On Wednesday, the FOMC left its interest rate policy in tact as it awaits more data before deciding to change interest rates. The FOMC statement wanted to reflect some underlying hawkishness but the market is reticent to accept the veracity of Fed releases. The DOLLAR initially rallied as the algo deemed the “hawkish” language a positive for the dollar and bearish for the precious metals but upon a very quick review the market reversed and now demands that the Fed reveal its Missouri lineage and “SHOW ME.” The yield curve gave the FED some credence by flattening in response to a change in some of the rhetoric, “near-term risks to the economic outlook have diminished.” This provides the FED the flexibility to respond to self-diagnosed headwinds in an effort to keep rates at present levels for as long as the DOVE can fly. The FED is pinned not by U.S. data but by the actions of the ECB and the BOJ.
There was a July 26 REUTERS article titled, “Global QE Running At Record $180 bln Per Month and Rising.” This shouldn’t be a surprise to readers of NOTES but it highlights the power of the world’s central banks to distort global financial markets. “The ECB and BOJ are buying around $180 bln of assets a month, according to Deutsche Bank, a larger total than at any point since 2009, even when the Federal reserve’s QE programme was in full flow.” All Fed decisions are dependent on the actions of “strangers” because of the search for relative bond yields across the globe. The DOLLAR will dramatically strengthen if the FED tries to NORMALIZE too quickly ahead of the pack, especially as we are in election mode and no formal fiscal stimulus plan is forthcoming in the remaining months of the year. Tonight, the BOJ will reveal what it learned from its “double secret” meeting with Ben Bernanke a few weeks ago.
I DON’T BELIEVE THE BOJ WILL CUT INTEREST RATES FURTHER BECAUSE NEGATIVE ABSOLUTE RATES HAVE NOT PROVEN TO RESULT IN THE DESIRED OUTCOMES. So, if we follow the Bernanke speech from May 31, 2003 in his advice to the Japanese I OPINE that the BOJ will follow this program of announcing an increased amount of QE purchases. In the 2003 Bernanke speech, he said: “One possible approach to ending deflation in Japan would be greater cooperation, for a limited time, between the monetary and the fiscal authorities. Specifically, the Bank of Japan should consider increasing still further its purchases of government debt, preferably in explicit conjunction with a program of tax cuts or other fiscal stimulus.”
Earlier this week the market acted on a rumor that Japanese Prime Minister Abe was set to announce a massive increase in a planned fiscal stimulus program. ABE‘s preannouncement may have been done to pave the way for an increase by the BOJ to purchase ever more government bonds. In a July 26 piece by Teneo analyst Tobias Harris, he suggests that this fiscal stimulus plan may have been tipped at the G-20 meeting in China earlier this month when BOJ Governor Kuroda told reporters,”… if the government activates fiscal policy amidst conditions of monetary easing by the central bank, the effects of economic conditions can be great.” This is right out of the Bernanke handbook. f the fiscal stimulus is structured with tax cuts, it will be the Fiscal Investment and Loan Program (FILP) and consist of some large infrastructure projects in politically supportive areas.
Also, there may be monetary support for low-income families, but it will not be a “helicopter add” because it will be financed by an increase in QE and not the imagined money drops. I am not certain how the YEN will react but if the BOJ plans to increase its QQE program the NIKKEI OUGHT TO BE THE MAIN BENEFICIARY. I will be patient but this seems to be the most probable scenario as Kuroda needs to create some stimulus to overcome the drag from a recently appreciating YEN. In my mind, the only other alternative would be a BOJ plan to increase QE by announcing it was buying FOREIGN BONDS but this would be deemed a major NO-NO by the G-20 and the Chinese would react to such a FOREX INTERVENTION BY DEVALUING THE YUAN. The BOJ and MOF are not at the point of suffering the IRE of the entire G-20 community.