Expectations of Monetary Policy Adjustment Go Unrewarded as Central Bank Keeps Easing on Hold
In a decision in which markets were largely divided about the potential outcome, the Bank of Japan abstained from incorporating any new expanded easing measures within existing policies. The current asset purchase program was left unchanged at Yen 80 trillion as the Bank of Japan continues to drain liquidity from the bank market and other equity assets it has been accumulating. The Bank of Japan has remained firm in its expectation that inflation will hit longer-term targets of 2.00%, but as Governor Kuroda has repeatedly stated, this is likely by 2017. The Yen responded to the developments in monetary policy with substantial volatility as the USDJPY currently is in the midst of a pullback to the downside following the decision to leave policy unchanged.
US GDP missed market estimates by a marginal amount, printing at 1.50% growth versus expectations of 1.60% expansion during the third quarter. Although just the preliminary estimate of GDP for the time period, it is in stark contrast to the second quarter’s blockbuster growth figure of 3.90%. A major contributor to GDP continued to be healthcare expenditures vis-à-vis Obamacare as gains from rising disposable income due to falling fuel costs wound up being spent in this area. The advance GDP estimate still has room for revision considering two further readings set to be released, but the number was largely taken as a positive sign in support of the Federal Reserve’s rate hike ambitions for 2015 as the probability of a December hike continues to rise. Equity markets managed to trend higher despite the risk of rising interest rates with the S&P 500 climbing to 2084.
The Euro Area preliminary consumer price index is set to be released this morning with expectations showing a slight rebound in the headline annualized number after two straight months of trending in negative territory. Headline CPI is forecast to print at 0.10% while core annualized inflation is estimated to print unchanged at 0.90%. The recent softness in inflation readings has raised the specter of expanded ECB quantitative easing measures from the European Central Bank during the December meeting should inflation continue to drag on the outlook as deflationary pressures circle. Continued losses in commodity prices make a near-term rebound in inflationary measures very unlikely despite expectations of the contrary. EURUSD continues to trend higher, retracing nearly half of the losses that followed Wednesday’s FOMC decision, closing on a bullish note in the previous session.