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Central Bank Preview - BoJ & FOMC


April 30, 2008

Date / GMT       ACM   Consensus   Current Rate
30th / 6.00 Bank of Japan 0.50% 0.50% 0.50%
  It is universally expected that the Bank of Japan will hold rates steady at 0.50% at the completion of its two day monetary policy meeting. Despite this fact, there was confirmation last week of an acceleration in inflation along with declining growth. In this context we don’t see much that the markets will be interested in. Knowing that inflation has affected food and commodity prices while growth slowed due to slowing exports, both in the US and Asia, the news out of Asia has taken the surprise element out of the BoJ’s revised Inflation and GDP forecasts. Markets expectations on monetary policy have adjusted remarkably in the last week with the yield curve steepening as markets shifted from a cut in 2008 to a 25bp hike. But we don’t expect this monetary announcement to have a significant spill over in the FX markets.
30th / 19.15 Federal Reserve 2.00% 2.00% 2.25%
  We expect the FOMC to cut rates by 25bp to 2.00% on Wednesday meeting. However the outcome is still very uncertain with growing speculation that the Fed will hold rates steady. The last FOMC minutes sowed the seeds of doubts into the market’s collective mind as two members voted against the 75bp cut and three others asking for a cut in the discount rate. This little storm among the governors is giving the perception that the Fed’s aggressive easing policy had taken on a more moderate velocity. Despite the fact that macroeconomic data and economic sentiment have continued to deteriorate since the last meeting the fed fund curves has shifted higher. We believe the market is mispricing the weakness in the US economy and premature in expecting the Fed to end their easing cycle. Employment data is dismal and is indicative that the economy is at best on the brink of a full blown recession. Retail sales and housing data continue to trend downwards and with consumer confidence sagging, the probability that the tax rebate will get immediately spent is slight. The bright spot has been the financial markets which has stabilized thanks to better than expected corporate earnings. Perhaps the principal unknown will be the emphasis that the FOMC will focus on inflation. Inflation hawks such as Plosser and Fisher who “preferred less aggressive action” will probably want to see the FOMC pause, given the inflation data on the horizon. While the recent backwards inflation data which looks tame with core PCE up just 2.0% y/y and 2.4% m/m, inflation expectation survey all point to another period of pressure. Overall we expect the statement to lower rate expectations without closing the door completely.

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