tomorrow.

ref :- "Banks Emerge as Winners from BOJ With Bonds, Yen Erasing Losses" , Bloomberg Markets

A very brief update on the changes made to the Bank of Japan's monetary stimulus package before we face the Fed's decision this evening ..... The BoJ maintained its reputation for avoiding predictability by tweaking things in a number of ways, not all of which were not generally expected. If the reception to Governor Kuroda's speech was a little mixed, in that not all are convinced that the changes will amount to much in the greater scheme of things, there's no doubt that the banks and other financial institutions will have been pretty happy with what they heard.

For example, the BoJ declined to cut interest rates any further (at this stage, at least). On balance, this just about qualifies as an unexpected outcome and alongside moves to steepen the yield curve should be seen as part of Mr Kuroda's admission that engineering such low rates at both the short and the long end of maturities severely affects the profitability of banks and insurers.

In order to control the yield curve, the BoJ said that its monetary base target (up to now set in stone at increases of JY80 trillion per year through asset purchases), may in the short-term move higher or lower as required. And as if to re-assert its commitment to doing what it takes by way of stimulus, Mr Kuroda pledged to expand the monetary base until inflation is stable ABOVE 2%, something we've not heard before.

The BoJ also pledged to act in the markets to keep 10yr Japanese Government Bonds (JGBs) at a yield around 0% and JGB's fell as a reaction as yields immediately moved back up towards zero. After an initial and slightly perverse move higher, USD / JPY has moved back below 101 as the lack of a BoJ cut in rates contrasted with expectations of no hike this evening by the Fed.

And what about the Fed ? You know it all by now : only a 1 in 5 chance of a hike according to markets, but expect some hawkish rhetoric to keep a December move on the cards. We can look at it all tomorrow  --  what Ms Yellen says and how she says it will key. We'd just like to point you to an article that examines something we've touched on quite a bit ..... namely the Fed's confusing and contradictory communications. This has genuinely become a big problem in our view. We know that the current situation was born out of a well-intentioned desire to be clear and transparent about Fed policy after the financial crisis. But when you have senior Fed officials publicly backing two entirely different policies within hours of each other, is it not legitimate to ask whether there might be a better way ?

Anyway, have a look at :

"Too much Fed talk is sending mixed messages" . The Financial Times , Markets and Investing, Analysis. Currencies

The Fed decision is at 19.00 hrs, NYT.