Fundamental Analysis 2017.09.20 – Fed Balance Sheet, FOMC Meeting Today

Today’s market
The focus today will no doubt be on the Federal Open Market Committee (FOMC) meeting. Following that, overnight there will be a Bank of Japan (BoJ) Policy Board meeting, but that is expected to result in only technical changes to policy at best.

No one expects the FOMC to change rates, but they are expected to announce the details of how they plan to reduce their massive balance sheet, which is nearly 5x as big as it was before they started quantitative easing. That has the potential to move US bond yields and therefore the dollar. However, they’ve been talking about it for months and have pledged to move gradually, so the impact may be limited.

Of more importance may be the new “dot plot” giving their estimates for where they expect rates to be in the future. The FOMC’s forecasts are significantly higher than the market’s, as has been the case for some time; will they revise down their forecasts to be more in line with the market, or are they still confident about hitting their targets in the projection period? Along with that, the revised inflation forecasts will also be a focus.

The BoJ Policy Board are unanimously expected to keep rates stable. It’s the one-year anniversary of their “yield curve control (YCC) policy.” During that time, the 10-year JGB yield has largely ranged between -10 bps and +10 bps, meaning that the BoJ has succeeded in its pledge to keep the 10-year JGB yield “around 0%.” However, the BoJ’s bond holdings only increased by ¥66tn over that time, notably lower than the ¥80tn that they had pledged. They could acknowledge that difference at this week’s meeting by either changing the target to a range, such as ¥60tn-¥80tn, or even eliminating it altogether. I don’t think such a technical change would have any impact on the currency, so I expect a fairly low-key reaction to the meeting.

Indicators

Aside from those two central bank meetings, Britain announces its retail sales for August. Sales excluding autos and fuel are expected to be unchanged from the previous month, while the year-on-year rate is also expected to slow. With real wage growth negative and consumer sentiment depressed, sluggish retail sales are no surprise. Slowing growth of retail sales suggests less pressure on the diminishing spare capacity in the economy and therefore marginally less need to hike rates soon, which could be negative for the pound.

US existing home sales are forecast to rise. While labor shortages and the difficulty procuring land are apparently holding back housing starts, there can be no such excuses with sales of existing homes, except insofar as people can’t sell their home unless they can be reasonably sure that they can find another one to buy. In any event, a rise here would probably be seen as positive for the dollar, even if it does appear that the figure isn’t likely to regain the January highs any time soon.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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