The BOJ in a nutshell

* The deposit rate was left unchanged.

* The much vaunted yield curve targeting, the "Qualitative and quantitative easing with yield curve control", really only means that they are targeting two points on the curve:  the depo rate at -0.10%, and 10y JGBs at 0%.

* To achieve this, they have loosened some of the guidelines for asset purchases- most notably, the guidelines for the average maturity of their purchases.

* All asset purchase volumes have remained intact, though the ETF purchases have evidently switched from Nikkei to Topix trackers.   This should help banks, which have a greater weight in the latter index.

* Engaging in such a simple yield curve mechanic has got to be a little disappointing, and 2s30s  has flattened today as a result.


* In a move that only academic economists could love, the BOJ essentially raised the inflation target such that they will continue to increase the monetary base until inflation exceeds 2% in a stable manner.  Note that y/y CPI ex fresh food is currently -0.5%, lower than it was when Abe took office.   In a related measure, Macro Man (who is 5'10") announced his intention to grow to 6'2".   it's a race to see who succeeds first, him or or the BOJ.


* Finally, the BOJ has extended its version of an LTRO (supplying funds at a fixed rate against a pool of collateral) to ten years from one year, with a lending rate of zero.   This has received almost no coverage.

When Macro Man woke up he checked USD/JPY, and it was almost exactly the same as it was when he went to bed.   This was interesting, as it made it fun to guess what the BOJ had actually done.   While the headline of the new program is certainly impressive, the substance is somewhat blah.   Two points- overnight and ten years- isn't much of a curve, and 10 basis points isn't much of a spread.   It does rather raise the question of how the BOJ expects to jolt inflation expectations higher when they send the message that fixed income investments will provide no return for the next decade.  As for raising the inflation target, it's hard to see why the public would believe this new commitment when they clearly didn't believe the old one.  It rather smacks of their mouth writing cheques that the asset purchase program cannot cash.

And so it's not much of a surprise that USDJPY has retraced its initial gains.  Frankly, Macro Man is a little surprised that global bonds aren't higher, but there is probably a Fed risk premium there, and the 10y point on the JGB curve did sell off.

In sum, while the BOJ has tried something different, it really looks like more of the same in a different dress.    Perhaps Kuroda-san should try firing up the whirlybird if he really wants to effect a positive shock to the market and the public....

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Anonymous
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September 21, 2016 at 1:20 PM ×

Kocherlakota loves it.As you'd expect.

"BOJ has announced that it is now aiming to overshoot its inflation target - and that's possibly a big deal: "

https://www.bloomberg.com/view/articles/2016-05-03/a-cure-for-japan-s-inflation-deficit

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Macro Man
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September 21, 2016 at 1:22 PM ×

"In a move that only an academic economist could love".....got it in one.

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Anonymous
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September 21, 2016 at 1:27 PM ×

Dbank is sitting on all time lows despite the bank sector rally this AM. Could get interesting if there's a general sell off post Yellen.

To counter that, Microsoft and Target out with 46bln in buybacks so far.

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Anonymous
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September 21, 2016 at 1:42 PM ×

It depends, Grasshopper, do you really believe that you will be 6'2"?

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Macro Man
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September 21, 2016 at 1:56 PM ×

It must be great to be one of Kocherlakota's kids. "I can play Xbox for the next three hours, Dad, because I intend to do my homework later and I am targeting an A."

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Leftback
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September 21, 2016 at 2:06 PM ×

So they did nothing, and Kuroda told us that he is willing to overshoot a target he may never attain. Yellen herself is a bit of an "overshooter", in so far as she thinks the US economy can run hot and then be tamped down with a little hiking.

More of the same from the Fed today, i.e. sweet FA.

After that we begin trading, what? The US election? December FOMC? Deutsche Bank waking up to a Kafkaesque reality and finding that it has turned into an enormous cockroach? [What's that Gregor? Holy crap. It IS a giant cockroach...!].

First we are going to crush volatility for three days, REITs will see a massive squeze, and we get to listen to 12yo doing what he does "best", i.e. baiting of his imaginary "perma-bears".

Back to the Hammock.

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johno
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September 21, 2016 at 3:35 PM ×

One additional point I haven't seen much mention of is the footnote "In case of a spike in interest rates, the Bank stands ready to conduct fixed-rate JGB purchases operations -- for example, those with regard to 10-year and 20-year JGB yields -- in order to prevent the yield curve from deviating substantially from current levels." I read that as the BoJ targeting the current curve shape, which is still much flatter than before their January NIRP announcement. The 10s/30s curve was ~100bps then and ~55bps yesterday. One might have thought they'd target something between 55bps and 100bps, not the very low end of that. Perhaps it's not so surprising though, since Kuroda only started commenting on curve shape in July when it was <40bps. Separately, a journalist asked during todays press conference how the BoJ would communicate the appropriate level of the yield curve ... Kuroda didn't answer.

