Yesterday was not a good day for the Fed’s credibility.
U.S policy members did what was expected of them, and not hike rates, but their interpretation of “clarity” going forward is considered disappointing.
In her press conference, Ms. Yellen highlighted that ‘Brexit’ was a factor in the Fed’s decision to keep the status quo, but there was no mention in the FOMC’s policy statement.
The Fed has made it very clear that rate hikes are data dependant. Now after one disappointing U.S jobs report, policy makers have made a major revision to the projected trajectory of the Fed funds rate.
The Fed has lowered its median forecast in 2017, 2018 and over the long run, while the number of voters who saw only one rate hike in 2016 jumped to six from one at the last meeting.
How to throw a curve ball?
In response to questions about the timing of the next rate hike, Yellen first indicated the possibility of a rate hike in the “coming months,” then backtracked by saying that she did not know, and then indicated that a July rate hike was “not impossible.”
So, It’s back to the drawing board for fixed income dealers. The smart money is now looking at a September rate move. A July hike is still possible, but would require not only a healthy rebound in job growth, but also a firming in inflation and inflation expectations over the next six-weeks and of course a positive result in the U.K referendum.
1. Bank of Japan (BoJ) less ‘dovish,’ Yen rallies to 21-month high
Ahead of the BoJ rate announcement last night, approximately three quarters of the market was expecting a delay in further stimulus measures as investors continued to gauge the effectiveness of NIRP (negative rate policy).
Nevertheless, nearly +25% of the market favored more easing in July, and its this that’s considered to be behind the violent move lower in USD/JPY to a new 21-month low (¥103.67). The markets interpretation of the changes in the statement seems to put the possibility of a July stimulus package into question even if domestic economic data continues to deteriorate.
Note – smart money was also looking at the opportunity to leg into owning JPY on any dollar rallies ahead of Brexit vote.
Not only did the BoJ stay on hold on both interest on excess reserves at -0.1% and annual monetary base expansion at ¥80T, Governor Kuroda and company also maintained their overall economic assessment of “continued moderate recovery trend,” and also upgraded their view of housing investment and public spending.
On inflation, the BoJ still saw core CPI at about 0%, but revised its outlook for inflation to allow for “slightly negative” CPI vs. prior view of “about 0%”.
With JPY where it is, expect BoJ intervention rhetoric to dominate the headlines in the short while.
2. Global stocks fall on BoJ’s inaction
Global risk aversion sentiment has returned after a one-day pause. It’s being supported by the cautious tone of central banks (Fed, BoJ and SNB) with the upcoming Brexit vote (June 23) being a factor in their decisions.
The latest U.K Brexit IPSOS/Mori poll published this morning is suggesting +53% for leaving, while +47% for staying (prior IPSOS/Mori poll +37% leaving, +55% staying).
In this low rate environment, it’s no surprise to see financial stocks leading the losses across Europe with the bulk of the major banks and Italian peripheral lenders leading losses in the Eurostoxx.
The Nikkei Stock Average sank -3.1% after the BoJ stood pat on its easing measures. Wall street closed out yesterday reversing early gains to end lower for a fifth consecutive session after the Fed kept interest rates unchanged as expected and lowered its forecasts for short-term rate rises in the coming years.
3. Gold rallies to new heights, Oil slips
Increased safe haven demand over the possibility of a U.K. exit from the E.U and the Fed’s scaling-back of projections for raising interest rates has given the green light to gold ‘bull’.
In overnight trading, the yellow metal finally broke through the psychological $1,300 handle to a new record a two-year high of $1,313.51 a troy ounce (August 2014).
The prospect of a Brexit is negative for other commodities, including industrial metals, because such an action could hurt their demand.
In this time of uncertainty, the ‘bulls’ seem to have set their sights on possibly hitting $1,400 an ounce this year. Mind you, if the Fed were to shift gears and change course and increase interest rates in coming months achieving higher gold prices will be difficult.
Crude oil prices have slipped for the sixth consecutive session this morning. The decline started with more U.S production rigs coming on line as crude prices rose.
Brent crude has fallen -1.5% to $48.23 a barrel, while WTI is trading down -1.5% at $47.30 a barrel.
4. SNB ready to act
The Swiss National Bank (SNB) has kept its negative interest rate policy unchanged this morning and this despite the recent strengthening of CHF ($0.9620). As expected, the SNB held its deposit rate at -0.75%. In times of stress both CHF and JPY are the go to safe haven currencies of choice.
Its no surprise that the SNB said they are keeping a close eye on the U.K June 23 referendum and is ready to take steps to offset any turbulence. The problem is that Swiss authorities hands are ‘almost’ tied. Further cuts to the deeply negative deposit rate would run the risk of destabilizing the banking system. And with a mounting pile of foreign currency reserves they may be limited in how aggressively it can intervene in foreign exchange markets. For now they rely on rhetoric and threats – “The Swiss franc is still significantly overvalued,” the SNB said in a statement.
5. U.K Retail sales and Bank of England (BoE)
Better-than-expected U.K. retail sales data (+0.9% vs. +0.4% m/m) this morning has temporarily helped the pound (£1.4152) to pare its earlier losses on the back of U.K Brexit IPSOS/Mori poll (noted above). The data should ease some of the markets concerns that fears of a possible U.K. vote to leave the EU in next week’s referendum may be feeding through into the wider economy.
The Bank of England (BoE) will release its monetary policy committee summary at 7:00 am EDT. The minutes of the meeting and the rate vote count will be announced at the same time. The BoE is not expected to announce any changes, and will most likely use this opportunity to warn markets about the upcoming Brexit referendum.