The Week Ahead – Hawks, doves and monetary policy mayhem

The Week Ahead – Hawks, doves and monetary policy mayhem

 

Previous week: 30 October 2017 – 03 November 2017

Bank of Japan monetary policy statement, BOJ outlook report, BOJ policy rate, BOJ press conference—31 October 2017 Tuesday

The Bank of Japan kept all its monetary policies unchanged as expected. But the details are crucial as will be expounded further below.

Statement on Monetary Policy dated 31 October 2017 by the Bank of Japan:

https://www.boj.or.jp/en/announcements/release_2017/k171031a.pdf

New member uber-dove Mr. G. Kataoka will now be a consistent dissenter with regards to the BOJ’s current policies. He is a dissenter not because he thinks that current policies are too loose. He is a dissenter because he thinks that current policies are insufficiently loose in achieving the BOJ’s 2% core inflation mandate. He wants to reach the 2% inflation target as soon as possible. In the previous meeting (his first), he dissented with the policies of the BOJ but did not provide any alternative policies. However in this meeting, he proposed that the BOJ should buy JGBs such that the yield on the 15 year JGB would be below 0.2%. Last I checked, the 15 year JGB is yielding 0.299%. Essentially, he wants to increase BOJ’s QQE and buy longer dated government bonds so as to flatten the yield curve even further.

https://www.investing.com/rates-bonds/japan-15-year-bond-yield

https://www.boj.or.jp/en/announcements/release_2017/k171031a.pdf

Outlook for Economic Activity and Prices (October 2017) by the Bank of Japan:

The BOJ have downwardly revised their forecasts for inflation for fiscal years 2017 and 2018. Inflation was revised downwards from +1.1% to +0.8% for fiscal year 2017. Inflation was revised downwards from +1.5% to +1.4% for fiscal year 2018. Inflation forecasts for fiscal year 2019 (ending March 2020) was unchanged at 2.3%. The BOJ sees inflation hitting 2% only by March 2020.

https://www.boj.or.jp/en/mopo/outlook/gor1710b.pdf

When digging deeper and comparing the estimates made by BOJ members in July and October 2017, it is noteworthy that fewer members now see downside risk to inflation, implying that they are more confident that their policies will be successful in increasing inflation to 2%.

CPI y/y FY 2017 (July v Oct) FY 2018 (July v Oct) FY 2019 (July v Oct)
Downside risks 5-4 6-2 8-6
Upside risks 0-1 0-1 0-0
Risks are balanced 4-4 3-6 1-3

 

BOJ’s October CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1710b.pdf

BOJ’s July CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1707b.pdf

//Though the members of the BOJ is now more dovish than before (9 doves and 0 hawks), no change in monetary is expected. This is because inflation rate in Japan seemed to be creeping back up, implying that there is some success in the policies they implemented with regards to defeating deflation / disinflation. September 2017’s core inflation y/y was +0.7%, matching the number in August. Inflation in Japan have improved greatly ever since it hit a low in September 2016 at -0.5%. That is an increase in inflation rate of 1.2% in 12 months.

//No doubt the current policies have gotten inflation up by 1.2%. However, it is still 1.3% away from the 2% target. The question to ask is: Are the current policies sufficiently effective for this trend in inflation to continue to rise to 2%? And if so, will inflation be sustained at 2% and not be one of the past times where it belly flopped and collapsed back down to zero? If not, should the BOJ start to consider further loosening its monetary policies?

 

US Crude oil inventories—10.30 pm 01 November 2017 Wednesday

US crude inventories decreased by -2.44 million barrels on the expectation of -1.3 million decrease. Baker Hughes US oil rig count decreased by 8 from 737 to 729. Oil production was 9553 barrels per day for week ending 27/10/2017, an increase from 9507 barrels per day in the previous week. This recovery in oil production is because refineries were turned back on after Hurricane Nate.

http://www.zerohedge.com/news/2017-11-01/wtirbob-sink-inventory-draws-disappoint

http://www.zerohedge.com/news/2017-11-03/us-oil-rig-count-drops-most-may-2016-5-month-lows

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

FOMC Statement, Federal funds rate—02 November 2017 2am

No nothing burger Fed meeting. No policy change. No press conference = no change in monetary policy. Yellen: “Every meeting is a live meeting”. Me: “Only meetings with press conferences are live meetings.” The only thing noteworthy is the Fed upgrading its stance on economic activity from “rising moderately” to “at a solid rate”.

Comparison of Fed statement taken from Zerohedge:

http://www.zerohedge.com/news/2017-11-01/fomc-leaves-policy-unchanged-upgrades-economic-outlook-solid-pace

Bank of England inflation report, MPC official bank rate votes, Official bank rate, BOE Governor Mark Carney speaks—8pm Thursday 02 November 2017

The Bank of England, for the first time since July 2007 (more than 10 years), made the determination that is was finally time to raise the bank rate by a quarter percentage point back to pre-Brexit levels from +0.25% to +0.50%. The vote count was 7 to 2 where 7 members voted to raise the bank rate by 25 basis points while 2 members (Cunliffe and Ramsden) voting to keep the bank rate unchanged at +0.25%.

Summary of BOE statement done neatly by Zerohedge:

http://www.zerohedge.com/news/2017-11-02/bank-england-hikes-rates-05-7-2-vote-first-rate-increase-over-10-years

Growth: GDP grows modestly over the next few years at a pace just above its reduced rate of potential.  Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.

Consumption: Consumption growth remains sluggish in the near term before rising, in line with household incomes

Trade: Net trade is bolstered by the strong global expansion and the past depreciation of sterling.

