German And Dutch Elections, And FOMC, BOE, And BOJ Meetings

The Bank of England meets on March 18, the day after the FOMC meeting concludes. Former BOE Governor King was outvoted at least a couple of times, but it seems clear that the current governor speaks for the majority when he underscores the downside economic risks and the considerable slack in the economy. The furlough program may be hiding some unemployment that may become more evident later.

At the start of the year, the short-sterling market was pricing in negative rates. This was true of the December 2022 contract through January. Since early February, the rate has been positive and rose to 40 bps by the end of last month and is now near 35 bps.

Perhaps some participants were inspired by comments from Haldane, the central bank's chief economist. He does not appear to be singing from the same songbook as the other members of the monetary policy committee and has suggested the central bank may be complacent about the looming inflation risks. Even after Bailey's efforts to counter such expectations, the contract was still implying a rate hike next year. 

The Bank of Japan's meeting concludes on March 19. It will have completed its formal review of the three elements of monetary policy: asset purchases, negative rates, and yield curve control. While the BOJ won't back away from negative rates, there is speculation about the other two levers.

After buying equity ETFs for more than a decade, the BOJ is sitting on more than $100 billion of profits and owns an estimated 7% of the stock in the Tokyo Stock Exchange first section. The BOJ limits itself to JPY6 trillion a year (~$56 billion) but during the chaos of last year, lifted it (temporarily) to JPY12 trillion.

With both of Japan's main benchmarks, the Nikkei and the Topix, trading near the best levels since the 1990's, the BOJ is likely rethinking its equity purchase strategy. Some market observers suggest that officials may have already changed their tactics. The BOJ could jettison the annual target and preserve the ability to intervene in disorderly markets. 

Under its yield curve control, the 10-year yield is allowed to move in a 20 bps range on either side of zero. The rise in global long-term rates has served to drag Japanese rates higher, too. In late February, the 10-year JGB yield rose to a five-year of 18 bps. There was some speculation that the BOJ would widen the range. However, BOJ Governor Kuroda seemed to try to dampen such expectations.

Instead, under the policy review, the goal is to make the policy framework more effective. This suggests minor tweaks, like not preannouncing purchases, for example. However, comments early last week by Deputy Governor Amamiya seemed to keep the door ajar. Amamiya suggested that yields could fluctuate more, provided that they did not disrupt the transmission mechanism of monetary policy.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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