Pro Perspectives 4/28/22
April 28, 2022
The big Fed meeting is next week. And global markets have been out of sorts in anticipation of a more aggressive rate hiking path, and the beginning of “quantitative tightening” (i.e. draining liquidity from the financial system).
That said, stocks bounced today, and did so in the face of a weak GDP report.
Remember, the world’s top central bankers and finance ministers met in D.C. last week.
And if there is one common theme we hear from almost all government officials and agencies, it’s the promotion of global “coordination, collaboration and cooperation.” And if there is a commonality in market turning points, historically, it’s that they tend to come with some form of intervention.
With that in mind, last week we talked about the prospects of the Bank of Japan (BOJ) coordinating with the Fed to keep market U.S. interest rates in check (making the Fed’s job to manage inflation expectations easier).
Remember, not only is the BOJ still in the QE business, but they are in the unlimited QE business (buyers of unlimited Japanese Government Bonds as part of their yield curve control program). They have a stated policy to buy as much as they see fit. And in Japan, that also means buying stocks, real estate, corporate bonds – it’s all fair game.
So, this brings us back to our discussion we’ve had on currencies. The dollar hit a 20-year high today (the dollar index). The yen has been getting destroyed, down 13% just in the past month. And inflation, globally, is running wild…
With all of the above said, the Bank of Japan met and announced a decision on monetary policy overnight. Did they start positioning for the big inflation fight, as the rest of the world is doing?
No, they didn’t. They continued the course: Unapologetic, pedal-to-the-metal QE.
This only amplifies the extreme monetary policy divergence between the U.S. and Japan (the Fed hiking and QT, while the BOJ still full bore QE). It’s an insult to the already injured Japanese yen. Just like that, the yen was down another 2% today.
What’s the point?
This looks increasingly like the Bank of Japan is taking the baton from the Fed and other central banks that are being forced into an inflation fighting role.
How do you prevent a global economic shock that may (likely) come from reversing the mass liquidity deluge of the past two years (if not 14 years, post Global Financial Crisis)?
You keep the liquidity pumping from a part of the world that has a long-term structural deflation problem, and that has the biggest government debt load in the world (exception, only Venezuela).
The Bank of Japan, in this position, can be buyers of foreign government debt (namely the U.S.) to keep our market rates in check (keeps the world relatively stable), which gives the Fed breathing room on the rate hiking path.
And Japan’s benefit? The world gives Japan the greenlight to devalue the yen, inflate away debt and increase export competitiveness (through a weaker currency). They hit the reset button on an unsustainable, debt-laden economy.
My view: It all looks like global central bank coordination. And this BOJ decision overnight may have lifted the clouds that have been hovering over markets the past few months. We will see.
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