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Market Recap – The Fed and Bank of Japan

Market Digest – Week Ending 9/23/16

Highly anticipated announcements from the Fed and Bank of Japan failed to include dramatic policy, but were well received by markets.The Fed held interest rates steady but strongly hinted at a December hike. Three members dissented in favor of a hike, which is significant. The Bank of Japan said it intends to keep the 10 year note near zero but will let longer maturity bond yields rise. This was considered bullish for Japanese banks who are struggling with a flat yield curve. In Washington, lawmakers grilled Wells Fargo CEO John Stumpf regarding millions of accounts which may have been opened without full customer consent. The incident may bring about fresh scrutiny on major financial services companies.

Weekly Returns:

S&P 500: 2,165 (+1.2%)
FTSE All-World ex-US: (+3.0%)
US 10 Year Treasury Yield: 1.62% (-0.07%)
Gold: $1,337 (+2.1%)
USD/EUR: $1.123 (+0.6%)

Major Events:
• Monday – The board of Illinois’ defined contribution plans terminated all active mutual fund managers in favor of passive index investments.
• Monday – Tesla’s bid for SolarCity was hit by shareholder lawsuits which may delay the deal.
• Tuesday – Microsoft announced a $40 billion stock buyback and raised its dividend by 8%.
• Wednesday – The US agreed to allow Boeing and Airbus to sell airliners to Iran.
• Wednesday – The Fed left interest rates unchanged at its September meeting, but hinted of a likely increase in December.
• Friday – Oil prices fell on skepticism major producers will be able to agree of supply cuts at next week’s meeting in Algeria.
• Friday – Facebook acknowledged it had been reporting inflated numbers on how long users watched ad videos due to a calculation methodology.
• Friday – Yahoo said hackers broke into its network in 2014 and stole personal data on over 500 million users.
• Friday – Twitter shares rose 21% on talk of a possible acquisition by Salesforce or Alphabet.

Our take:

Recent market jitters stemmed from fears that central bank stimulus measures are losing their potency and/or the banks are losing their desire to conduct more unorthodox policy. That was tested this week as the Fed and Bank of Japan each made announcements. Neither proved exciting or bold, but both remain generally accommodative, and markets reacted positively.

The Bank of Japan’s approach was more interesting. They intend to keep their 10 year government bond near zero yield and let the long end go higher. This will help their financial institutions make money and encourage them to yield. Historically, the shape of the yield curve has been a very powerful predictor of recession. Lately it has gotten less attention than the sheer brute force of ultra-low rates, but it probably makes sense to pay attention to the shape as well.

There are a million opinions on what central banks should do and how effective their policies have been. We don’t have a desire to add one more. But in the meantime we note that whatever they are doing continues to drive asset prices higher. That won’t last forever, but it may last a lot longer than many people expect.

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