Today is Federal Reserve day when just after 7pm (they are usually late) we learn the interest-rate decision of Jerome Powell and his colleagues. On the surface not much is expected which is highlighted by the front page of the Financial Times not mentioning it at all as I type this.Yet underneath the surface it is being very powerful via what the apocryphal civil servant Sir Humphrey Appleby would call “masterly inaction.” We can start with the financial market event of the week.
LONDON (Reuters) – Japan’s yen saw a sudden jump on Monday, suggesting the country’s authorities may have finally followed through on the FX market intervention warnings they have be making for months.
Monday’s moves follow a near-11% drop in the yen’s value against the dollar this year and a 35% slump over the last three decades that has pushed it to a 34-year low.
The around 5% pick-up in yield terms between the US Dollar and the Japanese Yen left it vulnerable,especially with Japan continuing the Abenomics style policies for a weaker Yen. On Monday with Japan quiet due to Golden Week the Yen found itself pushed to 160 as what the Japanese authorities were hoping would happen in several months took instead several hours. It looks as though they spent around US $30 billion in a barrage of intervention to get it back to 155, although they are being tight-lipped on the matter.
This has affected the Yen against other currencies as it was only recently it seemed a big deal that the Yen passed 160 versus the Euro. I remember people on Twitter scoffing at my view that the UK Pound £ would be strong versus it and I guess they were rather quiet when it nearly made 200 on Monday morning. A factor that has driven this on can be looked at via this from the 14th of December last year.
Most Federal Reserve officials have forecasted that the US central bank could cut rates by about 0.75 percentage points next year, as they held interest rates at a 22-year high…Officials expect rates to fall even lower in 2025, with most officials forecasting they would end up between 3.5 per cent and 3.75 per cent.
That lit the blue touch paper for bond markets and interest-rate cut expectations and on that road tonight could even have been the second cut. Except not only have there not been any so far the first one keeps getting further away.I pointed out at the time that the US two-year yield had fallen to 4.3% that day and in fact it later fell towards 4.1% whereas I recently noted it climbing back to 5% and it is now 5.03%. In itself it may not seem enormous but the change in expectations has been and along the way the central planners at the Bank of Japan have been wrong-footed. On the 30th June last year I pointed out they wanted a lower Yen and along the way Japan Inc will have welcomed that and the consequent all-time highs in the Nikkei 225 equity index as one of the signposts of the Lost Decade was taken down. But on Monday morning it became a bit of a rout, as these things have a habit of doing. This morning the Yen at just under 158 will be singing along with Queen and David Bowie.
Pressure pushin’ down on mePressin’ down on you, no man ask forUnder pressure that brings a building downSplits a family in two, puts people on streets
US Fiscal Problems
The situation here begins will the Bidenomics policy which in old language would be called a dash for growth.
The IMF’s fiscal monitor estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025 – double the 3.5% in 2015. ( Reuters)
In itself that is fine as long as the economy grows which so far it has. Whilst GDP growth in the first quarter of this year slowed to 0.4% it was some 3.1% higher than a year before which oils many fiscal wheels. But last night brought rather a change of emphasis from the US government.
US TREASURY SECRETARY YELLEN: I AM CONCERNED ABOUT WHERE WE’RE GOING WITH THE US DEFICIT. ( @financialjuice )
If we ignore the rather obvious elephant in the room about it being her policies which have sent in there we can see other issues. Back on the 26th of March I pointed out that she was also running the debt in a very risky way.
The US has shifted its deficit funding to short-term debt issuance, something most people in markets link to the fall in long-term Treasury yields since Oct. 2023. No one in the G10 remotely comes close to this shift. Canada is most similar, but debt issuance is much smaller… ( Robin Brooks )
The problem with doing that is you become ever more vulnerable to a fiscal crisis because you end up with quite a schedule of rollovers of your debt.
Now that was in theory going to be sorted by the Federal Reserve beginning a series of interest-rate cuts with US bond yields falling. Clever Janet! Except they have not happened and things in terms of the schedule always began a bit of a crunch next month due to the short-dated nature of her debt policy. Stupid Janet! With bond yields now high again refinancings will be expensive as we mull another case of theory clashing with reality. It also means that something else I noted on the 26th of March becomes more of an influence.
The interest on the debt alone exceeds $1 trillion per year, constituting around 20% of the government’s annual revenue. ( @BigBreakingWire)
As I frequently point out debt interest is a slow burner, but the issue for the US has changed. First there was all the Covid spending ( which officially does not count as most of it is on the books of the Fed). Then we have seen a continuation of loose fiscal policy added to by a very loose style of debt management by the US Treasury. Now US bond yields look set if I may use one of Jerome Powell’s phrases “higher for longer”
Comment
The Bank of Japan will be on alert later in case the policy announcement leads to another phase of Yen selling. It will no doubt be sending hints to Jerome Powell although there is the issue that the Federal Reserve is notoriously insular and rarely takes any notice at all of international implications of its policy. That means if we do get something there is a admission that the problem is very serious.
Next up is the issue of the fiscal deficit and Jerome Powell has mentioned this before as a worry. However he does not want to create a crisis and there are worries here. For example economic growth has been good and in the past many would have called the numbers below full employment.
Total nonfarm payroll employment rose by 303,000 in March, and the unemployment rate changed
little at 3.8 percent, the U.S. Bureau of Labor Statistics reported today.
Yet we see a fiscal deficit heading for 7% of GDP in what are officially good times.So we can expect something which Treasury Secretary Yellen has tried to forestall. These things can escalate quickly. One way of taking the pressure off would be an announcement to reduce QT……