Let’s play a game of cause and effect: Take Brexit, poor US employment figures, a Fed on hold, a BoJ on hold, a vacillating oil price, street protests in France, struggling Italian banks, Greece, a rising yen, falling sterling, slippery equity prices and bonds bid to buggery. Now try to match up causes with effects.
That the Federal Reserve was not going to tighten in June has been clear to me since shortly after Noah landed on Mount Ararat although in many market participants’ minds the final nail in the June rate hike coffin wasn’t banged in until two weeks ago on Friday with the shock non-farm payroll number.
That it would be unwise to tighten monetary policy a week ahead of the British referendum has been flashing from a sign ever since Dave “You may now call me David again” Cameron returned from Brussels with empty hands but then still kept his word and called the plebiscite. Then yesterday, Madame Yellen used Brexit in her post FOMC meeting press briefing and all of a sudden all the talk is that a rate rise yesterday was ruled out because of the British poll next Thursday. What a load of total tosh! We knew two weeks ago that there was no tightening on the agenda for yesterday and, as far as I’m concerned, that’s that.
Fed
It is in fact cost free and very easy to take five minutes out of one’s oh so busy life to read the most recent and the last FOMC’s post meeting statements and to compare them. This is where the meat of meeting is to be found. On April 27 the statement read:
“Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”
Yesterday that was changed to:
“Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened.”
That, and apart from replacing the words “ …labor markets will continue to strengthen.” with “….labor markets will strengthen.” is as far as the shift in the position of the FOMC goes. I heard one economist refer to a “paradigm shift” but to be frank, I can’t see one here. Sure, when the minutes of the meeting are released on July 6 we will know more but by then the referendum will be done and the knee-jerk reactions to the outcome will have been and gone. Markets might not like uncertainty and will, as long as night follows day, jump up and down on the back of not very much but the real economy can only take major strategic decisions now and then and although these can be postponed, they cannot be postponed indefinitely.
Poll position
The impending poll – just a week to go now – will mark the start for a lot of delayed activity ranging from capital investment to residential house purchases, from corporate issuance to hedge dissolution. I understand that Sir Mervyn King, former governor of the Bank of England, has been heard opining that the economic effect of a vote, one way or the other, will be no more than 1% on GDP in either direction. I do hope he is right but since his declared enthusiasm for the NICE economy – non-
There is of course a lot happening all over the place and it would be wrong not to acknowledge that. The BoJ’s choice not to add further stimulus today was taken rather badly with the yen rallying by over 2% against the greenback and Tokyo stocks tanking in sympathy by 3%. There is much talk about the strength of the yen but please be reminded that it closed in Tokyo today at ¥103.75 which is a far cry from the ¥80.00 it was at when Prime Minister Shinzo Abe first announced his three arrows policy in 2012. Nevertheless, the yen is at its strongest against the dollar in a short two years.
In four years the yen has depreciated a lot. At its lows it was around 60% below its pre-Abenomics level. If that wasn’t enough to kick-start the Japanese economy, would one not have to conclude that depreciation isn’t the solution? If that’s the case, is a rise in the yen really sufficient a reason to smack 3% off the price of stocks?
Oh, and in the cause and effect space, is oil back down to US$47.43 per barrel because the technical supply shortages are softening, because the outlook for the global economy is less favourable or because of the Brexit vote? Answers on a postcard, copy the “remain” campaign. That’s one Armageddon scenario they haven’t proffered yet.