The high importance of last night’s Bank of Japan meeting has been widely discussed in recent days, and whilst the central bank opted against a change in rates, a shift in its policy framework has been warmly received by stock markets.
BOJ seeks yield-curve control
For the past three years or so the Bank of Japan have been at the forefront of implementing unconventional monetary policies, and with questions raised about their ability to maintain their current levels of purchasing in Japanese government bonds (JGBs) they have decided to move away from a rigid target for expanding the money supply.
The initial reaction to the announcement saw the yield on JGBs rise into positive territory for the first time since March and the yen depreciate, but some of these moves have since pared. The Nikkei rose strongly led by banking and insurance stocks, and largely due to this these sectors are performing well in London’s markets since the open.
FTSE continues recovery
The UK blue-chip index is trading higher by 28 points so far on the day, with the reaction to the latest policy announcement from Tokyo being warmly greeted by stock markets around the globe. The decision to not take rates further negative has seen some sharp gains in the Nikkei for firms most sensitive to lower interest rates.
It’s a similar story on the FTSE100, with Barclays (LON:BARC) leading the risers with a 3.45% gain, and fellow financials Aviva (LON:AV), Standard Life (LON:SL) and Lloyds (LON:LLOY) Bank not far behind. At the other end of the benchmark, Imperial Brands (LON:IMB) is the biggest laggard, off by 1.73% so far this morning.
Focus shifts to the Fed
It’s a case of one down, one to go as far as major central bank announcements are concerned today, and whilst the news from Japan has had a moderate impact on UK assets, the main event could be still to come. The Federal Reserve will announce their latest monetary policy at 7pm (BST) this evening, and with the consensus seemingly expecting no tangible change, a second rate rise in a decade could send shockwaves through markets.
Since Fed chair Janet Yellen’s speech at the Jackson Hole symposium, during which she stated that the case for raising rates had strengthened in recent months, markets have started to treat the September meeting very much as live. A soft employment report momentarily dampened hiking expectations, but Fed speak since has been surprisingly hawkish.
With the next meeting scheduled less than a week before US presidential elections, many consider it highly unlikely that we get a major announcement in November, leaving just this evening and December as the only opportunities to raise. With US stocks near all-time highs, the US dollar not as strong as it has been and core CPI above the Fed’s mandate level, there’s lots to suggest that a hike now would be the right call.
However, markets have consistently expected a lower future rate path than the Fed’s forward guidance has indicated over recent years and they’ve consistently been right. Along these lines the market once more thinks the Fed will stand pat and bide its time.