As expected, the Federal Reserve Board yesterday left interest rates unchanged following the September meeting of the Federal Open Market Committee. In its statement following the meeting, the FOMC said, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
The Fed appears to be moving its targets. Chair Janet Yellen cited the need to wait for further improvement in the economy, even though there is evidence that the Fed’s goals have been achieved. She indicated that Committee members will continue to assess economic conditions but made no commitment on the timing of a rate increase. According to Bloomberg, the futures market places a 59% probability on a December hike, but the Fed’s shifting views make that uncertain.
1. Following a comprehensive assessment of monetary policy settings, the Bank of Japan (BoJ) this morning announced “tweaks” to their settings rather than radical changes. Prior to the meeting, press reports had suggested that the BoJ were split in terms of the actions that were deemed necessary. That in turn meant there was a wide spread of expectations in the market as to what would be announced today. The first “tweak” is to shift the focus of monetary stimulus from expanding the money supply to controlling the yield curve. The second “tweak” is to commit to “inflation-overshooting” with the monetary base expanding until inflation stabilises above the 2% target.
Posted in Equity, Fixed Income, Markets
Tagged BoJ, Central Banks, Economy update, Fixed Income, Global, Japan, markets, monetary policy, yen
1. Japanese Government Bonds – Canaries in the Coalmine?
In late January 2016, the Bank of Japan (BoJ) surprisingly cut their deposit rate to -0.10%, despite BoJ Governor Kuroda denying that he had contemplated such an action only a few days previously. That sparked a strong rally in Japanese Government Bonds (JGB’s) that pulled the yield on the 10-year JGB from +0.20% to a low of -0.29% by end-July. Arguably, this move started the global rally in bond yields that also saw 10-year German Bund yields move into negatively yielding territory. One of the other effects of the BoJ’s action was a massive flattening of the JGB yield curve, with the spread between 2-year JGB’s and 30-year JGB’s compressing from a level of 130bps in mid-February to a low of 36bps by the end of June. As with the fall in yield of 10-year JGB’s, this yield curve flattening was mirrored in other global bond markets, as the similar spread in Germany fell from +180bps at end-2015 to a low of 97bps at end-July. Continue reading
Posted in Economy, Fixed Income, Industry Insights, Markets
Tagged Central Banks, ECB, ECB APP, Economy, Economy update, Europe, European markets, Eurozone, Fixed Income, government bonds, Japan
- ECB Meeting – Some Further Thoughts
Having had an extra couple of days to digest the European Central Bank’s (ECB) announcement and subsequent press conference, we think that ECB President Draghi will have enjoyed a glass of Chianti this weekend, quietly happy with the job he did last week. For a start, he avoided committing the ECB to any action, even though most investors are expecting that an extension of QE will eventually be forthcoming. That in itself has introduced a more two-way tone to markets in the past few days. Secondly, he has engineered a steepening of the yield curve, which helps the beleaguered Banking sector and offers them some respite from the effects of negative rates. Thirdly, he has given markets an idea of what life may be like when the ECB finally do stop buying bonds, or when they start their own tapering programme. Fourthly, the market probably now needs to start debating when that tapering may occur, rather than blindly believing that QE will forever be extended and/or increased. Fifthly, Draghi again pointed to the fact that central banks on their own cannot boost world economic growth, and that help is needed on the fiscal side. This argument is increasingly gaining traction and appears to be gaining credence amongst government officials. Lastly, and in quite a clever move, the back up in yields has already eased the fears of investors about bond scarcity. Remember, the ECB currently cannot buy bonds whose yield is lower than the deposit rate of -0.40%. The rise in yields in the last few days has just increased the amount of bonds the ECB can buy. Every cloud has a silver lining. Continue reading
Posted in Economy, Fixed Income, Markets, Uncategorized
Tagged brexit, Central Banks, ECB, Economy, Economy update, Europe, European markets, european politics, Eurozone, Fixed Income, market volatility, markets, monetary policy, politics, QE
1. No change in the ECB’s deposit rate
As expected by the majority of market commentators and participants, the ECB (European Central Bank) today decided to leave interest rates unchanged. That means the deposit rate remains at -0.40%. ECB President Mario Draghi has mentioned in the past that although the ECB believe that negative deposit rates have had a beneficial impact, they are also aware that negative rates are affecting the profitability of the European Banking sector. However, the ECB did note that they see “rates at present or lower levels for an extended period and well past the QE horizon”. This highlights that the ECB still maintains an easing bias and potentially leaves the door open for further rate cuts, if deemed necessary by the ECB Governing Council. Given what we said earlier about the effect of negative rates on the Banking sector, we doubt that rates will be cut further. Continue reading