I was quietly amused yesterday morning when I read the opening lines penned by my fellow scribbler at Mint Partners, Billy Blain, who wrote: “Here we are… poised on the edge of the two most important central bank meetings ever…”
“Rule 1: “the market has no memory”, and Corollary 2(a): “most important events are only important till the next most important event”. Desperately hyped-up events, such as “pivotal” central bank calls tend to disappoint in their inanity.” What’s that about no truer words having been spoken in jest?
The Bank of Japan effectively produced a massive wet squib although all those pundits who had forecast seismic policy action have found themselves obliged to form a decent-sized mountain out of a very moderately sized molehill. To start with, the key rate remained unchanged at -0.1% and no new QE measures were announced. Formally, the declared policy shift was to move the focus of its monetary stimulus away from the rigid target of expanding the supply of money to managing the shape of the yield curve. In plain English, that means that from having failed to deliver 2% inflation that was promised in 2013 with a two-year horizon, the BoJ has set itself another near-impossible objective.
How does one steepen a yield curve if the short-end rate armoury is exhausted and one already owns 40% of the domestic bond market? We know that Kuroda-san and his merry men are desperate not to see 10-year rates go negative but as far as I can tell, all they have achieved so far is to push Japanese institutional investors overseas in search of yield and, in doing so, have contributed significantly to the flattening of the long end in the US and in Europe.
Much talk – though for obvious reasons precious little published research – has in recent days again been about the lack of options now left open to the monetary authorities. The BoJ this morning reminds me of John Wayne who, having emptied the magazine of his Winchester and having shot the last bullet from his Colt 45, in a final act of defiance, throws the gun at the attacking Indians. The difference is that, for the BoJ, there is no John Ford in the director’s seat who can now call “Cut!” so that everybody can go off to get their make-up touched up and have a swift glass of beer. Although few are prepared to admit this, the Bank of Japan and its monetary policy are drinking at the Last Chance Saloon and if the new strategy fails, which it surely will, there is nowhere left to go unless the whole bunch resigns and a new crowd comes in and tries something radically different…..which will never happen. I have spent 20 years watching this slow train crash….
So, incidentally, one must assume, has Mutti Merkel. It would appear that her take is that Japan is falling down a demographic black hole – not unreasonable – and that her country, in the face of falling fertility, is in dire need of fresh blood. Her attempt to resolve the matter in one fell swoop has blown up in her face, which she has finally admitted. The intention might have been good but the execution was abysmal.
Fed up
So that brings us to the FOMC. Broad consensus is for the Fed to pass on an immediate tightening, although it is perfectly possible that the wishy-washy action by the BoJ will spur the members of the committee to decide that the future starts today and not on December 14. What, for heaven’s sake, are they waiting for? 4% GDP growth? 2.5% CPI? 4.5% unemployment? What does it take to get the Fed Funds rate from 0.5% to 0.75%? I trust the members will not be swayed by anything as fickle as sentiment indices or futures strips and implied forward pricing.
The last payroll report might have “only” shown 180,000 job gains but hourly earnings were rising at 2.4%. Do I need to go on? August manufacturing PMI at 52, ISM prices paid at 53. Look at continuing claims: this is an absolute value and at 2,143,000 is close to the lowest it has been in 30 years. In fact it’s only 17,000 above the March 2000 low of 2,026,000 but just over six years ago, in June 2009, the figure stood at 6,618,000. This is in no way an economy which needs central bank rates at 0.5%.
We are living in a world full of spoilt children parading as portfolio managers and who still believe that the Federal Reserve can’t raise rates because it might unsettle the world of false and inflated asset prices upon which their bonuses depend. There is no sustainable outcome in which nobody gets hurt and the time has come for the Fed to stop trying to find one. Does anybody realistically believe that the picture will be clearer in December than it is today? I’d love to see Stan Fischer in the role of jump sergeant.
The more the FOMC pussy-foots and tries to please everybody, the weaker it becomes. We have already given up ascribing any credibility to many of the grand policy initiatives that creep out of the BoJ and the ECB, and what Mark “The Magician” Carney has achieved with his much-heralded “forward guidance” wouldn’t even raise a smile on the face of a comedy script writer. But we all still believe, a little bit at least, in the Fed.
Janet Yellen must at some point prove that she is her own boss and today would be a great opportunity. It was said of the late Yasser Arafat that he never missed an opportunity to miss an opportunity. I do hope that said description will not appear as a subtitle to the still-to-be-written review looking back at the Yellen Fed.
Markets, meanwhile, have spent two days going nowhere and today will be the same or at least until 2pm New York time. The Street is positioned for no change and will be slightly long while looking for a small pop to the upside when the unchanged policy is announced. I can’t see anybody having bet the house on either outcome.
I will close again with a borrow from Billy Blain. Every morning he opens his column with an obscure quote. Yesterday he had “If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to.” I immediately recognised it as being a description of John Yossarian’s dilemma in Joseph Heller’s Catch 22. Why hadn’t I thought of that?