CalPERS’ Earnings Flop Means Taxpayer Belt Tightening: New at Reason

The California Public Employees’ Retirement System isn’t doing well even though the markets are.

Steven Greenhut writes:

On July 18, the largest state investment fund announced a piddling 0.61 percent rate of return in its latest 12-month period. The system is significantly underfunded. CalPERS blames a bad year in the markets. Defenders of the status quo suggest all is well–the rebounding market will correct itself and fix the mess.

State Sen. John Moorlach (R-Costa Mesa) notes that the Dow Jones, the fixed-income market and the real estate market have been at all-time highs: “Now we’re in Peter Pan territory. ‘You’ve just got to believe’… the stock market will rise more than 7.5 percent per year. You’ve just got to believe that interest rates will stay at zero indefinitely. You’ve just got to believe that real estate prices will continue to rise.”

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Charting The Difference Between The Original And Revised GDP

While the 1.2% Q2 GDP print was so bad that it sent both oil and stocks higher, now that bad news is again good news as it means no Fed rate hikes for the foreseeable future, a key reason for the weakness was the adjustment of historical data as part of the BEA’s annual data revision.

As the BEA announced, “the estimates released today reflect the results of the annual update of the national income and product accounts (NIPAs) in conjunction with the “advance” estimate of GDP for the second quarter of 2016. The update covers the first quarter of 2013 through the first quarter of 2016. For more information, see “Information on the 2016 Annual Update” on BEA’s Web site.”

The revision dragged down all recent GDP prints, going back all the way to Q3 2015, and as a result, over the last 4 quarters real GDP has now increased a paltry 1.2%, confirming that low oil prices were far worse for the economy than economists predicted, driven by the collapse in CapEx spending. The full summary is shown below.

 

With this latest shock, we can now calculate that the US has to growth at a rate of over 4% in the second half to match last year’s 2.6% GDP growth.

Meanwhile, the breakdown of GDP components courtesy of Bloomberg, can be found in the next table.

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Hillary Historically Adequate in DNC Speech, Demonstrators Held in Federal Detention Center, Chelsea Manning Faces Charges for Suicide Try: A.M. Links

  • Hillary Clinton accepted the Democratic presidential nomination and became the first female presidential candidate for a major party with a convention speech described as “unadventurous but commanding” and “superbly written, adequately delivered.” The speech “lacked the poetic sweep of the President Barack Obama’s address Wednesday,” says CNN, “but it was in keeping with someone who presents herself as a practical, dogged, policy-oriented striver who gets knocked down and then gets straight back up.”
  • Around a dozen protesters were arrested in conjunction with the Democratic National Convention in Philadelphia this week. “The police, instead of hauling demonstrators off to jail as they did 16 years ago when Republicans gathered in the city, issued those who crossed the line $50 tickets for disorderly conduct and released them with complimentary bottles of water,” NBC reports. But seven people who crossed a Secret Service fence around the Wells Fargo Center were held in a federal detention center and scheduled to see a judge Thursday. 
  • A Texas police officer who witnessed part of the Sandra Bland traffic stop that led to her imprisonment said the local district attorney’s office wouldn’t allow him to testify to the grand jury; the Waller County District Attorney, Elton Mathis, said this is “fictional.” 
  • Chelsea Manning faces additional charges that could lead to indefinite solitary confinement after trying to commit suicide July 5. 
  • Thursday night’s DNC speeches featured the first openly transgender person, LGBT rights activist Sarah McBride, to speak at a major-party convention.
  • “Donald Trump… let me ask you, ‘Have you even read the United States Constitution?'” asks Khizr Khan, the father of a Muslim soldier killed in Iraq.

Follow us on Facebook and Twitter, and don’t forget to sign up for Reason’s daily updates for more content.

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GDP Shocker: US Economy Grew Only 1.2% In Second Quarter; Q1 Revised To 0.8%

With Wall Street expecting the US economy to grow 2.6% in the second quarter, there were mnay shocked faces moments ago when the Census Bureau reported that not only did the US economy grow a paltry 1.2% in the quarter, but Q1 GDP was slased from an already poor 1.1% to just 0.8%.

For the first quarter of 2016, real GDP is now estimated to have increased 0.8 percent; in the previously published estimates, first-quarter GDP was estimated to have increased 1.1 percent. The  0.3-percentage point downward revision to the percent change in first-quarter real GDP primarily reflected downward revisions to residential fixed investment, to private inventory investment, and to  exports that were partly offset by upward revisions to nonresidential fixed investment, to PCE, to state and local government spending, to imports, and to federal government spending.

