This week’s episode - week ending September 23, 2016
FED REMAINS ON HOLD, AWAITS FURTHER PROGRESS IN OBJECTIVES
The U.S. Federal Reserve Board (Fed) decided to keep rates unchanged, which was consistent with the low probability that market participants had priced in leading up to the announcement. The Fed kept the Federal Funds between 0.25% - 0.50%.
While the Fed acknowledged the strengthening in labour markets and a pick-up in economic activity following a weak first half of the year, they also noted that inflation remains low and investment is soft.
The Fed noted that it will wait until further evidence that shows continued progress toward its objectives. While labour markets are strong, the Fed would like to see an improvement in wage growth and for inflation to increase closer to its target.
The market rallied following the Fed’s decision as the Fed downgraded economic growth forecasts for the first time this year, as well as expectations for future rate hikes.
BANK OF JAPAN ADOPTS A NEW FRAMEWORK
As highly anticipated, the Bank of Japan (BoJ) eased monetary policy further after conducting a comprehensive policy review. The BoJ announced yet another program: “QQE with Yield Curve Control”. The central bank increased its flexibility and will now focus and target the shape of the yield curve.
Some of the changes to its policy include: targeting purchases of 10-year Japanese Government Bonds (JGBs), adjusting the pace of its current purchases in accordance with yield curve control, removing the guidelines surrounding the average remaining maturity of its purchases and introducing a fixed-rate purchase operation, which would allow the central bank to purchase JGBs with specific yields to help contain any significant movements in yields.
The central bank also removed its commitment to achieve its 2% inflation target over two years, which in addition to having more control over the yield curve, allows the central bank to improve the long-term sustainability of the program.
GLOBAL PMI’S MIXED IN SEPTEMBER
European manufacturing and non-manufacturing PMI were mixed during September. Manufacturing activity increased more than expectations in September to 52.6 (from 52.7 in August). Services weakened in September to 52.1 from 52.8 in August, though remaining in expansion territory. As a result of weaker services, the composite dipped to a 20-month low at the end of the second quarter. The services sector in Germany was the main factor behind the deceleration.
U.S. manufacturing slowed in September, according to the Markit U.S. Manufacturing PMI, which fell to 51.4, from 52.0 in August. New orders fell in August to the lowest reading since December 2015.
Encouragingly, the manufacturing sector in Japan moved into expansionary territory in September, the first time in positive territory since February 2016.
OTHER ECONOMIC NEWS
Canadian retail sales unexpectedly fell 0.1% in July, after a similar drop in June.
Canadian headline inflation fell 0.2% in August and rose a less-than-expected 1.1% from a year ago; core inflation was flat during the month, while falling to 1.8% from a year earlier.
U.S. housing starts fell by an unexpected 5.8% in September due to adverse weather conditions.
Sources: Investment Executive, Yahoo Finance, BMO Capital Markets, Globe and Mail