Remember last week when, lost in the fog of “Super Thursday,” Bloomberg reported that the BoJ was starting to contemplate its exit strategy?
For those who missed it, this was the excerpt:
The Bank of Japan is re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon, people with knowledge of discussions at the central bank told Bloomberg’s Toru Fujioka and Masahiro Hidaka.
With inflation still far below target, the BOJ is contending with increasing debate of exit in markets, the media and among some lawmakers.
And while that’s little more than a nod to the possibility that somewhere, over the rainbow, this will have to be rolled back, it was still enough to move the yen – if only for a moment.
Hours later, Draghi threaded the proverbial needle by throwing a downwardly revised inflation forecast into an otherwise hawkish statement that omitted the reference to further rate cuts.
As for the Fed, everyone wants to know what to believe: tentative inflation or an overheating labor market.
Implicit in all of this is a question about whether markets are going to have to start taking central banks more seriously.
That’s the subject of Tuesday’s missive from former FX trader Richard Breslow who has penned what amounts to a follow-up to the piece we discussed last week in “Josephine Witt’s Reign Is Over Or, Central Banks May Actually Mean It This Time.”
Full note below…
A few more central banks are meeting this week but you wouldn’t necessarily know that given how markets are trading. Traders are focusing on the fact that we pretty much know what rate decisions are or aren’t going to be made. Yes for the Fed, no for BOE, SNB and BOJ. But that’s utterly the wrong thing to be thinking about. What matters is to what extent and with how much finesse there’s any discussion of policy normalization. And what it means taking away the punch bowl as the party gets more and more messy.
- From that point of view, the U.S. and Japan meetings are firmly on my radar. I’d be really surprised if either of the other two varied from script
- It should be too early for the Bank of England to have come to any conclusions about what the latest political developments may (get the pun?) mean. But they’re unlikely to sound more dovish than traders are expecting
- And the SNB has got to be wondering why all this good news from the rest of Europe isn’t giving any lasting relief on the “the franc is too strong” front. Don’t expect them to back off from the party line. Theirs is a strictly reactive monetary policy framework
- Frankly the franc concerns me too. Because its strength probably, with justification, has far more to do with our newfound set of geopolitical risks than a repudiation of the things have gotten more sanguine in Europe fad. Congressional hearings are never one and done affairs
- The Bank of Japan is expected to make no changes to policy. But I wouldn’t miss the announcement for anything. Mixed in with all the dovish assurances will potentially be a first mention of how they might “theoretically” handle a future exit from monetary stimulus. And make no mistake, when the BOJ buys, they go far and broad. Equities, ETFs, REITs are all fair game. Not only do they have a lot more stuff on their balance sheet than the other banks, but relative to their economy it’s the biggest balance sheet out there
- When news of a potential communication tweak was floated last week, markets moved. And this with no one thinking that anything is happening anytime remotely soon. If I wanted an alternative explanation of why tech stocks finished last week with a caning, I’d be sorely tempted to think about the greater fool theory and the BOJ
- As for the Fed, the market has fully internalized a hike and is choosing to bet that afterwards we’re back on hold. But even if you believe recent inflation data will cause them to be dovish on rates, it’s a fantasy not to expect that the balance sheet normalization won’t be unambiguously hawkish. The Fed desperately wants and needs to get their holdings down. It will be a major milestone in the financial crisis recovery timeline. And for the legacy of this Fed
- One thing to keep reminding yourself is that global yields are as low as they are because yield suppression is a global phenomenon. How any bank handles normalization affects all of them. Everyone thinking they can get through the exit at the same time is as relevant for policy-makers as it is for traders who will keep dancing until the music stops