The last week of October saw a lot of major events taking place, mostly in the likes of the Central bank decisions which has continued to keep the markets uncertain and volatile therefore. The US Federal Reserve, the Reserve Bank of New Zealand and the Bank of Japan all held their monthly monetary policy meetings this week. With all the monetary decisions staying on hold, the stage is set for the respective Central Bankers to deliver a very eventful December where major policy decisions could be taken. We already know that Mario Draghi has said that the ECB would decide on whether to expand its QE program in December and that is just the start.
Here’s what we can make of it.
Federal Reserve: The markets were clearly caught off guard with the FOMC’s statement. While initially the markets responded bullishly on the statement citing lack of any major shifts, the markets quickly reversed after the FOMC’s statement was digested. Clearly, the Fed sent out a hawkish tone to the markets noting that December Fed hikes was still being considered. What tripped the markets was the fact that the Federal Reserve removed some key lines from its statement. Firstly, the Federal Reserve removed all references to the global slowdown which was seen as a major concern which kept the Fed from hiking rates in September. The devaluation of the Chinese Yuan and the emerging market tantrums were all too serious to consider. This was followed up by the statement which focused more on domestic growth and demand, sending a signal that the Fed was looking at the US economy rather than try to calm the global markets.
In light of weak NFP prints in August/September, it was almost a done deal that the Fed wouldn’t hike rates in October and clearly the Fed held back but still sounded confident that December would be considered. The Fed futures rates quickly started to rise with the probability of a December lift-off quickly gaining pace. However, the Fed’s hawkish tone will have to be supported by economic data. Yesterday’s Q3 GDP managed to barely meet the estimates, rising 1.5% and today the markets will get a glimpse of the PCE data with expectations that September was positive for inflation. As far as economic data supports the Fed’s hawkish view, the prospects of a December rate hike remains strongly in play.
In Summary: FOMC statement keeps rate hikes alive for December, if data supports it.
RBNZ Decision: The Reserve Bank of New Zealand met a few hours after the FOMC on 28th October and as expected, the central bank left rates unchanged at 2.75%. The RBNZ however attempted to strike a dovish tone which clearly failed to drag down the Kiwi despite the RBNZ’s statement citing concerns of an appreciating Kiwi’s exchange rate and the drag on inflation it poses. The NZDUSD has gained nearly 7.5% after touch 0.627 lows in September. Economic data from New Zealand remains subdued and nothing positive to talk home about. The RBNZ’s decisions to hold rates steady could be seen more as a means of buying time and saving its ammunition. Incidentally, the RBNZ will be meeting next in December right after the ECB’s conference and Janet Yellen’s speech which is being seen as a pre-cursor to rate decision later on December 16th. It is very likely that Yellen’s speech will be the key for the RBNZ to act or to refrain.
In Summary: RBNZ signals it is willing to cut rates further at its future meetings.
BoJ Monetary Policy: The Bank of Japan kept its policy unchanged today despite the markets expecting to see the Central Bank expand its QQE program. However, the BoJ decided to keep policy unchanged with a vote of 8 – 1 and kept its current pace of QQE purchases at 80 trillion Yen. The Japanese Central Bank has largely stuck to its narrative that Japan’s inflation could slowly but surely rise to the 2% target rate. With the Japanese Yen trading comfortably within the 120 – 119 range for the past few months, there is no incentive for the BoJ to expand its QQE without any additional pressures. However, things could change in December as the BoJ will meet on the 18th, coming right after the all important December Fed decision.
In Summary: BoJ holds its cards steady, remains optimistic on inflation reaching the bank’s target.
