The Daily Update - Fed BoJ

Markets are relatively quiet today with very little economic data in the calendar for release ahead of the Bank of Japan’s monetary policy meeting early tomorrow and the Federal Reserve FOMC gathering later at 7pm London time.

The BoJ is expected to expand its activities and may even lower rates once again, while the Fed is widely expected to sit on its hands once again although it could through its “dot plots” show a stronger chance of a move before year end. Out of 23 of the Fed’s preferred banks only two expect a move by the Fed this meeting and the futures market is pricing in just a 20% chance of a hike.

Following tomorrow the odds are that the next chance the Fed will have to raise rates would be December as their next scheduled meeting is just a week before the presidential election in November. Although Chair Yellen insists all meetings are live, the political fallout from a Fed move around the election is thought to make that meeting another “sit on hands” meeting.

Of course, Janet Yellen was appointed to the Fed chair by President Obama and was also President Bill Clinton’s top economic advisor during the 1990’s. “The Fed is being controlled politically, they’re not raising rates, and they’re being controlled politically” said Donald Trump last week in New York. In return Hillary, wife of Bill, blasted Trump for his continued accusations, “You should not be commenting on Fed actions when you are either running for president or you are president” she said, so there.

Meanwhile, Deutsche Bank equity strategists have moved up their chances of a US recession in the next twelve months to 30%. They write that there are four definite signals that are currently in place which makes this more likely. Firstly corporate margins have been falling for the last two years, secondly the Fed’s Labour market conditions index turned negative last month, thirdly, capex growth is in negative territory, and finally the US speculative default rate is above 5%. They point out that there has been just one occasion in the last thirty years on which these factors have come together and not resulted in a recession and that was 1986, when the Fed, chaired by Paul Volcker, dropped interest rates 550bp and the US dollar fell 40% boosting exports.

So tomorrow promises to be an interesting day.