BOE & BOJ Preview

GURU WISDOM

“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman
 

MARKETS

The US dollar has pushed higher after the Federal Reserve kept interest rates on hold and predicted they would stay at zero until 2023. The Japanese yen was little changed in response to the election of Yoshihide Suga as new Prime Minister.

Oil prices surged higher on Wednesday with WTI crude once again valued over $40 per barrel with Brent crude at $42. The price of gold slid for a second time just shy of $1975 per oz after the Fed meeting.

Stock markets were mixed in the run up to the Fed meeting with shares in Europe mostly higher, while Asian markets mostly dipped. Wall Street closed lower on Wednesday with tech stocks leading the losses well off from session highs.
 

The Fed

Fed policymakers improved their economic forecast for the US but peppered it with a very dovish forward guidance on interest rates. The Fed now sees US economic growth at -3.7% up from the -6.5% expected in June, while the dot plot showed no plan to raise interest rates over the next three years. The initial dollar-weakness in response to the dovish guidance faded and investors bid up the dollar ahead of meetings from the Bank of England and Bank of Japan.
 

Bank of Japan

A day after the elevation of cabinet secretary Suga to Japanese Prime Minister, the Bank of Japan is likey to keep policy on hold and signal a willingness to work with the new government. Suga has already said he believes Abenomics was the right policy – that would incliude the QQE and yield curve control policies of the Bank of Japan. Like the Fed just did, the BOJ migght lift its own economic proijecions for Japan for 2020.
 

Bank of England

There is a rising chorus of calls for the Bank of England to respond to the rising Brexit risks and the end of the government furlough worker scheme in October with extra stimulus. BOE policymakers caused some confusion at their last meeting with regard to the use of negative interest rates. If the BOE is to turn active again it will likely be via extra QE and be done at its November meeting, meaning it may need to start communicating as such now.