BOJ Adds a Jolt to Fed Day

September 21, 2016 Wall Street Journal

By: Ben Eisen


Twin central bank meetings dominated global markets on Wednesday, as the Bank of Japan introduced a new monetary policy framework just hours before the Federal Reserve was set to announce its latest interest rate decision.

Stocks rose, the yen initially retreated and long-dated government bond yields rallied around the world immediately after the Japanese central bank affirmed its commitment to aggressive easing at the conclusion of its monetary policy review.

The BOJ left its main interest rates unchanged, but introduced an interest-rate target for 10-year government bonds, committing to keep them around zero, and said it would continue quantitative easing until inflation “exceeds” 2%.

Stock markets largely rallied on the news, further buoyed by a 2% jump in the oil price. Futures pointed to a 0.4% opening gain for the S&P 500, after the Stoxx Europe 600 rose 1% midday and Japan’s Nikkei Stock Average closed 1.9% higher.

Financial shares led stock markets higher amid relief the Bank of Japan didn’t cut interest rates further into negative territory. A steeper yield curve was also expected to boost lenders whose net interest margins depend on the difference between the short-term rates at which they borrow and the long-term rates at which they lend.

Japan’s TOPIX banks sector jumped around 7%, while shares of banks and insurance companies rose around 2% in Europe.


The Bank of Japan put U.S. markets on notice overnight. Now the Federal Reserve will get its chance to jolt stock and bond prices.

The Japanese central bank left its negative policy rate unchanged and instead tweaked monetary policy by saying it will target long-term rates. While U.S. Treasury yields initially spiked after the news, they’re now little changed on the day. S&P 500 futures suggest the market will open 0.37% higher.

Interestingly, a stock market move of that size would be just about average for Fed day, which has been a reliable market mover since at least 1995. The S&P 500 averaged a 0.34% gain on days when the central bank makes a policy announcement, versus a 0.03% daily move when the Fed isn’t meeting, according to Bespoke Investment Group. In other words, Fed days account for only 3% of all trading days, but 35% of all market gains, according to the research firm.

But that doesn’t mean history will repeat. September, after all, is the fourth most volatile Fed day with an absolute move of 1%, Bespoke found.

Few expect the Fed to deliver any major policy changes, but they could signal they want to lift rates before the end of the year. Futures markets suggest an 15% chance of a rate increase in September but a 64% chance of an increase by the end of the year, according to CME Group.

Hawkish signals could show up, for example, in the way the statement assesses the risks to their forecast. Or, if officials revise down the pace of expected interest rate hikes, the meeting could be interpreted as dovish.

Already, options markets suggest investors are setting up for a high degree of volatility going into the meeting, according to Karl Schamotta, chief market strategist at Cambridge Global Payments.

“I think they are going to clearly signal that the monetary punchbowl is nearly empty and the guests should go home,” he said.

Read the full story here: