Markets are on tenterhooks ahead of the Bank of Japan meeting and statement today and the US Federal Reserve post-meeting update early tomorrow.
Wall Street ended this morning with gains of 0.1% or less, while European markets finished down 0.8% despite small gains in London and Germany.
Gold and oil edged higher, iron ore rose to more than $US55 a tonne in China yesterday, even though Chinese steel product prices hit three months lows this week.
But it’s the Fed meeting which looms as the most vital for market confidence – even though the Bank of Japan is widely expected to add something to its already very loose monetary policy and quantitative easing later today.
The Fed is not expected to change its policy stance – even though Barclays and French bank, BNP-Paribas reckon the US central bank could very well surprise with a rate rise.
But a story on Reuters overnight has cast doubt on that and any rapid rise in US rates for sometime to come.
Reuters said the Fed is set “to again cut their forecasts for how high interest rates will need to go in an economy where output, productivity and inflation are growing at a slower pace than in past decades.”
“It would be the fourth time in 15 months that the U.S. central bank has been forced to admit its estimate of this so-called neutral rate was too optimistic, raising questions about the health of the economy in the coming years,” Reuters reported.
"Conversations with Fed officials suggest some will cut their predictions for the longer-run rate at this week’s monetary policy meeting, with the median forecast possibly falling to 2.75 percent. It was 3.75 percent in June 2015 and 4.25 percent four years ago,” according to Reuters.
The Fed is expected to leave its overnight interest rate unchanged at 0.25% to 0.50%. The last increase was in December and since then the rate has averaged around 0.38%.
Reuters pointed that “the expected reduction in the longer-run neutral rate forecast amounts to a lower speed limit on future rate hikes, and points to fewer increases with longer gaps between them than U.S. central bankers and investors had expected.”
That means if the lower neutral rate remains in force for the next year to 18 months, there may be one, or perhaps two rate rises. This has implications for other central banks and their key rates, such as the RBA which now seems to be a holding pattern, and the RBNZ which is now expected to either cut rates or signal another one is coming in its post meeting statement to be issued early tomorrow (three hours after the Fed’s statement is issued).
It also has implications for bond and dividend yields and currencies. That could force some central banks to try and take the pressure of their currencies by cutting rates (using weak inflation as justification).
IF the RBNZ doesn’t cut rates (and that is only a small chance), it will likely do so in November, according to Kiwi economists.
