FOMC today, BoJ tomorrow: The Fed's mantra unveiled

There are two main events coming up with the Fed on the way today and the BoJ tomorrow in Asia.

Source: iStock

Source: iStock

Markets have been back and forth leading up to these events and rightly so. The market is split, but so are the Central Banks. Both Banks have the same dilemma in that they have no idea where real interest rates are in this global bubble that has been created with their continued nonsense monetary policy by creating trillions of dollars and yens out of thin air looking for a free lunch. 

The consequences are 'of course unintended', (yeah right), such as Wall Street, in respect to the US economy, making a huge amount of money, but the real unemployment numbers in the US (that I have touched on time and time again in previous reports) prove that this policy of madness isn't working while the debt burden continues to hold everybody back while productivity growth slowing, even with interest rates down at close to zero.  

Helicopter money here we come, but not just yet

As markets get worse and as the world comes to the end, what next, we all get sent a cheque through the door?

Look, the U.S. will be showing in the first estimate of Q2 GDP on July 29 that the economy has snapped back after two quarters of disappointing performance (1.4% Q4 15 and 1.1% Q1 16). My predictions for the Fed today will be supportive of the idea that a rate hike could be back on the table before the year is out in a less dovish statement than June's, but this will be based on a number of improvements in recent U.S. data. 

However, on the other hand, they will not want to be too hawkish and they will want to offer a very balanced message to markets in order to prevent a stock market crash that is already very toppy, ahead of the presidential elections. Sure, global head-winds have diminished to some degree in recent weeks, but they have not abated and wages along with reported inflation continue to disappoint target growth rates. However, real inflation is off course higher, but the Fed refuses to acknowledge that because if they did, they would have to put interest rates up, or at least they would have to admit that they should never have put rates up in December 2015, but years before in fact, although that would have lead to an inevitable crash in the US, the dollar and the global economy - all to come by the way.

What is pretty to clear to me, and what might prevent a full on rally in the dollar today, is that markets are starting to wake up and are seeing the elephant that is in the Fed's boardroom. Even on better numbers, such as the last set of nonfarm payrolls, watching the rebound in the price of gold and how the dollar couldn't take off speaks volumes. 

Printing more money is not the solution, but is there any other choice? 

The only other option is to hike rates and then we are at a stage, having read the history books, where we have been before and it is not pretty. For now though, the Fed will continue kicking the can down the road delaying the inevitable turmoil that is on the way. I still don't see a rate hike coming this year, in fact, I think they are thinking about cutting rates and more 'variations' of QE . They have been doing so ever since they started pushing back their dot-plot into infinity. The question is how will they deliver that notion to the markets without causing mayhem? Well, while there is good data, they will play on that, while there are uncertainties, they can hide behind those such as when they did with Brexit sending stocks higher and then they can play the neutral card while slowly adjusting their rhetoric until markets start to get ahead of them. At that stage, the Fed can then adjust to the market's perception and finally move towards an easing bias before eventual rate cuts into negative territory once the markets have already priced it in. In case you missed it, I have just  unveiled the Fed's mantra for you.

However, what is the trade for today on the Fed?

Source: iStock

Staying short of stocks, scalping out a long dollar position and fading gold on a cautiously optimistic Fed, taking profits before consolidating back to a neutral market outlook and position ahead of the BoJ tomorrow and US GDP Friday.

BoJ: don't believe the hype

To keep this short on a busy day ahead, I think the BoJ has been over-played. The Bank will do something, but don't believe the hype. Again, they have this same dilemma and are in a deep hole but there are limits to what they can actually do both legally and effectively. For helicopter money to land, legislation needs to change first in respect to the BoJ directly buying bonds from the government unless they start converting the JGBs they currently hold into “perpetual bonds”, effectively writing off some of Japan’s enormous debt stock, as explained by James Smith, Economist, Developed Markets. Here is what he feels could be on the cards for the BoJ:

Fresh BoJ action likely – but limited to credit easing

"We think an expansion of JGB purchases or another rate cut seem unlikely and instead, we expect the BoJ to act via the following channels:

1. Expanded ETF/corporate bond purchases: The BoJ’s ability to meaningfully increase the ETF purchase target is limited given that it owns an increasingly large share (over 55%) of the market. Fresh purchases would therefore have to rely on jumpstarting issuance, as they did earlier in the year. Corporate bond purchases seem more feasible (they currently buy these assets to maintain the level of existing holdings). Importantly though, both of these markets are fairly small and the corresponding impact on markets more widely may be limited.
2. Pay negative rates on Loan Support Programmes: Despite being priced in ahead of April’s meeting, the BoJ opted against any stimulus back then. This time, the Policy Board may see this as a low hanging fruit and seen as a way of boosting lending. Although a lack of credit demand is more of an issue in our opinion, it would nevertheless be modestly positive for markets and banks.

Ultimately, we feel that neither measure is likely to meet the high bar set by markets over recent days. Thus, much like after April’s meeting, investors may be left disappointed."