{"id":1476,"date":"2014-10-31T14:00:00","date_gmt":"2014-10-31T14:00:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2014\/10\/31\/viewpoint-central-banks-at-a-crossroads-fed-pulling-back-boj-accelerating\/"},"modified":"2014-10-31T14:00:00","modified_gmt":"2014-10-31T14:00:00","slug":"viewpoint-central-banks-at-a-crossroads-fed-pulling-back-boj-accelerating","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/viewpoint-central-banks-at-a-crossroads-fed-pulling-back-boj-accelerating\/","title":{"rendered":"Viewpoint – Central banks at a crossroads: Fed pulling back, BoJ accelerating."},"content":{"rendered":"

– BoJ \u2013 Additional monetary stimulus, to counter downside risks to inflation and the longerlasting effects than expected of a restrictive fiscal policy. The central bank is determined to do all that is in its power to prevent a fall-back into deflation…..<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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Intesa Sanpaolo \u2013 Research Department – For professional investors and advisers only<\/strong><\/p>\n

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– FOMC \u2013 Another step towards monetary policy normalisation: end of QE3, more positive assessment of the economic picture, guidance tied to the evolution of data.<\/p>\n

– The BoJ has announced the addition of further monetary stimulus, signalling that it is ready to act again if needed. The central bank has decided to raise the targeted change in money base (to 80 trillion yen from 70 trillion a year), increasing purchases of all categories of securities, including risk assets. As regards JGBs, the target is to increase the portfolio stock by around 80 trillion yen a year; also, the average duration of the purchased securities will be extended to 7-10 years. The statement explains that the new measures are aimed at safeguarding the positive impulse on inflation expectations, and signals that it intends to keep pursuing quantitative and qualitative easing (QQE) until inflation will have stabilised at 2%. The new intervention is the result of a close call within the BoJ, with a 5-4 vote in favour of the new measures.<\/p>\n

– The central bank has published its updated macroeconomic forecasts, with downward revisions, as expected, of both GDP growth and prices in fiscal year 2014 (ending in March 2015). Forecast GDP for FY2014 has been lowered to 0.5% (from 1%), and is expected to change little in the following biennium (to 1.2% from 1.3% in 2015, unchanged at 1.5% in 2016). As regards the CPI net of fresh food and of the consumption tax hike, the forecast for 2014 is 1.2% (from 1.3%), with a stronger downward revision in 2015 (to 1.7% from 1.9%); the CPI is forecast unchanged in 2016 at 2.1%. The central bank expects GDP to keep growing above potential (estimated at around 0.5%), and inflation to remain stable in the short term, and subsequently resume rising gradually. However, significant downside risks to prices exist, as well as considerable uncertainty over inflation expectations.<\/p>\n

– During the press conference Kuroda used very firm tones, asserting that the BoJ will do all that is in its power to achieve the 2% goal and to stabilise inflation expectations in positive territory. Kuroda stressed that for the time being it is not appropriate to discuss an exit strategy. The new intervention, according to the governor, was also prompted by the fact that this is a critical time at which to mark the end of deflation, and it is important to maintain the positive changes in expectations, in phase in which the effects of fiscal consolidation are proving to be more protracted than expected. The BoJ\u2019s decision is an important signal for the sustainability of the recovery in Japan, and increases the probability of the government confirming the planned consumption tax hike (October 2015) in the next few weeks. The reaction of the markets is proving to be positive. Stably low yields, a weaker exchange rate, the decline in the price of oil, and rising stock indices, will all help support Japanese growth in the next few quarters.<\/p>\n

– Another important element for the financial markets adds itself to the BoJ decision. Today, the Japanese government has announced the new portfolio allocation of the Government Pension Investment Fund, with a reduction from 72% to 60% of the targeted investment in domestic securities, as opposed to an increase from 23% to 40% of the target for foreign securities.<\/p>\n

