The FOMC maintained its interest rate status quo by holding rates again yesterday, this time round with one dissent. The only significant upgrade to the economic assessment was, “Near-term risks to the economic outlook have diminished.” This comment suggests the Fed is gearing up to resume the normalisation process, however there was little guidance that lift-off will take place at the next meeting in September. The US Treasury curve bull flattened after the announcement as market makers favoured the long-end of the curve, and the dollar has remained softer against major currencies today.
Only three meetings remain this year (September, November and December), with the US presidential elections in November we expect the Fed will want to wait until next year to begin its gradual interest rate tightening cycle. The futures market is not pricing in a hike until March 2017, while some market makers have pushed out their expectations for the next hike as far as June next year.
Tomorrow we will hear from the BoJ once it concludes its two day policy meeting. The central bank will no doubt be under pressure after PM Abe’s surprise ~USD 265bn (5% of GDP) fiscal stimulus package announcement earlier this week. Details of the hefty package are currently unclear, however we expect to have more clarity after the cabinet meet next week.
The central bank is expected to react with accommodative monetary policy this month, however recent moves by the BoJ have fallen short of market expectations which in turn is forcing the yen’s appreciation; hampering exports thus growth. The market consensus according to Bloomberg is for a 5bps cut in rates to -0.15%, and we expect the bank will need to expand its asset purchases as the country battles with falling inflation. The idea of “helicopter money” has been dismissed by BoJ governor Kuroda who claimed that there is “no need and no possibility” of implementing such a package.
With markets quickly losing faith in central banks our bias at the long-end of the curve has remained supportive of performance. We therefore remain comfortable with our high credit rated range of diversified portfolios which continue to offer ample spread cushion and attractive yields.