Central Bank Views

The FOMC voted unanimously to leave the Fed funds rate unchanged at 1.25-1.5% in January. There were some minor changes in the accompanying statement but the theme continues to suggest that that gradual removal of monetary stimulus remains on track. Policymakers eventually took out the impacts of hurricanes in its economic forecasts and continued to see 'solid' growth in' employment, household spending and business fixed investment'. Meanwhile, they acknowledged that core inflation has stopped declining, thus allowing them to maintain the view that inflation would strengthen this year then stabilize at around the 2% objective. The Fed reaffirmed the pledge to monitor the development closely. The market viewed the meeting outcome as slightly hawkish, sending Treasury yields modestly higher. CME’s 30-day Fed funds futures suggest that the market has now priced in 80% chance of rate hike in March, up from 74% before the announcement. Other barometers have suggested that chance of a March rate hike has increased to 90%.

ECB left the policy rates unchanged, with the main refinancing rate, the marginal lending rate and the deposit rate staying at 0%, 0.25% and -0.40% respectively. The pace of asset purchases also stayed unchanged at 30B euro per month until September, or beyond, if necessary. President Mario Draghi attempted to downplay speculations that the central bank would soon adjust the forward guidance, as interpreted by many following the December meeting minutes. Meanwhile, he stressed that any rate hike would be 'well past' the end of asset purchases. Draghi also warned of the impacts of the strong euro on growth and complained about the US for talking down the greenback at the World Economic Forum.

BOJ again voted 8-1 to leave the monetary policies unchanged in January. The targets for short- and long-term interest rates stay at -0.1% and around 0%, respectively while the guideline for JGB purchases remains at an annual pace of about 80 trillion yen. As a ritual since he has joined the Board in September 2017, Goushi Kataoka has dissented again. The central bank has turned more upbeat on the inflation outlook although the members left the GDP growth and inflation forecasts unchanged for fiscal years from 2017 to 2019. At this meeting, the members also voted unanimously to extend for one year new the applications for the fund provisioning measure to achieve certain the goals such as stimulating bank lending and supporting economic growth.

BOC raised the policy rate by +25 bps to 1.25% in January, as 'recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity'. The move had been widely anticipated. As such, we observed the instant 'sell the news' move in...

The December minutes turned out more hawkish than expected. While the policymakers generally judged that the existing monetary policy remained 'appropriate'. They also agreed that the forward guidance might warrant some adjustments as the pace economic recovery accelerated. The minutes noted that the 'transition would take place without a change in sequencing', suggesting that no rate hike would be implemented before the end of the asset purchase program. The minutes indicate that the forward guidance would be a key policy tool in the year ahead.

BOJ offered to buy 190B yen of JGBs with maturity of 10- 25 years, down 10B yen from the purchase made on December 28. It also reduced the purchase of JGBs with maturity of 25- 40 by the same amount to 90B yen. The move has heightened speculations that the central bank is preparing to trim its stimulus measures. The market reactions match with the speculations with USDJPY slipping -0.42% while EURJPY down -0.65% on Tuesday. Japanese longer- dated 20- and 40-year bond yields rose to their highest in a month. Longer- term US Treasuries were also affected by BOJ’s move with 10-year yields gaining +6 points to 2.546%. Of course, the movement of US Treasuries was also affected by the auctions this year.

The FOMC minutes for the December meeting revealed that policymakers were optimistic about the path of economic expansion. This was partly a result of the government's fiscal stimulus. On the tax cut, some members judged that it would help boost both capital and household spending, although the magnitude remains uncertain. The December rate hike of +25 bps was data-dependent but a key factor was the strong employment market. While wage growth was still "modest", a few members forecast it to accelerate as the job market tightened further. Many members expected that the tightening labor market would lead to higher inflation in the medium- term, but some continued to judge that core inflation would persistently stay below the 2% target. The rate hike in December was not unanimous as Chicago Fed President Charles Evans dissented.

As widely anticipated, BOJ again voted 8-1 to leave the monetary policies unchanged in October. The targets for short- and long-term interest rates stay at -0.1% and around 0%, respectively while the guideline for JGB purchases remains at an annual pace of about 80 trillion yen. The central bank has turned more upbeat on the economic outlook, especially on Capex and consumption. Goushi Kataoka was again the lone dissent as he supported bond purchases so as to facilitate the decline of 10-year (or over) bond yields. Governor Kuroda's speech at the press conference has not tilted towards less easing/ policy normalization in the near-term

The RBA minutes for the December meeting revealed that policymakers were more upbeat on the global and domestic economic outlook. While maintaining a natural monetary policy stance, the minutes contained some hawkish ingredients, suggesting that recent data on employment and inflation have made the members more confident. The key concerns remained subdued wage growth and household consumption.

As widely anticipated, ECB left the policy rates unchanged, with the main refinancing rate, the marginal lending rate and the deposit rate staying at 0%, 0.25% and -0.40% respectively. The focus of the meeting was on the updated economic projections and the press conference. For the former, accompanying the upbeat statement were upgrades of GDP growth and inflation forecasts. The staff has also unveiled the 2020 outlook for the first time. For the latter, little news revealed with President Mario Draghi refraining from discussing the internal division over the future of the QE program. He, however, reiterated that the monetary policy should remain accommodative as inflation has yet to be self-sustainable.

The BOE voted unanimously to leave the Bank rate unchanged at 0.5% in December, following a historic rate hike in the prior month. Policymakers also decided to leave the asset purchase program unchanged at 435B pound. Overshooting of inflation remains a key concern with the central bank putting its blame on British pound's weakness. Policymakers noted that recent macroeconomic data have been "mixed" and raised the concern that GDP growth might slow in 4Q17. The central bank also acknowledged the progress of Brexit negotiations, suggesting that it has helped support the pound. We expect the BOE would keep its powder dry at least for the first half of next year, unless abrupt changes in the growth and inflation developments.

