Fed Watch – A Tale of Two Central Banks

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In a tale of two central banks, the US Federal Reserve and the Bank of Japan (BOJ), began the week with two opposing market expectations for their respective conclusion of their monetary policy meetings. While the market expected the US Fed to maintain its dovish language and keep rates steady, the market expected the Bank of Japan to increase its quantitative easing. Though both policy meetings may have concluded uneventfully, market reactions were wildly different.

Wednesday afternoon’s conclusion of the Federal Open Market Committee (FOMC) meeting did very little to shift market expectations on the velocity of US interest rate increases. As expected, the FOMC maintained the Fed Funds Rate, the interest rate at which banks lend to each other overnight, at its current target range of 0.25% and 0.50%. The ten-year US Treasuries were bid as yields fell 6bps to 1.85%.

Dissecting the FOMC’s statement for clues to future rate hikes, the sentence ‘global economic and financial developments continue to pose risks’ was removed. A relatively positive tone on the appreciation of oil prices (WTI Crude has recovered 42% from its YTD lows trading at 45.32 as of this writing) and its inflationary impact is mildly hawkish. Interestingly, voting for a rate increase of 25bps was Esther George, the Kansas City Federal Reserve President and inflation hawk.

Taking the overnight market by surprise, the Bank of Japan held off on expanding its monetary stimulus overnight leading to an immediate US Dollar depreciation against the Japanese Yen from the previous day’s close of 111.46 to an overnight low of 107.96. The BOJ is betting that its January implementation of a 0.1% negative-rate of return on a portion of bank deposits strategy will generate an acceleration in consumer and business lending with the hopes of increasing inflation towards its 2% target. Taking a similar stance to the US FOMC, the BOJ will be data dependent and will not drive policy based on market demands. Of interesting note, US Treasury Secretary, Jacob Lew, mentioned earlier in April that there was no reason for Japan to intervene in the currency market.

On the economic data front, Weekly Jobless claims (259k expected), Q1 GDP (0.7% expected) and Core PCE inflation data (1.9% expected) will print at 8:30AM EST. There is no Fed Speak scheduled for today.

Opening in New York trading this morning, US Treasuries are bid with yields dropping over 1bp across the curve. S&P Futures are opening slightly softer at 2075.20, down 15.50 points.

Danny Fung
Managing Partner