Just as bad, strong historical GDP reports such as the 3.9% alleged growth in Q2 2015 which served as the springboard for the Fed’s rate hike rhetoric in mid-2015, was slashed to a far lower 2.6%.

As of this moment, the economy has grown at less than a 2% pace for three straight quarters. Since the recession ended seven years ago, the expansion has failed to achieve the breakout seen in past recoveries. The average annual growth rate during the current business cycle remains the weakest of any expansion since at least 1949.

The reason for the dramatic cuts: historical revisions going back to Q1 2013. From the BEA:

Updated estimates of the national income and product accounts (NIPAs), which are usually made each July, incorporate newly available and more comprehensive source data, as well as improved estimation methodologies. This year, the notable revisions primarily reflect the incorporation of newly available and revised source data. The timespan of the revisions is the first quarter of 2013 through the first  quarter of 2016. The reference year remains 2009.

It now appears that at a time when the US economy was said to be approaching escape velocity for a rate hike, it was in fact contracting. According to the latest data, in Q4 when Yellen announced the Fed’s first rate hike, the growth trend economy was in fact decelerating, growing by only 0.9%, the lowest since Q1 2014.

Some more details:

  • Core PCE 1.7%, far below Q1’s downward revised 2.1%
  • GDP deflator: 2.2%, Exp. 1.8%, and up from 0.5%

From the BEA:

Real gross domestic product increased at an annual rate of 1.2 percent in the second quarter of 2016 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.8 percent (revised).

 

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE) and exports that were partly offset by negative contributions from private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

 

The acceleration in real GDP growth in the second quarter reflected an acceleration in PCE, an upturn in exports, and smaller decreases in nonresidential fixed investment and in federal government spending. These were partly offset by a larger decrease in private inventory investment, and downturns in residential fixed investment and in state and local government spending.

There was some good news in the report: In the second quarter, consumer spending rose strongly. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate, the best gain since late 2014. Outlays on goods advanced 6.8%. Spending on services climbed 3%.

However, nonresidential fixed investment, a measure of business spending, declined at a 2.2% pace, the third straight quarterly drop. Companies spent less on buildings and equipment.

It appears capex matters.

Weak business investment is confirmation that firms don’t have confidence in the global economy. Manufacturers especially have been challenged by a strong dollar, which makes U.S.-made goods more expensive overseas. The energy industry has also been constrained with relatively low oil and natural gas prices curtailing investments in mining and wells.

Firms also paired back inventories sharply. The change in private inventories subtracted 1.16 percentage points from overall growth. That was the category’s fifth-straight decline and the largest drag from inventories in two years.

We will breakdown the revised numbers shortly, but with this latest data in the Fed’s hands it looks like any rate hike hopes for September, or any time soon for that matter, were just crushed.

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Why Social Fragmentation Suits The Powers That Be

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

The Elites have successfully revolted against the political and economic constraints on their wealth and power.

Ours is an Age of Fracture (the 2011 book by Daniel Rodgers) in which "earlier notions of history and society that stressed solidity, collective institutions, and social circumstances gave way to a more individualized human nature that emphasized choice, agency, performance, and desire."

A society that is fragmenting into cultural groups that are themselves fracturing into smaller units of temporary and highly contingent solidarity is ideal for Elites bent on maintaining political and financial control.

A society that has fragmented into a media-fed cultural war of hot-button identity-gender-religious politics is a society that is incapable of resisting concentrations of power and wealth in the hands of the few at the expense of the many.

If we set aside the authentic desire of individuals for equal rights and cultural liberation and examine the political and financial ramifications of social fragmentation, we come face to face with Christopher Lasch's insightful analysis on The Revolt of the Elites and the Betrayal of Democracy (1996 book).

"The new elites, the professional classes in particular, regard the masses with mingled scorn and apprehension…. Middle Americans, as they appear to the makers of educated opinion, are hopelessly shabby, unfashionable, and provincial, ill informed about changes in taste or intellectual trends, addicted to trashy novels of romance and adventure, and stupefied by prolonged exposure to television. They are at once absurd and vaguely menacing."

Though better known for his book on the disastrous consequences of consumerism in an era of economic stagnation, The Culture of Narcissism: American Life in an Age of Diminishing Expectations, Lasch's The Revolt of the Elites and the Betrayal of Democracy is the more politically profound analysis, as it links Elite dominance of the media, higher education and cultural narratives to the erosion of democracy as a functioning institution.

Extreme concentrations of wealth and power are incompatible with democracy, as Elites buy political influence and promote cultural narratives that distract the citizenry with emotionally charged issues. A focus on individual liberation from all constraints precludes an awareness of common economic-political interests beyond the narrow boundaries of fragmenting culturally defined identities.

In a society stripped of broad-based social contracts and narratives that focus on the structural forces dismantling democracy and social mobility, the Elites have a free hand to consolidate their own personal wealth and power and use those tools to further fragment any potential political resistance to their dominance.

The Elites have successfully revolted against the political and economic constraints on their wealth and power, and now the unprivileged, unprotected non-Elites are rebelling in the only way left open to them: voting for anyone who claims to be outside the privileged Elites that dominate our society and economy.

As long as the American public chooses to focus on individual liberation and consumerist expressions of "freedom," the Elites will have a free hand politically and financially.

The Powers That Be excel at claiming they are busy reforming a broken system, even as they co-opt, water down or outlaw any real reform that threatens their concentrations of wealth and power: Why Our Status Quo Failed and Is Beyond Reform.

Precisely what does individual "liberation" mean in a neofeudal society of indebted financial serfs?

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Movie Review: Jason Bourne: New at Reason

BourneIn Jason Bourne, the world’s most misunderstood killing machine returns after a nine-year exile. For those whose memories may have hazed over, the movie offers a collection of what might be called Bourne’s Greatest Hits. There are furious close-quarters smackdowns and hair-raising automotive sprees, and a sniper stalk through a crowded locale that recalls the Waterloo-station knuckle-biter in The Bourne Ultimatum. There’s also a bumpy vehicular ascent of a flight of stone steps that’s rather like the Mini Cooper bit in The Bourne Identity; and a scene in which a clever tech device is slipped into an unsuspecting character’s pocket (another Ultimatumecho). Our man is also still prone to taking time-outs from the rampant hubbub in order to stare soulfully at his battered countenance in bathroom mirrors. It really is like old times, writes Kurt Loder.

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Trump, Clinton, “Ugliest” Election Coming – Gold’s “Summer Doldrums” Prior To Resumption of Bull Market

The Trump and Clinton election is set to be one of the “ugliest” and “messiest” U.S. elections ever, astute gold analyst Frank Holmes warned this week. He believes this is a reason to own gold and will be one of the factors that will see a resumption of gold’s bull market after the summer doldrums which we explore below.

CLEVELAND, OH - JULY 21: Republican presidential candidate Donald Trump delivers a speech during the evening session on the fourth day of the Republican National Convention on July 21, 2016 at the Quicken Loans Arena in Cleveland, Ohio. Republican presidential candidate Donald Trump received the number of votes needed to secure the party's nomination. An estimated 50,000 people are expected in Cleveland, including hundreds of protesters and members of the media. The four-day Republican National Convention kicked off on July 18. (Photo by John Moore/Getty Images)
Republican presidential candidate Donald Trump delivers a speech at the Republican National Convention on July 21, 2016 (Photo by John Moore/Getty Images)

Gold is now in the “summer doldrums” prior to the seasonally stronger period of the Autumn when gold tends to perform best – especially in the month of September (see seasonal chart below). Holmes believes the bull market will resume soon due to the very strong fundamentals including “low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.)” and of course heightened geopolitical risk including in the U.S.

He writes:

“Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).”

GoldCore: Seasonality of Gold and Silver

GoldCore have long pointed out that the summer months frequently see seasonal weakness as has been the case in recent years and since gold became a traded market in 1971. Gold and silver often see periods of weakness in the summer doldrum months of May, June and July.

Gold’s traditional period of strength is from early August into the autumn and early winter. Thus, early August is generally a good time to buy after the seasonal dip.

Next week, we commence August trading and August along with September and November, are some of the best months to own gold.

Late summer, autumn and early New Year are the seasonally strong periods for the gold market due to robust physical demand internationally. This is the case especially in Asia for weddings and festivals and into year end and for Chinese New Year when voracious China stocks up on gold.

Gold’s weakest months since 1975 have been June and July. Buying gold in early August has been a good trade for most of the last 40 years and especially in the last eleven years, averaging a gain of nearly 11% in just six months after the summer low.

Thackray’s 2011 Investor’s Guide notes that the optimal period to own gold bullion is from July 12 to October 9.

Holmes is the CEO and chief investment officer of U.S. Global Investors and is one of the better gold analysts out there. He shares our view regarding the summer being an optimal time to buy gold. Read more here.

Discounted Bullion For Storage (Allocated and Segregated) In London, Zurich and Singapore

London
Gold Bars (1 oz) x 100

Zurich
Gold Bars (1 oz) x 50
Gold Krugerrands (1 oz) x 10
Silver Bar (1051.2 oz Engelhard) x 1
Platinum Eagle  (1 oz) x 1

Singapore
Gold Bars (1 oz) x 50
Gold Eagles (1 oz) x 5
Silver Maples (1 oz) x 455
Silver Eagles (1 oz) x 455
Silver Bars (100 oz) x 15

Call for discounted prices  +353 1 632 5010 (IRL)    +44 (0) 203 086 9200 (UK)    +1 302 635 1160 (US/ Canada)

Gold and Silver Bullion – News and Commentary

Gold up slightly in Asia ahead of BoJ policy review, rate decision (Investing.com)

Gold futures score a 2-week high as Fed inaction fuels bulls (Marketwatch)

Gold inches up, set for monthly rise as markets await BoJ decision (Reuters)

U.S. jobless claims rise; labor market still strong (Reuters)

TD’s $230 Billion Man Goes Maximum Gold as Volatility Mounts (Bloomberg)

7RealRisksBlogBanner

World heading for shortage of physical gold – DRDGold (Mining Weekly)

‘Joe Weisenthal: How Donald Trump changed my mind about gold (Bloomberg)

IMF admits disastrous love affair with euro, apologizes for immolating Greece (Telegraph)

Monetary sledgehammer to nut of Britain’s post Brexit economy? (Telegraph)

Stockman Warns “2008 Was Just Spring-Training For What Comes Next”(Zerohedge)

 

Gold Prices (LBMA AM)

29 July: USD 1,332.50, EUR 1,200.18 & GBP 1,012.03 per ounce
28 July: USD 1,341.30, EUR 1,208.78 & GBP 1,017.64 per ounce
27 July: USD 1,320.80, EUR 1,200.21 & GBP 1,007.77 per ounce
26 July: USD 1,321.25, EUR 1,199.56 & GBP 1,006.40 per ounce
25 July: USD 1,315.00, EUR 1,196.91 & GBP 1,000.32 per ounce
22 July: USD 1,323.20, EUR 1,199.22 & GBP 1,005.10 per ounce
21 July: USD 1,322.00, EUR 1,199.32 & GBP 1,000.75 per ounce

Silver Prices (LBMA)

29 July: USD 20.04, EUR 18.03 & GBP 15.20 per ounce
28 July: USD 20.41, EUR 18.42 & GBP 15.52 per ounce
27 July: USD 19.58, EUR 17.81 & GBP 14.95 per ounce
26 July: USD 19.68, EUR 17.89 & GBP 15.00 per ounce
25 July: USD 19.41, EUR 17.66 & GBP 14.77 per ounce
22 July: USD 19.70, EUR 17.87 & GBP 15.03 per ounce
21 July: USD 19.34, EUR 17.55 & GBP 14.66 per ounce
20 July: USD 19.70, EUR 17.88 & GBP 14.95 per ounce


Recent Market Updates

– Gold Bullion Up 1.6%, Silver Surges 3.7% After Poor U.S. Data and Dovish Fed
– Marc Faber: Invest 25% Of Investment Portfolios In Gold Bullion
– “Could Not Invent A More Bullish Story For Gold Bullion”
– Gold In Bull Market – “Every Reason For It To Continue” – Frisby In Money 
– Is Gold Set To Hit $1,500 Per Ounce?
– Why Italy’s bank crisis could be a ‘ticking time bomb’
– Gold Holds Near Two-Week Low as Risk Appetite Rises on U.S. Data
– IMF Scraps Forecast for Global-Growth Pickup on Brexit Fallout
– Gold, Trump and Rates: Bank That Foresaw Rally Flags $1,500
– Gold Lower After Central Bank’s Surprise Move
– “We Are On the Cusp of an Explosion in the Silver Price”
– Stocks Rally – Is Brexit Systemic Risks Contained?
– Britain has a new prime minister – here’s what that means for you

 

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ExxonMobil Tumbles To 2-Month Lows After Earnings Miss Worst Analyst Expectation

But, but, but the dividend yield, the oil recovery? ExxonMobil is down almost 3% in the pre-market to 2-month lows as it misses earnings expectations drastically (+41c vs 64c exp.. below the lowest expectation of +55c). Production levels also missed expectations as it appears the oil glut has trickled down to motor fuels, dragging refinery margins notably lower.

  • *EXXONMOBIL 2Q EPS 41C, EST. 64C; PRODUCTION MISSES EST.
  • *EXXONMOBIL 2Q PRODUCTION 3.96MBOE/D VS EST. 4.1MBOE/D

The market is not happy…

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Is The BOJ About To Overhaul Its Entire QE Program: Wall Street’s Take On The “Comprehensive Assessment” Clause

As previously reported, the yen soared more than 2.4% in an extremely volatile session, and the Nikkei plunged then soared, completing a stunning 1,000 point move, after BOJ’s stimulus disappointed watchers and failed to match expectations, with just an increase in ETF purchases and a doubling of a dollar-lending program to $24b.

The summary

  • Kuroda expands ETF target purchases to 6t yen, and orders assessment of effectiveness of BOJ policy for Sept. meeting
  • The BOJ maintained policy interest rate at -0.1%
  • USD/JPY just under 2% to 103.30 after falling as low as 102.71. Yield on 10-year JGB jumps 9.5 bps to -0.18%, set for the steepest advance since 2013
  • USD/JPY 3-mo. basis swap climbs 5.6 bps to -65 bps
  • Macro accounts sold USD/JPY after a muted rally following BOJ’s decision, with some clients already expecting BOJ to disappoint beforehand, trader says

For those confused by the unexpected letdown by the BOJ, here is a summary of Wall Street reactions to the central bank’s announcement, courtesy of Bloomberg

Jun Kato (fund manager, Shinkin Asset Management)

  • BOJ’s decision was at the minimum end of what investors were expecting, disappointing them
  • Decision leaves some room for further easing after seeing details of the economic stimulus package by PM Abe
  • USD/JPY will probably see profit-taking and move gradually toward 100

Sim Moh Siong (FX strategist, Bank of Singapore)

  • Outcome of BOJ meeting was a let-down. Onus now on fiscal stimulus to do the “heavy lifting” for the economy
  • Sees 103.40 as a key level for USD/JPY; a close below there today raises the risk of another test of 100 level in 1-2 months

Hideo Suzuki (chief manager of forex & financial products trading, Mitsubishi UFJ Trust and Banking)

  • BOJ refraining from deepening the negative interest rate is a “relief,” though the 2- and 5-year JGBs are seeing selling pressure as the market has priced in cut of 10 bps
  • The decision indicates that there are limited options left for the central bank
  • Yield curve may face bear-flattening pressure

Kit Juckes (global strategist, Societe Generale)

  • This is an opportunity missed
  • “Conditions for a policy move were far more propitious than in January. The message the BOJ is sending is not so much ‘whatever it takes’ as monetary policy’s pretty much played out.”
  • Nothing here to weaken the yen

Nizam Idris (FX and fixed-income strategy head, Macquarie Bank)

  • Asian currencies have been rather moribund lately and BOJ’s decision today isn’t going to change things very much
  • SGD has the highest correlation to JPY among Asian currencies in recent months. Likely to remain case for now

Nicholas Smith (CLSA strategist)

  • Lack of full-fledged monetary policy stimulus by BOJ shows Japan’s economy can’t be fixed by the central bank alone
  • Seems PM Abe’s surprise stimulus announcement was on expectations that BOJ Governor Kuroda may not be able to do much
  • Kuroda has disappointed markets, especially currency, yet again. ETF buying, doubling of U.S. dollar lending is good but way less then what was discounted
  • Abe needs to do more now with central bank chipping in later

* * *

Deutsche Bank’s Makoto Yamashita explains why there is “risk of oBOJ overhauling QE framework” as a potential nevative for JGBs

Risk of BOJ overhauling its monetary easing framework following “comprehensive assessment” is a potential negative for JGBs

The BOJ announced an Enhancement of Monetary Easing on July 29, almost doubling its ETF purchases from JPY3.3 trillion to JPY6 trillion and introducing new “measures to ensure smooth funding in foreign currencies by Japanese firms and financial institutions” by way of a response to “volatile developments (…) in the global financial markets”. However, market hopes for a further lowering of the marginal (Tier 3) policy rate were confounded, and the BOJ also opted to leave the quantitative aspect of its easing framework unchanged. The initial market reaction has seen the JGB curve bear-flatten and the yen strengthen.

The BOJ concluded its statement by saying:

… with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank will conduct a comprehensive assessment of the developments in economic activity and prices under “QQE” and “QQE with a Negative Interest Rate” as well as these policy effects at the next MPM. The Chairman instructed the staff to prepare for deliberations at the next meeting.

Some might interpret the phrase “comprehensive assessment” as a signal that further monetary easing could be forthcoming in September, while others may envisage the commencement of an overhaul of the current monetary policy framework. We are unable to rule out the latter scenario, and see potential for the BOJ to cut the policy rate while shifting to a more flexible target range for JGB purchases with a view to making them more sustainable. Many market participants have already expressed concerns about the negative side effects of BOJ NIRP and doubts as to whether the central bank can continue to increase its JGB holdings by JPY80 trillion per year. That said, it is also quite  possible that the BOJ will simply opt for further easing under the current framework after completing its “comprehensive assessment”. In any case, with QQE+NIRP having catalyzed such a dramatic bull-flattening of the yield curve, uncertainty as to whether the framework will be maintained in its current form could potentially be a negative for the JGB market.

* * *

Finally a comprehensive analysis from Goldman’s Naohiko Baba which also focuses on the BOJ’s “comprehsnive assessment” claue

Increase in ETF purchases designed to support confidence

Governor Kuroda said that heightened uncertainty caused by Brexit and slowdown in emerging economies necessitated action to prevent deterioration in corporate and household confidence. The bank decided to step up ETF purchases in particular because this measure is believed to be the most effective to prop up confidence among the three dimensions of easing. He also noted that there is no issue with respect to price manipulation.

Political pressure denied; instead, synergies with economic policy emphasized

Prime Minister Abe had surprised the markets by announcing economic stimulus just before the MPM and several Cabinet members had also made comments urging monetary easing, but Governor Kuroda denied any impact on BOJ decision-making from political pressure. Instead, he emphasized the potential synergies to be captured through a mix of fiscal and monetary policies. The BOJ left the negative interest rate and JGB purchase program unchanged at the latest MPM, but Governor Kuroda underlined that these measures were playing a major role in preventing a crowding-out effect from fiscal spending.

Adverse side effects of policy tools refuted

Governor Kuroda clearly refuted that there were any adverse side effects from the negative interest rate, and stressed that positive effects were already evident even in the real economy. He struck a softer tone on quantitative expansion via JGB purchases compared with his advocacy of the negative interest rate, noting only that the bank would not underestimate the importance of this policy.

He also continued to fly the flag for the 2% price stability target, underlining that the upcoming comprehensive assessment would be conducted solely from the standpoint of achieving the 2% target at the earliest possible.

Our impressions of the above are as follows.

  • Although Governor Kuroda denied any political pressure, we believe the decision to increase ETF purchases may have been the result of the BOJ seeking to avoid taking no action at all, under the strong demand from the government for a fiscal/monetary policy mix. We think that the BOJ, keenly aware that its remaining options were limited, may actually have preferred to maintain its policy status quo, backed by positive macro factors in the form of postponement of the consumption tax hike and the government’s fiscal stimulus package.
  • We believe some in the market may be harboring expectations for the BOJ to withdraw the negative rate policy or reduce JGB purchases once its comprehensive assessment is complete. Our impression from Governor Kuroda’s press conference is that: (1) the announcement of a comprehensive assessment is essentially a means to keep market expectations alive while buying some time; (2) the BOJ may consider buying other new financial products, but this would likely raise question marks as to the viability of such a policy, given issues with market size/liquidity and selling incentives for financial institutions; and (3) via a process of elimination, we accordingly see ample possibility that the BOJ will at the bare minimum maintain each of its three dimensions of easing, and expand them as it sees fit.
  • With regard to the negative interest rate policy in particular, Governor Kuroda said that the comprehensive assessment would include an examination of how the earnings of financial institutions would be impacted by a recent flattening of the yield curve. How the BOJ interprets the results of its examination based on the latest Apr-Jun financial institutions’ earnings, which will feel the full effects of the negative rate policy, could in our view prompt the BOJ to further advance the policy.
  • We will spend some time to build our views on what the comprehensive assessment means and how its outcome might affect the BOJ’s monetary policy management.

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