While leaving the policy rates unchanged for another month and pledged to continue FX market intervention when needed, the SNB has turned less dovish in December. It has turned more upbeat over the economic recovery outlook and acknowledged the depreciation of Swiss franc and the euro and US dollar. the central bank revised modestly higher the inflation forecasts for this year and 2018, while leaving that for 2019 unchanged.

The greenback got dumped, as a result of a series events happened over the past day. Defeat of GOP Roy Moore in the Alabama Senate race and the miss of the core CPI were followed by a final version of tax bill. The day culminated in the conclusion of the FOMC announcement, which saw a 25 bps rate hike as expected, but with two dissents. US dollar fell against major currencies with the DXY index losing -0.71% for the day. Treasuries firmed, sending yields higher with the 2-year and 10-year yields dropping -4 points and -5 points respectively.

SNB's FX reserve slipped to 738.17B franc, from a record high of 741.96B franc (revised from previous estimate of 741.32B franc), in November. The drop is in contrast with consensus of an increase to 745B franc and marks the first drop since June this year. Meanwhile, the sight deposit fell to 576.78B franc in the week ended December 1. Subsequent decline from the August peak has sent sight deposit to the lowest level since June 2017. The movements of both FX reserve and sight deposit have suggested that the SNB is not in a hurry to intervene with the recent weakness in Swiss franc. Separately, the country's unemployment rate stayed unchanged at 3% (seasonally adjusted) in November, compared with expectations of a rise to 3.1%. For the quarterly SNB meeting scheduled on December 14, we expect policymakers to maintain the status quo, i.e. keeping 3-month LIBOR target range unchanged, at between -1.25% and -0.25%, maintaining the interest rate on sight deposits with the SNB at -0.75% and reaffirming that the central bank is committed to intervene in the FX market as necessary. We believe the domestic economic developments since the September meeting have shown gradual improvements, leaving policymakers more room to wait and see.

The BOC left the policy rate unchanged at 1% in December. While acknowledging the strength in the employment situation, it warned of the slack in the labor market. While upgrading GDP growth forecast, it noted that it does not necessarily imply a narrower output gap. While admitting the policy rate would have to increase over time, it reiterated caution over any monetary decision. All in all, the central bank attempted to deliver a neutral to dovish message, so as not to cripple the recovery path – a lesson learnt after two consecutive rate hikes in July and September. Canadian dollar plunged after the announcement, with USDCAD jumping to as high as 1.2777, highest level in three days.

RBA left the cash rate unchanged at 1.5% in November, following the last reduction in August 2016. The accompanying statement contained little surprise. While staying confident over the employment situation, policymakers remained weary off the persistently soft inflation and wage growth. The RBA stance is largely unchanged from the previous meeting. We retain the view that the policy rate would stay unchanged for the entire 2018.

The greenback slumped as the FOMC minutes for the November meeting revealed that 'several' members were concerned that weak inflation would be persistent, rather than temporary. They highlighted the worries about a 'a diminished responsiveness of inflation to resource utilization'. Another important message suggested in the minutes is that a December rate hike is almost a done deal with 'many' members judging that it is 'warranted in the near term' if the macroeconomic data remain steady. Such opinion has outweighed the thought of 'a few 'members' that a rate hike should be delayed. We view the USD selloff might have been over-reacted. Note that the (core) PCE, the Fed’s preferred inflation barometer, has improved, while the October CPI, released after the November meeting, also picked up. We believe the majority of the FOMC still retain the view that weak inflation is transitory.

The RBA minutes for the November minutes delivered a dovish tone as policymakers expressed concerns over the wage growth outlook. This is consistent with the central bank's worry over household spending as indicated in the meeting statement (released earlier this month). We believe this has added further pressure to Aussie's recent weakness, sending AUDUSD to the lowest level in 5 months. The central bank kept its powder, leaving the cash rate unchanged at 1.5%, in November. We expect the monetary policy would stay unchanged at least until 1H18 and could extend to 2H18.

The talk of the day is undoubtedly the flattening of US yield curve with the spread between the 10-year and 2-year yields fell to 64 bps, the lowest level since November 2007 on Thursday. Meanwhile, the spread between 30-year and 5-year yields also dropped below 75 bps, the lowest in about 2 week. Flattening yield curve has raised concerns as this is probably also a reason of diminished risk appetite this week, apart from disappointing global macro dat. Textbook knowledge suggests a normal yield curve is upward-sloping as yields for longer-dated investments are higher than shorter-dated ones. An inverted yield curve (short-dated yields exceed those of long-dated) is usually a signal of upcoming economic recession. A flat yield curve is the transitory period from a normal to an inverted curve. However, this interpretation does not necessarily hold true. For instance, US' economic growth managed to avoid recession, despite a series of global economic crisis from 1995-2000, years after the sharp yield curve flattening from 1994 to 1995 (Second Chart).

While keeping the OCR unchanged at 1.75%, the tone of November RBNZ statement has turned slightly more hawkish than previous ones. The central bank upgraded inflation forecasts, while describing core inflation as 'subdued' and reiterating 'uncertainties' in the new government's policies. The growth outlook remained largely unchanged from August's, as weaker growth in the housing and construction sector would be offset by greater fiscal spending promised by the new government and higher terms of trade, thanks to NZD depreciation and the rise in oil prices. RBNZ slightly pushed ahead the rate hike schedule. However, given the minimal change, we believe this is rather a symbolic move. The central bank expects more material interest rate movements by 2020. We believe the monetary policy would stay unchanged for the rest of 2018.