Daily Commentary

MarketMinder’s View: Hats off to the headline here, which hints at our view of the Bank of Japan’s (BoJ’s) move: It is another step toward normalizing monetary policy. The Bank of Japan’s long-running nemesis isn’t inflation but deflation, leading to an alphabet soup of weird, conflicting and counterproductive policies aimed at boosting prices over the past 25-ish years. Stable domestic economic fundamentals, along with more consistent (and by global standards utterly tame) inflation have given the BoJ room to move further away from its negative-rate era, yet rates there remain low by global standards. Interestingly, sentiment toward Japanese rate hikes has shifted wildly over the past two years. When hikes began, headlines and the yen freaked out over feared disruptions to the yen carry trade, which was supposedly pumping global markets (people borrowing in yen then investing elsewhere to capture currency gains as well as market returns). Now people have seemingly gotten used to the BoJ’s moves, as this very calm article indicates. There is no freakout, illustrating how broader sentiment has improved during this bull market. As for whether the move itself is wise, given Japan’s 10-year yield is still a bit north of 2.6%, per FactSet, short rates at 1% leave the yield curve plenty steep. We think monetary policy should still support lending and growth.

MarketMinder’s View: China’s May economic data hit the wires today, and as the article notes, they were a mixed bag. Retail sales fell -0.6% y/y (bringing the year-to-date, year-over-year growth rate to 1.4%), missing expectations, while industrial production accelerated to 4.5%. Fixed asset investment fell, due largely to real estate investment, and per the National Bureau of Statistics’ official release, services rose. Exports and imports each grew both year over year and year to date, indicating healthy domestic and external demand. All in all, the report didn’t show any new trends. Headlines have long sweated Chinese consumers’ relative weakness and worried only heavily subsidized exports are fueling growth. This article touches on that, warning it limits China’s growth prospects. We agree not all is perfect on China’s economic front, but it doesn’t need to be. Markets move most on the gap between reality and expectations, and today’s negative sentiment seems to overlook that China is still contributing just fine to global growth despite occasionally patchy domestic data. Fears of weak consumption keep the bar for reality to clear low.

MarketMinder’s View: This long piece reads a lot into new Fed head Kevin Warsh’s past comments about the Fed’s communication policies, speculating over how he might reduce the institution’s verbal output. That is all speculative, however interesting it is to think through, and we don’t think you can read much into it. Central bankers often act differently than people expect based on their record before taking the hot seat. But our broader issue here is with the underlying presumption that a more transparent, communicative Fed has made monetary policy more predictable and cut the risk of surprise. We think there is a lot of evidence to the contrary. Take 2022. Heading into the March meeting, Fed officials had spent months talking down inflation as “transitory” and downplaying the likelihood of a rate hike. Then they changed course and hiked aggressively, upending sentiment. We think that shock contributed to that year’s short, shallow bear market (not the hikes themselves, but sentiment toward them), and it was a shock entirely of the Fed’s making. Former Fed heads Janet Yellen and Ben Bernanke also ended up defying their own forward guidance at various times, leaving folks flummoxed. The Fed’s infamous “dot plot” of policymakers’ fed-funds target rate forecasts also tends to change and prove wrong. All of this risks the Fed’s credibility, which we think is the biggie here. Monetary policy is always unpredictable. Credibility matters much more, and if reducing press conferences, cutting the policy statement’s word count or axing the dot plot rebuilds Fed credibility, we reckon that would be a net benefit.