What does this all mean for the curve? If the footnote is taken at face value, then I don't see a catalyst for a steepening in this. But if Kuroda didn't mean to guide anyone on yield curve shape beyond the 10y point (as one might infer from silence on the point during the press conference), then you could argue the uncertainty should at least be priced, i.e. there should be more term premium in those ultra-long points. I haven't seen any mention of the footnote or much discussion of the beyond-10y in what commentary I've read here and elsewhere yet, so curious what people are thinking about it.

Closed out a long in Topix futures at the close, which was nice, but I completely missed trading the headline and then fine print in bond futures :(. Flat all things Japanese since then.

Now we have the Fed. Dots likely come down and JPM points out that the USD has always fallen and bonds always rallied when the dots have been lowered. In the price?



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Mr. T
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September 21, 2016 at 3:46 PM ×

BOJ et al getting onboard with the fairly wide view of inflation overshooting, but with the logical underpinning that the 2% target is an average over a period. Based on a rough spreadsheet, if the fed wants to see average 2% over the post-GFC period (its 1.72 now), CPI (yeah yeah) will need to be running at 4% all the way through YE-2017 until they can see their average. I cant imagine the consternation 18 months of 4% headline with rates at 25-50bp would cause - but if we take at face value what they are saying thats the case. If we plug in 3%, it wolnt be until 2H2019 that the fed would raise.

My thoughts are along the line that there is no way the bond market would subject itself to -3% real rates for any period of time. Not sure how that resolves itself without the cb's losing whatever control they currently have.



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Leftback
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September 21, 2016 at 3:49 PM ×

As long as there are USD longs and bond/equity shorts (and clearly there are), it is not quite all in the price. Cue a modest squeeze, 2-3 day vol selling orgy. Rinse and repeat.

We will be buying USD on weakness. There are a number of factors that can lead to a firmer dollar in Q4 other than Fed policy. Look at DX today: it is if anything higher today than it was before Brainard and Hilsenrath killed a September hike.

GBPUSD, CADUSD and AUDUSD will all rally this week, and all of the rallies should be sold. Sell strength in commodity FX.

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abee crombie
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September 21, 2016 at 3:58 PM ×

Nice MM. I'd love to be 6"2 as well ;-)

But the thing with Central Banks and money is that at some point all these experiments will lead to inflation and debasement. I havent a clue when but very confident in the ultimate outcome. just bc the world is over supplied with "stuff" and inflation is low, doesnt mean you can print money ad infinium. At some point the increase in the money supply overwhelms the real economy and causes inflation. Though granted that point is unknown and probably over estimated many times in the past 20 years. But it does exist.

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abee crombie
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September 21, 2016 at 4:01 PM ×

johno, where do you get long MXN? I'm thinking we can go to 21 maybe 22 on Trump victory but at at point you are, on a PPP basis, as cheap as BRL/COP were this year and a good point to buy. Or is everyone too scared that Trump would actually rip up NAFTA and Mexico would lose big time and MXN does something crazy. I'm willing to wager that at 21/22 you are getting paid for those risks

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Anonymous
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September 21, 2016 at 4:06 PM ×

Abee, do you think that the first country to show inflation could be Japan? Looking at the tightness of the labor market (job to applicant ratio for instance), the fact that inflation "is always a monetary phenomenon" + Phillips curve not completly dead could make it here?

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Anonymous
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September 21, 2016 at 4:29 PM ×

I believe that it is all about politics now. If Fed does not raise today (high probability event), then it surely will hike in Dec and then hike a few more in the first half of 2017. Given the mid-term election and Hilary's reelection (assuming she wins this Nov, another high probability event for now), there is no way Fed is going to hike after 2017.

And this is the playbook I am stick with, for now, until changes.

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Anonymous
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September 21, 2016 at 4:46 PM ×

German GDP: $3.3T
Deutsche Bank's Derivative Book: $42.1T

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Anonymous
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September 21, 2016 at 4:49 PM ×

Raise Rates: Bad
Raise Rates: Good

The fed is in self preservation mode due to all the negative article on Fed policy.

They will hike and double up on the dove language.

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johno
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September 21, 2016 at 5:00 PM ×

abee @ 4:01. Haven't thought about MXN much lately, but I really should. It looks about 1.5 standard deviations cheap on my long-term regression (which is mostly driven off relative Mex/US PPI). For me, there's no stepping in front of this price action. MBonos look ugly here, too. If I were to look at getting long MXN with this setup, as a reversion-to-model bet, I would only do it via options. But that's only my style. I do see that UBS is out with a note today, watching for FX intervention and possibly a 50bps hike in Sep ....


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Danny
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September 21, 2016 at 5:02 PM ×

@abee Crombie
You can print all the money you like but only when it gets *SPENT* will you ever get inflation.

