Daily Market Digest: Markets muted to BoJ. FOMC takes stage

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Market Summary

  • Bank of Japan leaves interest rates and QQE unchanged
  • BoJ unveils new policy tools, with “yield curve control.”
  • UK budget deficit shrinks
  • FOMC policy decision in focus
  • Canada wholesale sales rise 0.30% in July
  • Markets await Fed decision, gold rallies

Today’s Economic events

  • Japan trade balance 0.41tn vs. 0.50tn
  • Australia MI leading index m/m 0.0% vs. 0.10% previously
  • New Zealand credit card spending y/y 1.90% vs. 5.60% previously
  • BoJ policy rate -0.10% vs. -0.20%
  • UK Public sector net borrowing 10.1bn vs. 10.5bn
  • Canada wholesale sales m/m 0.30% vs. 0.30%
  • SNB releases quarterly bulletin

Coming Up

  • (USD) Crude oil inventories
  • (USD) FOMC statement
  • (USD) Fed funds rate
  • (NZD) RBNZ OCR decision

BoJ announces new policy strategy

The Bank of Japan’s monetary policy meeting today saw the central bank come out with a new framework to achieve its inflation target mandate. The central bank set a cap on the 10-year bond yields while sounding confident that the policies would help inflation overshoot the 2.0% target. The central bank’s policies today showed new efforts the Bank of Japan governor while staying committed to reaching its inflation target.

“The price stability target of 2 percent has not been achieved … [and] this is largely due to developments in inflation expectations. Inflation expectations need to be raised further in order to achieve the price stability target,” the BoJ said on Wednesday.

Japan 10Yr Bond Yields, Intraday chart
Japan 10Yr Bond Yields, Intraday chart

The central bank left the interest rate unchanged at -0.10% but said that further rate cuts are possible.

BoJ’s new policy tools

The Bank of Japan pledged to cap 10-year government bond yields at zero percent. This means that the central bank will b buying bonds at zero yield while maintaining the bond purchases in line with 80 trillion yen a year.

The BoJ said that it would continue buying assets until inflation overshoots the 2% target and remains stable. In its statement, the central bank noted that “With a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank decided to introduce ‘QQE with yield curve control.”

Still many questions remain, especially on the credibility of the central bank which has struggled to raise inflation in the past three years.

UK budget deficit shrinks in August

UK’s public sector net borrowing excluding interventions fell by 0.9 billion GBP to 10.5 billion GBP in August, compared to a year ago. The data released by the Office for National Statistics reported on Wednesday showed. Despite the decline in deficit, it was bigger than the shortfall of 10.2 billion.

ONS said that in August 2016, the public sector spent more money than it received in taxes and other income leading to borrowing 10.5 billion GBP to balance the books. From the 10.5 billion, 7.6 billion was related to the day to day activities in the public sector while 2.9 billion was related to infrastructure spending.

At the end of August, UK’s public sector net debt was at 1,621 billion or about 83.60% of the country’s GDP.

UK public sector debt, March 1994 to August 2016
The UK public sector debt, March 1994 to August 2016

In the current financial year to date, PSNB excluding public sector banks fell 4.9 billion to 33.8 billion. The ONS said that June’s referendum was yet to show an observable impact on the public debt figures despite covering 2 months of post-EU referendum data.

The budget deficit data was 4.3 billion higher than what was initially forecast by the Office for Budget Responsibility, which forecasted that public borrowing would rise to 72.2 billion during the financial year ending March 2016. For the financial year ending March 2017, OBR forecasts a reduction in borrowing to the tune of 21billion.

Canadian wholesale trade rises in July

Wholesale sales in Canada advanced 0.30% in July to a seasonally adjusted 56.53 billion, data from Statistics Canada showed on Wednesday. The increase in July was in line with forecasts and showed an increase for the fourth consecutive month. Most of the gains came from the motor vehicle industry which posted a record high with broad gains in five of the seven subsectors. In volume terms, wholesales sales were unchanged during the month.

Canada wholesale inventories - Unchanged (July 2016)
Canada wholesale inventories – Unchanged (July 2016)

Markets await Fed’s decision on interest rates

The markets are likely to remain on the edge with the Fed’s two-day FOMC meeting concluded today. At 1800 GMT, the US Federal Reserve will be publishing the details of its two-day monetary policy statement. The markets are widely expected to see the Fed leaves the Fed funds rate unchanged at 0.50% at today’s meeting. Still, there is a chance that the Fed could come out hawkish in its statement leaving the door open for a rate hike in December when the next FOMC press conference in scheduled.

XAUUSD (1328.85)
XAUUSD (1328.85)

Equity markets remain muted reflecting the broader sentiment of traders unwilling to take risks ahead of the Fed’s decision. US 10-year bond yields are seen trading at 1.69, a pullback from intraday session highs above 1.720 which followed the BoJ’s monetary policy decision. Gold prices also maintained pressure, currently up over 1 percent on the day.

The FOMC is also expected to release new quarterly staff economic projections. At last check, US headline inflation rate rose 1.10% in August, reaching for July’s highs, while unemployment was stable at 4.90%. However, some of the leading indicators pointed to weakness in the US economy, which has prompted many to believe that the Fed will keep rates unchanged until further confirmation from economic indicators.

The markets will be busy in the run up to the Fed decision as US weekly crude oil inventory report comes ahead of the Fed meeting and the RBNZ interest rate decision is due later in the evening.

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