Europe Shrugs Off Fed and BoJ Disappointment

• Yen surges as BoJ resists the urge to ease;

• Fed issues balanced statement but leaves June on the table;

• Data from German, eurozone and US, and earnings in focus today.

It’s been quite an eventful 12 hours for the markets and yet, European futures appear unaffected, with equity markets currently seen opening only slightly lower on Thursday.

The biggest shock overnight came from the Bank of Japan which resisted the temptation to ease monetary policy further despite all of the pieces appearing to be in place to warrant such a move. This was compounded by reports last week that the BoJ could consider negative lending rates after a similar move with the deposit rate failed to get the desired results.

The yen has reversed its recent losses and is up more than 2% on the day in response to the lack of policy action from the central bank, which came despite annual core inflation falling to -0.3%. Even if oil prices are stripped out, prices rose by only 0.7% which is well below the central banks’ target. Moreover, the BoJ revised down its growth and core inflation expectations for this year and next despite claiming that consumer inflation will hit 2% during fiscal 2017.

The Federal Reserve was no more bold or committal following its monthly meeting only hours earlier. The central bank left rates unchanged which was expected but the statement it put out alongside it was fairly balanced and told us very little about the timing of the next rate hike.

The most significant thing in the statement was the removal of the balance of risks which suggests the Fed no longer sees this as posing a threat. Offsetting that though were warnings that economic activity appears to have slowed and household spending moderated, despite income rising at a solid rate. The addition of a positive to offset any negatives is clearly not a coincidence but it does suggest that while June remains on the table for the next hike, the Fed is not confident at this stage that the timing is right.

Once again the lack of activity from the Fed and BoJ does support the view that major central banks are choosing financial market stability over what is possibly the correct policy response domestically. Of course, it’s understandable that they would want to avoid financial markets turbulence, the kind of which we saw at the start of the year, but what is happening at the moment seems to be a coordinated effort to prioritise this.

There is plenty of economic data being released throughout the day, including sentiment surveys from the eurozone, inflation data from Germany and jobs, inflation and first quarter GDP data from the US. On top of this there will again be a number of companies reporting first quarter earnings which could again today dictate sentiment in the markets as it has at times this week.