Get ready for another week dominated by central banks.
What else is new, right? We’ll get the Fed on Wednesday and the Bank of Japan on Friday and make no mistake, these are important meetings.
As you’re probably well aware, the FOMC has increasingly embraced its role as the guardian of global stability or, perhaps more appropriately, the bubble maintenance squad. Explicit recognition of the extent to which domestic and international financial markets impact the Fed’s decision making calculus (“the reaction function” in macro strat parlance) came last September when, on the heels of the turmoil created by China’s decision to devalue the yuan, Janet Yellen adopted the now famous “clean relent.”
From that point forward, the committee pretty much gave up on trying to convince anyone that the Fed is truly “data-dependent.” This isn’t about the US labor market or really much about inflation expectations unless by “inflation expectations” you mean the “expectation” that stock and bond markets will remain “inflated.” So to the extent an increasingly uncertain macro backdrop gives the Fed an excuse to put off normalization to another meeting, that’s great.
They don’t want to find themselves in another situation like they were in in March, when there was essentially no excuse for not pulling the trigger on a second hike other than the fact that stocks and oil had just crashed. In that regard then, Brexit is a welcome scapegoat when it comes to explaining the dovish statement we’ll almost certainly get come Wednesday afternoon.
Then again, it’s going to be pretty hard to ignore the blockbuster June jobs print and the market’s resilience following the UK referendum. Here’s BofAML’s take for what it’s worth:
“The interesting discussions at the July FOMC meeting will occur behind closed doors and only be revealed in the minutes three weeks later. There is no press conference or projections update at this meeting. We do expect the statement language to reflect the overall improved tone of the data. The June employment report removed most concerns about a significant labor market slowdown. 2Q GDP growth also looks decent, although investment spending remains soft. The inflation outlook is similar to the June meeting, while global risks appear somewhat less concerning in light of the post-Brexit price action. Thus there is some chance the FOMC will drop “closely” when describing its monitoring of inflation indicators and global developments in the second paragraph. That would be seen by the markets as a mildly hawkish move; dropping the “monitoring” sentence altogether would be both more hawkish — and much less likely in our view.”
If you want to know how silly this has become, look no further than the following graph:
(Chart: BofAML)
How long will it be before everyone just throws in the towel and admits the truth? They are never going normalize policy - ever.
As far as the BoJ goes, the sanity horse left the barn a long, long time ago. To speak of “options for further accommodation” is largely meaningless. They’re monetizing the entirety of gross government bond issuance, they own nearly two thirds of the Japanese ETF market, and rates are below zero.
It’s gotten so bad that the bank’s primary dealers are literally resigning because they’re afraid the BoJ has broken the government bond market.
(Table: Barclays)
Where exactly, does one go from there? Nowhere, that’s where.
The focus instead will shift to the increasingly ubiquitous “helicopter” chatter.
As we documented on Thursday, the BBC inadvertently threw the yen for a loop by releasing an old interview with the BoJ chief Kuroda in which he seemed to explicitly rule out the possibility of central bank funded fiscal spending. No one truly believes he’s actually unwilling to consider it (believe us, Kuroda is willing to consider anything), but it didn’t help sentiment and it came across as schizophrenic when set against multiple reports that Prime Minister Shinzo Abe is considering a stimulus package as large as 30 trillion yen - that’s trillion with a “t.”
Allow us to put it this way: either Kuroda says something about fiscal stimulus next Friday or the yen will soar and then it’s bye, bye carry.
So that’s pretty much the long and the short of it in terms of previewing next week’s main monetary policy events. Now it’s up to you to decide whether to be...well… long or short of it.