Tuesday was once again a fairly quiet session for global markets as investors await the outcome of this week’s two key risk events, the monetary policy decisions by both the Bank of Japan and the Federal Reserve. The S&P 500 reversed the majority of initial gains of up to +0.54% to finish relatively flat, up just +0.03% with Healthcare & Consumer Non-cyclicals outperforming finishing +0.45% & +0.22% higher respectively while Energy & Basic Materials lagged down -0.81% & -0.41% respectively. The Nasdaq 100 eked out a modest gain of +0.19%, as did the U.S. dollar index up +0.16% while bond yields on two and ten year government debt were little changed at 0.7784% & 1.6927% respectively.
The current market implied probability of any action to raise rates at the conclusion of the FOMC’s two day meeting (announced at 4am Thursday Sydney time) is currently just under 20%. Recent data out of the U.S. has continued to improve but not enough to suggest the urgent need to hike at this meeting, as doing so would cause an unnecessary shock to markets. December seems to be the base case as long as we continue to see improving data over the next two months, November just doesn’t make any sense with the upcoming U.S. presidential election.
There are a few key focuses for this meeting, the first being Janet Yellen’s press conference shortly after the conclusion of the meeting, where we expect her to reiterate that the case for a gradual tightening of monetary policy is strengthening. Alongside this we will also have the updated economic projections, known as the “dot plots”which are updated every other FOMC meeting and these forecast are expected to signal an increase in the Fed funds rate by 25 basis points for the end of 2016. The final factor to watch for is any addition to Esther L. George in dissenting against leaving rates unchanged, signalling growing momentum for the hawkish camp within the FOMC.
The only key data out for the U.S. on Tuesday was housing starts and building permits (MoM Aug) both of which missed expectations. Housing starts decreased -5.8% from 1.4% previously and expectations of a -1.7% decline while building permits also decreased -0.4% against estimates of a 1.8% increase, although it is an improvement from the previous -0.8% reading.
European equity markets were fairly flat with no notable data releases, the Euro Stoxx 600 finished -0.08% weaker while the DAX closed +0.19% higher, as did the FTSE100 up +0.25%. Both the Euro & Pound were weaker against the U.S. dollar, down -0.22% & --0.38% respectively.
Japanese equity markets resumed trading on Tuesday after being closed on Monday for a public holiday. Equities were mixed ahead of today’s BOJ monetary policy decision which is usually released between 12-1pm, the Nikkei closed -0.16% lower while the Topix finished +0.42% higher. At the same time the Yen strengthened +0.14% against the U.S. dollar while yields on two and ten year Japanese government debt fell -0.4 basis points to -0.264% and -0.8 basis points to -0.061% respectively.
This is a very tough meeting to reasonably forecast an outcome, the request for a report to be conducted into the effects on prices of the banks negative interest rate and QQE program throws a spanner into the works. No one really knows what will come from this report, whether it signals the BOJ pushing deeper into its extraordinary stimulus or pulling back. The other factor to consider is whether the BOJ would implement any potential recommendations immediately or over the coming months. Similar to the FOMC decision we will also be looking for if there is any increase in the number of members dissenting from any decisions, any increase would send a message that Governor Kuroda would face more difficulty in implementing any future stimulus.
I do believe there is a limit to what monetary policies can achieve, especially given the limited tools available to affect specific areas of economies, governments on the other hand have the ability to do this for example targeting youth unemployment or a shrinking population. While there is an acknowledgement and focus globally that governments need to do more, I don’t believe the BOJ is yet at the limits of its policy yet. Central banks since the 2008 crisis have constantly surprised with the ability to “pull a rabbit out of the hat” so to speak, and potential avenues for the BOJ include deeper cuts into negative rates, expanding purchases the purchases of the current QQE program, expanding eligible securities in the QQE program to include regional debt, increasing lending facilities to banks at negative rates or even monetary financed fiscal programs. Regardless of the outcome from today’s decision the one thing I that feel is a sure thing is volatility following the announcement across Japanese bonds, equities and the USDJPY.
Locally the S&P/ASX 200 finished slightly higher, up +0.17% at while the market looks set for a modestly weaker open this morning with ASX SPI200 futures 9 points lower in overnight trading.
Data releases:
- Australian Westpac Leading Index (MoM Aug) 10:30am AEST
- BOJ Monetary Policy Decision (Approx. 1-2pm AEST)
- BOJ Governor Press Conference (4:30pm AEST)
- U.K. Public Finances (MoM Aug) 6:30pm AEST
- U.S. Crude Oil Inventories (Sep 16) 12:30am AEST
- U.S. FOMC Monetary Policy Decision & Summary Of Economic Projections (Sep 21) 4:00am AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3600.