The Daily Update - BoJ and Fed

With high expectations for the BoJ to ease further after the recent strong rally of the yen and weak core inflation readings, the central bank left its three key easing tools unchanged catching some investors off guard. The central bank’s inaction did little to help the continued strength of the yen which breached the ¥108 level today (in London trading hours), soaring ~3% against the dollar. 

Back in January the BoJ’s adoption of negative rates took the market by surprise, again, it was not a popular move and was in fact counter-productive as the yen began its ascent against the dollar. This time round the bank has wrong-footed a number of investors whose expectations were for the central bank to deliver further monetary stimulus; especially after Governor Kuroda’s comment that the central bank “would not hesitate to take further easing measures” in order to reach its targeted inflation - which has consequently been pushed out, for the fourth time, into the next fiscal year.

The move has had little impact on our portfolios. We do however believe that the BoJ have actually missed a trick and markets are quickly losing confidence in the central bank. We understand the reasoning behind the BoJ’s decision to monitor the effect of January's negative interest rate decision over a longer term. However, the wrong signals have been sent to the market which expected the bank would, at the very least, expand its bond-buying program, and/or boost its ETF exposure and possibly go further into negative rates. In his statement post-announcement, Kuroda did comment that venturing further into negative interest rates was not off the table.  What is however, is stimulus in the form of “helicopter money” which he said cannot be adopted “under Japan’s current legal system”. One has to wonder whether the central bank is running out of options. The market will now look to Prime Minister Shinzo Abe for any hints of fiscal stimulus to spur growth.

Elsewhere, the FOMC remain broadly unchanged and “continues to monitor inflation indicators and global economic and financial developments”. A recent pickup in China data has helped reduce the risk of “global economic and financial developments”. Concern has shifted to US domestic economic activity which appears “to have slowed”. Today we had the release of Q1’16 growth in the US which the market expected to be around 0.7%; the Atlanta Fed and New York Fed called for 0.6% and 0.8% respectively. The reading disappointed at 0.5% qoq annualised, the slowest pace of growth in two years. Forecasts had been as high as 2.5% back in January! US Treasuries and the dollar did not seem to react to the miss with the 10-yr yield and DXY Index trading more or less within range. Since 2010 we have seen weaker Q1 readings, averaging 0.8%, however this year there were limited “adverse weather conditions”, or “residual seasonality”, coined by the Commerce Department. Despite the Fed’s favoured core PCE Q1’16 reading (+2.1% qoq) beating market consensus of 1.9% qoq, a June hike is looking ever less likely.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.