With bond markets calming down this week after the rise in yields brought on by the Trump victory, the focus will be on Fed chair Janet Yellen’s congressional testimony this evening. The market will be eagerly awaiting the chair’s thoughts post the Trump victory as to the impact on monetary policy over the coming year or so. The futures market has already priced in a rise in the funds rate at the 13-14 December meeting at around 94% and so little new information is expected about the near term but of major importance will be any information Yellen gives as to the likely pace of further rises during 2017.
Unless you want to focus on Hillary’s Gmail account and Donald’s ‘wall’ most of the headlines came from the Far East this morning, where amongst other news the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) held meetings. The RBA, as widely expected, left the policy unchanged as did the BoJ but some interesting tinkering from the BoJ as to their inflation thoughts did emerge. They moved down their expectations once again, now looking for CPI to run at 1.5% in 2017 from the previous 1.7% and pushed out their 2% target rate to fiscal 2018, which still appears a little optimistic to us.
One hundred years ago today, “Little Willies”, or Lincoln Machines were introduced as the first ever tanks to be used in warfare at the Battle of Flers-Courcelette. Why would a dangerous machine be referred to as a “Little Willie” you might ask? Well, there was a very popular comic strip posted in the Daily Mirror at the time by William Haselden, called “The Adventures Of Big And Little Willie”... makes sense? Meanwhile, the word “tank” derived from the armoured vehicle’s initial reference of “water carrier”; which was used to befuddle enemy spies. How far this past century has taken us, with the announcement earlier this week that Japan has unleashed an aptly named “Prodrone”. Armed with two robotic claws, the drone is capable of lifting as much as 22lbs (10kg) each arm while flying almost as high as the summit of Mount Kenya, at top speeds of 37mph, in most weather conditions!
The efficacy of negative interest rates has been a well debated topic with Mark Carney, the Governor of the Bank of England, making clear his view clear with an emphatic dismissal of the use of this policy tool: "I’m not a fan of negative interest rates. We've seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don't need to go to that resort." For him “the effective lower bound is a positive number, close to zero.”
Yesterday the Bank of England (BoE) found itself unable buy enough long dated gilts as investors continue to cling on to developed government bonds of all varieties. Following the BoE’s decision to cut the UK base rate and expand its quantitative easing programme by £60bn it only managed to receive offers to purchase £1.12bn of gilts with maturities over 15 years versus their target of £1.17bn. At least part of the reason for this shortage of availability is the more illiquid markets over the summ er – indeed the ECB overbought in earlier months in expectation of such illiquidity but the recent post Brexit expansion of QE obviously had no such option. This prevailing shortage, versus demand, of government bonds looks likely to remain a prolonged dilemma for central banks and investors alike.
Growth or the continued weak state of it remains a continuing theme for global investors. Not surprisingly, Japan which is also grappling with negative structural trends (ageing population, lack of immigration, secular stagnation and the need for greater structural reform) is receiving a lot of attention as it is one of the furthest down the route of deploying unconventional policies. More questions are being asked about whether they are reaching the stage of deploying helicopter money, particularly following Ben Bernanke’s recent visit to Tokyo.
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.
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.
Relative calm was evident today as US markets are closed for Presidents’ Day and China returns to work after the week long Lunar holiday. Our markets closed upbeat on Friday, spurred by a tidy $3 per barrel bounce in Brent (around +12% from the lows) combined with a positive day for stock markets in Europe and America. We thus start this week with a risk-on attitude with prices moving higher across the board.
The Bank of Japan (BoJ) has released a summary of opinions expressed by the 9 board members at the 28th - 29th January policy meeting. At the January meeting the BoJ took the market by surprise as they cut a key interest rate to below zero, in what some see as a bold move in its continued efforts to overcome deflation. The interest rate on excess reserves was taken down to -0.1%. Of the 42 economists surveyed by Bloomberg, only 6 predicted the move. Interest rates have not been above 0.5% this century, a long way from the 8% seen in the 1980’s. As expected the BoJ left QE at a rate of JPY 80bn a year.