Last week gave us the widely anticipated Fed and Bank of Japan policy meetings, which completes a string of high profile central bank meetings including the ECB 9/8, BOE 9/15, and Fed/BOJ 9/21. The financial market response this week was a modest rally in equities and a reprieve from the ‘mini taper tantrum’ (10yr moved from 1.54% to 1.73% on Thursday), with yields falling on the longer end of the curve. The economic calendar was relatively light so markets maintained focus on central bank meetings and will soon begin to look more closely at November election outcomes now that we are approaching the first Presidential debates and a true beginning of the home stretch.
The Bank of Japan meeting was arguably more important that the Fed meeting and should simply be categorized as a change of scenery. The announcement was partially status quo with some elements of surprise. The BOJ opted to maintain both the interest rate and level of QE bond buying (¥80t/$785b). However, they indicated a few new wrinkles including targeting the shape of the yield curve (tactical bond buying across all maturities), an explicit 0% target yield on the 10yr JGB, and they engaged in ‘rhetoric easing’ by pledging to overshoot their 2% inflation target. The net effect was mixed however as the Yen weakened initially but then strengthened as the day wore on.
The Fed meeting had no real surprises as the meeting communique and Yellen presser conveyed a ‘hawkish hold’ signaling a preference for a December hike but complimented that messaging with a somewhat downbeat economic forecast, and approximately 50bps reductions in rate expectations for 2017 and 2018. Of note were three dissenting voters who preferred a hike in September but, by no big surprise, the FOMC consensus was to wait until after the election. December futures are currently pricing in a 57% probability for a December hike. One notable trend in the financial markets has been the surge in 3mo LIBOR in the third quarter, from 0.62% to 0.86%, which is the highest rate since 2009. Capital flight from prime money market funds due to new regulations is the primary culprit here, but either way, it provides nice cover for the Fed as short term rates have already risen materially.
The first Presidential debate next week should mark the beginning point where the markets will start paying closer attention to who will emerge and the resulting policy outcomes. Realclearpolitics is one decent source of polling information because they aggregate the latest polls into one single rolling average. Current figures from RCP have Clinton in a slight lead but amount to a toss-up given margin of error. Another interesting source of information is Nate Silver’s blog which maintains a statistical ‘Nowcast’ model. Current figures there have Clinton at 64% and Trump at 36% odds, if the election were held today.