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Anonymous
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September 21, 2016 at 6:33 PM ×

@Danny Wake up, we already have inflation. Sure your TV is $100 cheaper, but your house costs $500k more, your medical bills/insurance/education/food/bills are all up 50-100% over 10yrs. Overall we're all WAY worse off.

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abee crombie
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September 21, 2016 at 6:37 PM ×

Good point @danny. Hence why we may skip inflation and head to debasement at some point. Not saying its soon but will come eventually if cb keep doing these grand experiments. Anyways cb'ers dont belive it can happen which us exactly why it will happen. Think about what the next recession brings, or the one after. Thst will be reaaly insane.

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abee crombie
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September 21, 2016 at 6:37 PM ×

Good point @danny. Hence why we may skip inflation and head to debasement at some point. Not saying its soon but will come eventually if cb keep doing these grand experiments. Anyways cb'ers dont belive it can happen which us exactly why it will happen. Think about what the next recession brings, or the one after. Thst will be reaaly insane.

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checkmate
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September 21, 2016 at 6:41 PM ×

Whether your house or your healthcare costs vastly more has nothing to do with whether you are 'worse off' or not. Presumably if my occupation is as a provider of healthcare and I have channelled all of your much appreciated costs into my larger shinier house I am better off. Moreover if you in your role of rocket scientist happened to have realised very substantial increases in your annual earnings then even paying me for your healthcase may still mean you are better off. Context is everything. If however you are inferring that many ordinary people working in developed countries have failed to see their earning power keep pace with certain non discretionary costs then you are more than likely right. Those people are worse off because they have actually lost purchasing power derived from their labour.
They can find it in amongst widening wealth distribution gaps and some of it of course in Asia etc where some people have moved from the ok class to an increasing middle class.Oh and I've probably got some stuffed away .

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Leftback
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September 21, 2016 at 6:43 PM ×

LB hates Fed days, and has a few thoughts to offer into the void that is pre-FOMC hour.

Just asking... is anything MORE boring than the hour before the release of a Yellen FOMC statement?

[I know, MM, "the hour of the Yellen press conference that takes place AFTER the FOMC statement"]. At least Draghi gets protesters who jump on the table in front of him. Dame Janet looks like she is leading a knitting circle.

The Dot Plot should go, btw. It is useless, is always corrected after the fact, and should have been killed off as a "forward guidance" communications device once Bullard had flaked out and moved his dots from Santa Barbara, Salt Lake City and Dubuque all the way over to El Paso, Panama City and Jacksonville. Asinine. Just stop it.

All the calls for the FED to take charge and make a STATEMENT by tossing a FIFTY are Looney Toons. Fun to think about, but seriously it is just not going to happen.

One really wonders why the hell they indulged in all the Tough Talk, Fischer and Yellen and Dudley, only to then send out Princess Lael to pour cold water on the Hawks and Hikers Club. What on Earth was the point of the rhetoric?

When will this Fed learn to Just Shut Up. Hey, Janet: "Don't Hand Me No Lines and Keep Your Dots to Yourself"?

https://www.youtube.com/watch?v=AMFMf9cN64U

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scepticus
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September 21, 2016 at 6:51 PM ×

Lots of analysis and discussion of easing, monetary base, interest rates, inflation or lack of it etc etc.

But, nary a mention of 'velocity' in amongst all this - not just around here but in most all discussion about policy wherever you look.

Whether one believes that velocity comes first and gives rise to a rising interest rate, or vice versa, it is IMO relevant either as a leading or lagging indicator.

What I take from the historical FRED data for MZMV (going back some decades, and up to the present) is a few things :

* changes in velocity have always lead durable interest rate rises
* rising velocity has typically been followed by an increase in the rate at which total debt grows
* velocity hasn't ticked up even once since the GFC, it has gone down with each new CB easing measure

Not sure the BOJ or the FED can do much directly about velocity, and its difficult to know how it figures in their thinking, or not.

Presumably all the money and synthetic derivatives of it ends up finding its way via our economic arteries and capillaries to those hands with a high propensity to save it, much like rivers flow to the sea. Can't see that a bit of CB voodoo like yield curve control with QQE is going to do much to change the plumbing of how and where money flows. A similar analysis would apply to chopper cash, unless the channels of distribution get re-plumbed (which must have something to do with asset ownership), it'll all end up back in the already very deep sea of existing excess capital.

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Anonymous
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September 21, 2016 at 7:05 PM ×

With cut n paste from previous statements I could have written that in seconds.....

As expected, no rush and can't get excited about a Dec hike, too much uncertainty with global considerations and new administration, now what about 3/15/2017?

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Leftback
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September 21, 2016 at 7:12 PM ×

Super snoozer and muted market reaction. I suppose CBs count that as a successful outcome.

OK, time out continues for us here at Hammock Asset Management, we already know what's going to happen this week.

Spoos will probably tack on 25-30 points, fill the gap at SPY 218, grind vol down into the low double digits... after that we can start thinking about Europe again and watching the DB stock price, which is sending a message and it's not a happy one.

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