The policy calendars at the Bank of Japan (BOJ) and the US Federal Reserve (Fed) are similar. Both central banks have eight scheduled meetings in 2016, typically within days of one another. Both are set to meet next week, which means monetary decisions will be a focal point for global investors.
The outlook for the Fed’s April 27 meeting appears relatively assured. While some Fed officials have openly advocated raising interest rates, economic data have been recently weak and comments from Fed Chair Janet Yellen—the only official that speaks on behalf of the entire Federal Open Market Committee (FOMC)—have been relatively “dovish”. Based on Chicago Mercantile Exchange fed funds futures, the odds on an April rate hike are hovering at around just 2%.
Ironically, perhaps, one of the challenges facing the BOJ may be the Fed’s relaxed monetary stance. Delayed Fed rate hikes this year have helped suppress the value of the US dollar, the corollary of which has been strength in the yen. But policymakers at the BOJ want the exact opposite: A weaker yen is needed to support Japanese exports, corporate earnings, wages and inflation. To that end, BOJ Governor Haruhiko Kuroda has said he “will not hesitate to take additional easing measures in terms of...quantity, quality and the interest rate if it is judged necessary.”
Governor Kuroda is pushing ever-deeper into untested waters. Through it’s “traditional” quantitative easing (QE) programs, the BOJ has already purchased assets equivalent to nearly 80% of GDP—more than the Fed, the European Central Bank and the Bank of England combined. Meanwhile, the BOJs foray into negative interest rates in January was not well-received—bank shares cratered, while safe-haven demand drove the yen to a 16-month high versus the US dollar. Earlier this month, Mr. Kuroda swore-off a third potential monetary tool—helicopter money—saying “we have no intention to employ… anything like that.” Pressure to act is obviously high. The IMF thinks Japan may grow just 0.5% in 2016 before falling into recession next year.
Looking to the economic calendar, the week starts slow, but ramps-up fast. On Monday, we will get a look at German IFO economic expectations, US new home sales and Japanese leading economic indicators.
Tuesday brings a barrage of reports on the US economy. Analysts think durable goods orders may have picked-up, but home prices likely slowed, while consumer confidence may have slipped. Political junkies will get primary election results from five US states and clearer insight on whether Hillary Clinton or Donald Trump could be the next US president.
Wednesday is crowded with important economic releases, including first quarter GDP for the UK, industrial sector profits for China and consumer confidence for Italy and France. But the Federal Reserve policy decision will likely steal the show. While an April move is unlikely, Fed officials still have two rate hikes penciled in for 2016. Look to the FOMC statement for hints on when those might occur.
On Thursday, the big news should be the BOJ monetary decision, with potential for a rate cut deeper into negative territory (from the current -0.10%) and/or an expansion of QE (from the current ¥80 trillion per year). Policymakers will base their decision, in part, on a slate of freshly released economic data, including unemployment figures, retail sales, industrial production, construction orders and headline and core inflation.
Beyond Japan, other reports on Thursday will show German inflation, euro zone economic confidence and first quarter GDP for the US. On that final point, according to the Atlanta Fed, the US economy may have expanded at a tepid 0.3% annualized rate during the first quarter. Confirmed, this would continue the slowdown in US growth from 1.4% in the fourth quarter of 2015, 2.0% in the third quarter and 3.9% in the second quarter.
The week concludes with GDP and inflation figures for France, unemployment and inflation figures for the euro zone and personal income, spending and inflation data for the US. For technical investors, the bear market rally may be running out of steam as shares bump up against strong resistance levels. The run-up in commodities is also approaching resistance levels, with risk of a short-term correction. Weakness in the US dollar appears advanced, with increasing potential for a recovery in the greenback.
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About the Author
Greg Meier is a US investment strategist with Allianz Global Investors. He has a B.S. in business administration from the University of Montana and an M.B.A. from the University of Washington.
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