Welcome back to the madhouse, where we are in for an extremely active week...
• The Bank of Japan, the Federal Reserve and the Bank of England all meet this week.
• Technology shares are trading nervously (and the FAANGS have become 'MAGA').
• China is near-desperately activating both easier monetary policy and more fiscal spending to counter the deleveraging process hailed by President Xi.
• Did USD peak with the GDP number last week? We think so.
Tomorrow's Bank of Japan meeting could be the most important central bank meeting of the year. The consensus holds that the BoJ may tweak its yield curve control policy to accept a higher 10-year Japanese government bond yield of 10 basis points (versus a narrow band around 0% at present) and fix five-year yields at 0% from tomorrow.
The problem is that a flat yield (and negative short yield) hurts financial sector earnings and banks' ability to lend.
See my recent tweet for more on this, as well as a chart.
Inflation numbers continue to erode despite the Japanese central bank's best efforts. The risk here is that the bank will weight the short-term negative of banking sector losses higher than the elusive long-term goal of >2% inflation. If so, USDJPY could come off dramatically, a move that would likely signal a top for the overall dollar trade as last Friday's US GDP number was probably a cycle high based on tax credits from April and agricultural exports ahead of the trade war.
The BoE, meanwhile, is 90% likely to hike interest rates on August 2 while the Federal Open Market Committee is “in between meetings”.
In a similar fashion to what we saw in 2007, China has started an aggressive countercyclical loosening of monetary policy along with increased fiscal spending. This will change the dynamics of global growth and dollar direction – don’t forget that USD is the global reserve currency so its direction will be driven by the ever-changing dynamics between growth in the US and growth in the rest of the world. More on this later...
In equities, the technology sector has taken centre stage of late led by misses at Facebook and Twitter. Is this a buy opportunity, or is the world of engagement moving away from “in your face” marketing ploys and data selection? It's possible that the recent acronym shift from FAANGS to MAGA (no, not President Trump's 'Make America Great Again', but Microsoft, Apple, Google, and Amazon) reflects a peak in investor appetite for “user-driven technology”.
This week's central bank calendar: