A Simple Life Into Month End – FOMC & BoJ Special

Month end on Thursday, 31st October and we have 2 big central bank meetings that are poised to be non events.


BOJ rate decision day and a glimpse into 2014 monetary base targets.

From experience, the market always expects too much of the BoJ and nothing they ever do is good enough which has become market expectation and as such, the past 3 BoJ policy decisions since Aug have resulted in higher USDJPY on the days after Abe’s disappointing arrows in June and July.

jpy and boj

The Nikkei just dipped into bearish territory, dancing precariously on the edge of a thin Ichimoku cloud. Verdict : BoJ saves the day.


The FOMC a day before on the 30th with Janet Yellen, still the Vice Chair. We are heading into the 5th year this December of unprecedented unconventional monetary policy

The market consensus is for the Fed to start tapering in 2Q14 which gives us another 6 months. Yellen will not be sworn in till Jan and we have another shutdown looming in a couple of months. This reeks of a certain complacency.

The US govt and Fed’s credibility have taken a beating in the past weeks and forward guidance or not, the Fed certainly cannot let themselves be read like an open book and held like a hostage at gunpoint by the S&P 500 near its historic highs even if economic numbers are starting to look wan.

Ben Bernanke, Chairman U.S. Federal Reserve
Janet Yellen, Vice Chair of the Federal Reserve Board of Governors
Chicago: Charles Evans
Boston: Eric Rosengren
New York: William Dudley
Daniel Tarullo, Federal Reserve Governor
Sarah Bloom Raskin, Federal Reserve Governor (Moderate Dove)
Elizabeth Duke, Federal Reserve Governor (Leaning Dove)
Jeremy Stein, Federal Reserve Governor (Leaning Dove)
Saint Louis: James Bullard (Hawk)
Kansas City: Esther George (Hawk)
Jerome Powell, Federal Reserve Governor (Leaning Hawk)

Even the hawks have thrown in the towel with Bullard last caught saying that the shutdown makes tapering less likely in October. Can we still afford to be skeptical ?

Buffet says that the FED is the market’s largest hedge fund and with all eyes on Yellen who was conceivably second or third choice, she could pull a surprise or two.

1. Yellen will be tough on banks http://www.reuters.com/article/2013/10/10/us-usa-fed-banks-idUSBRE9981A320131010?feedType=RSS&feedName=businessNews

2. She is not as dovish as we would like to imagine especially when 2007 transcripts show she called the private equity bubble with a vengeance. http://www.businessinsider.com/yellen-warns-of-private-equity-bubble-2013-1


3. She favours employment over inflation having done extensive research into the topic of long term unemployment (but nothing on quality of job creation).

More reading : http://www.csmonitor.com/Business/2013/1009/Janet-Yellen-Where-she-stands-on-five-key-economic-policy-issues/Housing

I wish I could say I am expecting a surprise this Wednesday but I cannot unless it is to come from extreme market positioning into month end.

Eurozone Banking

The IMF has recently warned that the Basel III requirements could clash with new bail-in rules and Draghi has called to question rule on the bail-in of junior bondholders before applying for state aid.

Coupled with the latest ECB health checks on Eurozone banks which I understand will only be announced in a year’s time, US banks still have the upper hand at the moment as the euro area moves to a stronger union (single regulator) and stronger financial systems.


EUR has broken to a new 23 month high which is extraordinary and looks sustainable to me.

Positioning And Trades

Markets are on a risk on mode with just about everything rallying against the USD and stocks in a world of their own.

Rebalancing surveys for the month end expect to see the current momentum sustained ie. rally against the USD despite the USD weakening for the past fortnight.

Main question for me – can it be that simple ?

Yet animal spirits have been pretty powerful from experience so lets go in for the ride.