FOMC statement and the Bank of Japan

Market Movers

• Focus today on digesting the FOMC statement and the Bank of Japan.

• In the UK, everything continues to be driven by the upcoming EU in/out referendum. Today, chancellor Osborne is questioned by the House of Commons Treasury Committee about the cost/benefit of EU membership. In a recent report the Treasury argued that UK GDP could be between 3.5% and 7% lower after 15 years, if the UK leaves the EU.

• The US will see the first estimate of GDP growth in Q1 and we expect this to confirm that activity slowed in Q1 as most indicators have shown. We look for growth of a mere 0.7% q/q (ar) as private consumption has slowed and investments have been weak. Our main scenario is that growth will rebound in Q2 and Q3, as we expect consumption growth to pick up again because it has been relatively subdued in Q1 despite high consumer confidence and increasing employment.

• Focus on Norwegian releases, see Scandi Markets.

Selected Market News

Contrary to our expectations, the Bank of Japan (BoJ) this morning decided to opt for unchanged policy measures as the key policy rate was kept at -0.1% (we had called for a cut to -0.3%) and the asset-purchase target remained at JPY80trn. While a wide dispersion of views as to how and when the BoJ might react to the JPY surge seen in recent months were present ahead of the meeting, a build-up in expectations had clearly taken place judging from not least the drop in USD/JPY to below 110 this morning. Data might show that the Japanese economy was hit by a technical recession with negative GDP growth rates in Q4 15 and Q1 16 and both the PMI and Tankan surveys also imply a weaker economic outlook in the coming months. Finally, a stronger JPY is putting further downward pressure on inflation expectations. A key risk now is that the BoJ will be tested whether it has run out of options or given up on pursuing a weaker currency. Still to come at the time of writing is Kuroda’s press conference: key points to watch for will be any hints that further easing or possibly a coordinated fiscal and monetary policy response are on the table further out.

Last night the FOMC as expected kept the Fed funds target range unchanged at 0.25-0.50% but the key outcome from the meeting was that the statement did not completely rule out the possibility of a June hike. Our main scenario is still that the Fed stays on hold until September and only hikes once this year. The still patient stance - despite the slight change in rhetoric - underlines that US monetary policy should prove a supportive factor for risk assets still near term. Hence, it seems that the trigger for a repeat of the global bond sell-off we witnessed a year ago is not going to be US monetary policy for now. That said, both the fixed-income and the FX markets are vulnerable if the money market starts to move forward the timing of the next hike (September priced with a mere 60% probability at present).

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