The result of Central Banks meetings do not seem to have gone well from a market prospective. While the US meeting did not mention the global risks as a reason to delay an increase, there was little said in terms of forward guidance in when an increase will come. Perhaps June. The BoJ was another story. The clear evidence of a need for more stimulus did not prompt the committee to add more stimulus. This has caused the expected reactions in the Yen and stock market.
What the central banks are saying to the markets at this point is they are in a wait and see pattern. Looking at the health of the economy on its own to see if it will be able to perform without a safety net. This will adjust the expectations of the market in terms of where bad news will take the markets and how much volatility can spike. The market will also have to use data to estimate when a rate hike (or cut) is most likely to occur. With US GDP coming out in a little over an hour, positive news will help to solidify the estimates of a June hike or push them further. As the markets are left to walk on their own more, it can be expected to experience a few stumbles and wobbles. The question is how many falls until the bank step back in.
A busy day with the Fed and Boj coming out with policy statements and interest rate decisions. For the Fed no change in rates is expected but rather the language of when the Fed looks to raise rates is going to be important. What will be important to look for is if members note global risks to the downside, such as China, in their statement. In the past this is what was looked at by the markets to determine if a rate increase was on the horizon. Things have changed in terms of growth in China and the numbers being presented are looking better than the start of the year. However this is due to large amounts of borrowing that was enacted to boost the Chinese economy. It will be interesting to see if the Fed looks past the headlines ad talks of continued weakness towards China of takes the numbers for what they are and talks a more hawkish note towards inflation.
The Bank of Japan will take some of these cues from the Fed statement, but has mentioned recently that they are satisfied with the results of negative rates. With more of the numbers in Japan starting to turn negative and the Yen up to 111 to the dollar the trend does not match with the recent language of the central bank and some are expecting more stimulus in the coming months, perhaps even at this meeting. If the outlook is still displayed as rosy and optimistic, you will no doubt see continued strength in the Yen as others look for safe havens in the Asia Pac regions.
Today will see some insights from central bankers in Europe with the ECB having its interest rate decision and the Bank of England Carney speaking. With talks of the Brexit and slowing global growth it will be interesting to hear if this is brought up in either of the Governors speeches. Many are not expecting to see any major moves from the ECB at this meeting, more of an assessment on the previous moves and their effectiveness. I some terms they are, lending has increased and the Euro has remained low despite a bit of a dollar selloff. Inflation could still use more attention and the bank will likely address the need to see more inflationary trends to feel comfortable with current policy being the end.
The BOE governor Carney will most likely talk about the state of the UK economy and touch on the implications of the Brexit vote that is taking place in June. The vote produces a lot of unknowns for the country and the Eurozone, the concern that the central bank expresses could add and increasing market focus on the vote and add volatility to the GBP as the deadline approaches. While it is hard to measure the actual moves from a policy event, knowing the amount of concern that it is producing in the markets can help in dealing with, or taking advantage of, volatility as different sides of the policy debate publish views and reports.
The Oil quandary in the idle east has caused a stir in prices, over the last few days. The drop in early trading Monday followed by a spectacular rebound leading to positive gains on the Week Tuesday. The underlying trends had little to do with the meeting however. The strike in Kuwait (and the ending of it today) were main causes of the price movement so far this week. Looking longer term it will be interesting to see how much of the rise in oil prices over the past month will be given back on the breakdown of the deal.
News is coming out of the EIA today that will give some insights into oil stock in the US, but more insightful news is coming out in a few days. Saudi Arabia is coming out with its vision of the future and how it plans to build a country not entirely dependent on oil revenues. The architect of this vision is Prince Mohammad Bin Salman, the same person who allegedly halted the negotiations this weekend. The success (or failure) of this plan will determine if the country will be firm on maintaining market share in the future or higher prices.
More talk from the BoJ governor about the willingness to add stimulus, if necessary. Kuroda still expects inflation to pick up and reach the 2% target, and the bank will monitor the impacts of the markets on the economy. These attempts to talk down the currency are not having the same effects on the Yen or inflation expectations that the BoJ would like because the US Fed governors are speaking louder and with a more powerful message. With the US having the ability to reverse the current trend in policy, any talk towards that end will trigger more price movements in the dollar then Japan talking of more of the same waiting for inflation and adding stimulus if necessary.
Trying to talk up inflation expectations in Japan is challenging in the face of the economic and regional uncertainty. Getting consumers to change their mindset without major changes to their sentiment will be challenging. Uniqlo is a good example of a company that changed course on their pricing after initially raising prices last year. The consumer did not accept the price increases and other companies did not follow suit, hurting the company’s bottom line and having them abandon the price increase plans.
The raising of prices for the sake higher prices will not stoke inflation. In a competitive marketplace companies are going to continually lower prices in pursuit of more market share and higher returns. Higher prices therefore will have to be pushed onto all companies equally for prices to rise. This can be achieved by higher input costs and transportation costs, which are not on a good trajectory. Increasing the costs of borrowing will be another way to affect companies prices equally (depending on their debt needs), which is also hitting lows. These factors combined with the regional economic and geopolitical issues are not conducive to an environment where prices have to go up and consumers are forced to accept the change, in fact the opposite is going to occur under these conditions without more of a commitment to stimulus.