ICYMI: Over the past week, three major central banks, Bank of Japan (BOJ), Federal Reserve, and the Bank of England (BOE) held their central bank meetings, issued guidance on their economic outlook, and issued changes in monetary policy. Despite the global economic slowdown, these countries each implemented a different policy on rates at their recent meeting.
Catch-Up Quick: Last week, the BOJ hiked interest rates 15 bps to 0.25%. Meanwhile, the Federal Reserve kept interest rates at 5.25-5.5% while the BOE cut interest rates 25 bps to 5-5.25%, the first cut in nearly four years. While the Federal Reserve’s position was expected, there was uncertainty about the monetary policy decisions by the BOJ and BOE. Given the global economic slowdown, what is causing the divergence in monetary policy?
Key Facts
BOJ maintained an unconventional monetary policy for two decades with negative interest rates
BOJ hiked rates for the 2nd time this year; U.S. has yet to hike or cut rates; BOE cut rates for the first time since 2020
Inflation Rates
Japan: 2.8% (trending higher)
U.S: 3% (trending lower)
England: 2% (trending lower)
FED has a dual mandate: low unemployment and 2% inflation
BOE and BOJ mainly focus on maintaining 2% inflation
Short-Term Implications: Instability. Currently, the divergence in the Japanese and the Western economies are fueling the divergence in interest rate policies. Coupled with recent weak economic reports, this has led to sharp declines in the stock market as investors fear that the current interest rate environment is not enough to tame inflation and a looming recession. Furthermore, this divergence has led to massive instability in the FOREX market with the USD depreciating to four-month lows and the Yen appreciating significantly. While this depreciation in the dollar likely has few short-term implications, it sets the stage for a weaker currency, pricier foreign goods, and cheaper U.S. goods for foreigners.
Long-Term Implications: As a stand-alone event, these policies likely have minimal long-term implications. However, the U.S. has become the last major economy to initiate quantitative easing, helping to spark massive fear among investors about a potential recession. Furthermore, the depreciating USD will likely positively impact US businesses with large operations overseas, as foreigners benefit from cheaper goods due to a weaker dollar. Conversely, foreign companies with large operations in the United States will likely struggle in the coming quarter as foreign goods become increasingly expensive in the U.S. If the depreciation persists, these drops in profit will likely be visible in Q4 earnings reports.
Macro Roundup
JOLTS: 8.18M vs 8.23M expected
Consumer Confidence: 100.3 vs 99.5 expected
Initial Jobless Claims: 249k vs 235k expected
ADP employment: 122k vs 150k expected
ISM Manufacturing: 46.8% vs 48.9% expected
Jobs Report: 114k vs 185k expected
U.S. Unemployment Rate: 4.3% vs 4.1% expected
U.S. hourly wages: 0.2% vs 0.3%
FED holds interest rates at 5.25-5.5%
BOE cuts rates 25 bps to 5-5.25%
BOJ hikes rates 15 bps to 0.25%
Other Highlights
Kamala Harris raises $200M
Nicolas Maduro wins disputed election in Venezuela
Lineage raises $4.4B in 2024’s largest IPO
Big Tech reports earnings
Gold rises on geopolitical instability + economic worries
HVAC companies seeing record demand
INTC cuts ~15% of workforce
Americans economic divide deepens
US national debt tops $35T
Oil rises due to geopolitical turmoil
US and Russia broker largest multinational prisoner swap in decades
2Y yield falls below 30Y yield
10Y falls nearly 40 bps WTD to 3.78%
VIX is at 18-month high
What’s the Big Picture: All signs pointing to rate cuts in September. There is tremendous volatility in the market as economic reports indicate a weakening US economy and looming recession. This has led investors to hike prospects of rate cut bets significantly, with ~70% expecting the FED to cut rates by 50 bps in Sept and nearly ~100 bps by EOY. Consequently, there should be increased inflows into safe-haven assets, such as gold, as investors seek safety during these uncertain times.
Looking Ahead
As a heavy economic week passes earnings season winds down, investors will likely wait to see the FED’s next move and further economic reports:
Monday: ISM services, LCID, PLTR earnings
Tuesday: U.S. trade deficit, UBER earnings
Wednesday: DIS, LYFT, CVS earnings
Thursday: Initial jobless claims; Richmond FED President Tom Barkin speaks, LLY earnings
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