Recap 3-16-12

Main Items:

  • U Michigan Confidence declined to 74.3 in March vs 76 exp and 75.3 prev
  • US headline CPI was unchanged at 2.9% YoY as exp. Core CPI declined to 2.2% YoY as exp vs 2.3% prev

Overseas:

  • Spanish Labor Costs rose 1.6% YoY in 4Q vs 1.5% prev

Upcoming Data:

  • Mon: NAHB, RBA Minutes
  • Tues: UKCPI, US Housing Starts,
  • Wed: Japan Merchandise Trade Balance, BoE Minutes

Commentary:

People have been trying to peg how high 10y rates can go.
1) The historical 1 year range for yields since 1988 is 164bps, with a standard deviation of 40bps. YTD so far, the range is just 51bps so far, so we could have another 70bps left. This suggests ~3%.
2) Fair Value models are kind of shot because no one is certain of how to properly model for QE & Twist. The best estimate is somewhere around 2.5-2.75% because conventional models using macroeconomic data suggest ~3.25%, and Fed policy is estimated to take that 50-75bps lower.
3) Historical support/resistance lines suggests that the late 2010 range of 2.4-2.8% could return
I’m not sure if any of this is more useful than asking a psychic. And price action does look a bit stretched short term. But 2.6% looks as reasonable of a target as any, medium term.

Separately, the BoJ Minutes were pretty interesting. Some highlights:

  1. at the previous meeting on January 23 and 24, 2012, some members reiterated the need to review the "understanding of medium- to long-term price stability" (hereafter "understanding") and how the Bank presented its commitment to the policy duration based on the "understanding," given that the Federal Reserve had been discussing its strategy for communication; and (3) there was renewed and increased attention to central banks’ determination to achieve price stability following the Federal Reserve’s announcement of the introduction of its "longer-run goal" for price stability.
  2. Some members commented that (1) the term "target" suggested that monetary policy would be conducted in an automatic manner in response to short-term fluctuations in prices, so as to maintain a certain level of inflation; (2) the terms "target" and "definition" had rigid and inelastic connotations, and therefore it would not be appropriate to use these terms in a situation of a high degree of uncertainty surrounding future developments such as structural changes in Japan’s economy and movements in the global economic environment;
  3. Some members expressed the opinion that the goal of overcoming deflation would be achieved through efforts to strengthen growth potential and via support from the financial side
  4. The representative from the Cabinet Office made the following remarks:
  5. (1) Japan continued to be in a chronic situation where it was difficult to overcome deflation. It seemed that factors behind deflation were the negative output gap, the decline in firms’ expectations for Japan’s economic growth, and prolonged deflationary expectations in the private sector. The government would like to reemphasize that, in order to smoothly carry out the comprehensive reform of the social security and taxation systems, it was necessary for the government and the Bank to work more closely and take a firmer stance on overcoming deflation
  6. (3) The government expected the Bank to make its utmost efforts in the conduct of monetary policy in parallel with these government measures, so that measures to overcome deflation would produce visible results.
  7. (4) The Bank was proposing new measures at this meeting. The government deemed this appropriate because it was in line with the worldwide trend of increasing the transparency of the conduct of monetary policy and enhancing accountability to the public. The government expected the Bank to continue to make efforts to increase transparency.

So:
1) The BoJ acted because it was following the Fed, but probably also as a result of political pressure from the government.
2) Since the Fed appears to be backing off additional easing measures, does that mean the BoJ will as well?
3) The BoJ appears to be reluctant to pursue really aggressive easing. The extensive discussion of the ‘inelastic connotation’ of the word ‘target’ and the emphasis on the uncertain outlook support this. If the BoJ really wants to push inflation to 1%+, it has a very long way to go, and after 2 decades of deflation, some uncertainty around the outlook really shouldn’t be much of an impediment for deciding to go with the word ‘target.’
4) There are some within the BoJ who thinks that the BoJ alone can not overcome deflation on its own
5) The pressure from the Noda cabinet appears pretty heavy. Remember the BoJ is not independent like the Fed or MPC. With multiple upcoming BoJ appointments, political pressure is likely to continue to have a sizable impact on BoJ policy
6) This all suggests that the BoJ will continue to pursue token easing, with the real ‘target’ of appeasing the government

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