More in detail, the target for Japanese bonds has been almost halved, from 60% to 35%, whereas the target for the overall stocks component ah doubled, from 24% to 50% (with 25% shares each for the domestic and foreign segments). The GPIF owns total assets worth 127.3 trillion yen. The fact that the Boj is consistently stepping up asset purchases helps contain potential risks of a rise in yields tied to the expected reduction in pension fund purchases.<\/p>\n

– As expected, the FOMC meeting put an end to QE3. Many changes were made to the statement, some of which important, both in terms of the assessment of current conditions, and in the formulation of guidance.<\/p>\n

1. Assessment of the economic picture. The statement reports that economic activity \u201cis expanding at a moderate pace\u201d, with household spending and business fixed investments advancing; most importantly, labour market conditions are said to have improved further, with \u201csolid job gains and a lower unemployment rate\u201d. Labour market indicators allow the FOMC to signal that \u201cunderutilization of labor resources is gradually diminishing\u201d (whereas slack was previously defined as \u201csignificant\u201d). Changes have also been with regards to inflation. First of all, the assessment of expectations makes a distinction between marketbased measures of inflation, that \u201chave declined somewhat\u201d, and survey-based measures, that have remained stable. Also, \u201calthough inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year\u201d. This is also an important signal of confidence in the evolution of the recovery.<\/p>\n

2. Stimulus measures. The decision to end asset purchases is justified by a positive assessment of the adjustment of the labour market: \u201cthere has been a substantial improvement in the outlook for the labour market since the inception of its current asset purchase program\u201d, and the Committee sees \u201csufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability\u201d. As expected, the policy of reinvesting principal payments and of rolling over maturing securities will be maintained. Stimulus is now stabilised.<\/p>\n

3. Guidance. The FOMC has therefore entered the limbo which separates the phase of increasing monetary accommodation (which ended with this latest meeting) and that in which stimulus removal begins. The statement, as expected, once again contained reference to the \u201cconsiderable time\u201d that should pass between one phase and the other, \u201cespecially if projected inflation continues to run below the Committee\u2019s 2% longer-run goal\u201d. Fischer stated that \u201cconsiderable time\u201d can be interpreted as a rather uncertain period of between 2 and 12 months. Guidance is now tied more explicitly to the evolution of economic data.<\/p>\n

Thus, \u201cif incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.<\/p>\n

Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated\u201d. While the statement doesn\u2019t change the expected policy, by explicitly linking actual and expected progress, it formally introduces an element of volatility in guidance. The FOMC wants to convey the message that now the future path of interest rates is intrinsically uncertain, as it depends on the evolution of the economic picture. Guidance in the current transition phase cannot be as reliable as before.<\/p>\n

4. Dissent. The vote on the statement singles out Kocherlakota as a dissenter, who would have wanted greater weight given to low inflation and to the easing of market expectations, and was in favour of keeping asset purchases unchanged.<\/p>\n

– On the whole, the Committee expressed cautious optimism on the economic scenario, and took another step towards the normalisation of monetary policy, in light of a return to health of the economy, that is now considered rather convincing. The minutes (due for release in three weeks\u2019 time) will provide important information on the debate that led to the new formulation of the statement. For the time being, however, despite the clarification of guidance, the Committee probably continues to envisage a shift on rates in mid-2015; should data continue to come in strong, a new, moderate upward shift of the expected path of interest rates as projected in December may be possible. Market expectations will have to shift further upwards. For the time being, we continue to forecast an initial hike in June 2015, with rates at around 1-1.25% at the end of 2015.<\/p>\n

Source: BONDWorld.ch<\/p>\n","protected":false},"excerpt":{"rendered":"

– BoJ \u2013 Additional monetary stimulus, to counter downside risks to inflation and the longerlasting effects than expected of a restrictive fiscal policy. The central bank is determined to do all that is in its power to prevent a fall-back into deflation…..<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[50],"tags":[],"class_list":["post-1476","post","type-post","status-publish","format-standard","hentry","category-weekly-analysis"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1476","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=1476"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1476\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=1476"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=1476"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=1476"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}