Inflation: After CPI rose to 3.0% in September, the MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices. Expects domestic inflationary pressures to gradually pick up as spare capacity is absorbed and wage growth recovers.

Wages: The central projection was that whole-economy total pay growth was expected to rise from a little over 2% to 3% in a year’s time, levelling out at around 3.25% in the medium term.

Brexit: Uncertainties are weighing on domestic activity, which has slowed even as global growth has risen significantly.  Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

Slack: slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target

Speech by Governor Mark Carney:

US Non-farm employment change, unemployment rate, average hourly earnings m/m, participation rate—8.30pm 03 November 2017 Friday

Not a strong rebound in employment during the recovery period from the hurricanes that devastated the nation. The unemployment rate dropped because people dropped out of the labour force.

Name Actual Expected Last (with revisions)
Non farm employment change +261k +312k August: +169k to +208k

September: -33k to +18k

Net revision: +90K

Unemployment rate +4.1% +4.2% +4.2%
Average Hourly earnings m/m +0.0% +0.2% +0.5%
Average Hourly earnings y/y +2.4% +2.6% September: +2.9% to +2.8%
Participation rate 62.7% 63.1% 63.1%

 

Donald and his plan to cut taxes just overcame its second hurdle (ongoing till end of year)

The House of Representatives released its tax reform bill. So very pro big corporate. Corporate top tax rate from 35% to 20%. A transfer of wealth from main street to wall street.

https://waysandmeansforms.house.gov/uploadedfiles/policy_highlights.pdf

https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf

https://www.bloomberg.com/view/articles/2017-11-03/digging-into-the-details-of-trump-s-tax-reform-plan

The House of Representatives took a step closer towards cutting/reforming taxes.

Nothing is more important to the Republicans than cutting taxes. Unlike healthcare, it seemed that republicans in the House of Representatives and Senate are hell bent to get the votes to reduce the tax rate (for the wealthy). I believe they will get the votes needed in the House of Representatives and the Senate to pass the tax cut bill before the turn of the New Year. The market is already pricing in a successful passage of the tax cut bill through Congress in the capital markets.

https://www.cnbc.com/2017/10/26/house-narrowly-passes-budget-moves-one-step-closer-to-tax-reform.html

Coming week: 05 November 2017 – 11 November 2017

RBA Cash Rate, Rate Statement—11.30 am 07 November 2017 Tuesday

No change expected. Cash rate stays at +1.50%. Global uncertainty remains elevated. Chinese growth is on shaky ground.

RBNZ Cash Rate, Rate Statement, Press Conference—4.00 am 09 November 2017 Tuesday

No change expected. Cash rate stays at +1.75%. Global uncertainty remains elevated. Chinese growth is on shaky ground. Although good labour data out of New Zealand last week.

Fun Fact: How did New Zealand got its name? It used to be named after the Dutch Province Zeeland. From Wikipedia: “Dutch explorer Abel Tasman sighted New Zealand in 1642 and called it Staten Landt, supposing it was connected to a landmass of the same name at the southern tip of South America. In 1645, Dutch cartographers renamed the land Nova Zeelandia after the Dutch province of Zeeland. British explorer James Cook subsequently anglicised the name to New Zealand.”

https://en.wikipedia.org/wiki/New_Zealand

US Crude oil inventories—11.30 pm 08 November 2017 Wednesday

Another draw in inventories?

Trade Ideas

USD/JPY short

USD/JPY is now right at resistance at 114.

JPY’s side of the argument:

From written above, the members of the Bank of Japan (excluding uber-dove Mr Kataoka) are now more confident that their policies will succeed in generating inflation and meeting their 2% target by FY 2019. The probability of further loosening of monetary policy will be pretty slim. No change in monetary policy is expected for the foreseeable future.

//When digging deeper and comparing the estimates made by BOJ members in July and October 2017, it is noteworthy that fewer members now see downside risk to inflation, implying that they are more confident that their policies will be successful in increasing inflation to 2%.

CPI y/y FY 2017 (July v Oct) FY 2018 (July v Oct) FY 2019 (July v Oct)
Downside risks 5-4 6-2 8-6
Upside risks 0-1 0-1 0-0
Risks are balanced 4-4 3-6 1-3

BOJ’s October CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1710b.pdf

BOJ’s July CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1707b.pdf

USD’s side of the argument:

See below.

Long NZD/USD

After selling off hard for some time, NZD/USD is now at a crucial support zone at 0.68.

USD’s side of the argument:

  • The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.3% and moving away from the 2% target. The 91.7% rate hike probability for December’s meeting seemed to totally dismiss any concerns by the Fed for the lack of inflation.
  • Donald Trump is (and had always been) a wild card. He (and the GOP) failed to repeal and replace of Obamacare. He may just fail to pass his tax cut / reform plan (which has much greater implications to corporate profitability). However, I am still of the opinion that Republicans will fall in line and support the tax cut bill.
  • Donald’s beef with Kim. The ongoing escalation of tensions with DPRK led to buying of safe havens like US Treasuries, Japanese Yen, and Gold. Lowering of yields in US Treasuries will make it hard for the US Dollar to rally.
  • The Federal Reserve is tightening their monetary policy (argument for USD strength).

Image of US core PCE year on year taken from Investing.com:

https://www.investing.com/economic-calendar/core-pce-price-index-905

Fed’s rate hike odds is now at 100% (125 – 150 bps 96.7% and 150 – 175 bps 3.3%) for December’s meeting. Basically a rate hike in December has already been priced in. But, the issue is whether there is a chance of a surprise from the Fed by them choosing to stand pat and not hiking in December. This is especially so when September’s CPI was another miss and also when the Fed mentioned that low inflation may be due to persistent factors too.

“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

 

 

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