29.07 Weekly Viewpoint : Fed, BoJ and ECB: see you in September!

The Fed has left the door open for a hike in the coming months. If the data maintain the positive pace of the last month, the Committee could act as early as September, but preparatory work is needed as the market remains skeptical on a rate hike in 2016…………

Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy 

Intesa Sanpaolo – Research Department For professional investors and advisers only

The BoJ announced a disappointing package this week but left the door open to further increases in monetary stimulus, perhaps as early as September.

In the euro area, latest data on growth and inflation do not indicate an urgent need to increase the monetary stimulus. ECB‘s actions in September remain conditional on new information.

The Fed reopened the door for a rate increase in the near future, given a more optimistic assessment of the macro outlook. The FOMC members believe that “the short-term risks to the economic outlook have declined”. However, the Committee did not provide an explicit guidance on the possible timing and kept all options and conditions open. Once more, the evolution of data and global risks will shape the interest rates path. On the data front, a rather solid series of positive information and some upward surprise accumulated in the past month. If the trend is confirmed, the Committee could move already in September, but it will need some preparatory work as the market remains skeptical on the prospects of a move in 2016. The minutes of the July meeting (due out in 3 weeks) and Yellen speech in Jackson Hole in late August will be key to assess the likelihood of a rate hike in September. Decisions on the timing and size of the future interval for the Fed funds interest rate will depend on the assessment of “actual and perspective economic conditions”, based on the evolution of labor market conditions and inflationary pressures, and in particular on the progress of inflation towards the 2% target. The Committee continues to believe that “economic conditions will evolve in a manner that justifies only very gradual increases in the federal funds target”, while the actual rates should remain “for some time” below long term rates.

The BoJ disappointed expectations of a sizeable increase in monetary stimulus at the July meeting and only delivered: 1) an increase of the ETFs purchase program to 6 tln yen per year (from 3.3 tln with a non-unanimous vote of 7-2), and 2) an in increase measures to facilitate foreign currency funding. The other dimensions of the monetary policy strategy remain unchanged, both in terms of JGB purchases (+80 tln yen per year, with 8-1 vote) and in terms of the policy rate level (-0.1% with a 7-2 vote). The outlook for growth and inflation was revised down modestly, but inflation is still expected at 1.9% in 2018. The statement emphasizes the great uncertainty for the scenario and leaves the door open to an increase in the monetary stimulus already in September. The BoJ Governor requested staff to carry out preparatory work to assess the measures already in place and for further discussion and possibly new decisions at the next meeting. The assessment of monetary policies already in place is justified by several members’ skepticism but it could also be a prelude to a more “revolutionary” monetary policy approach in coordination with the fiscal policy strategy. The government will announce a fiscal stimulus program around 28 tln yen within the next week. The BoJ could perhaps be considering moving to helicopter money?

In the euro area, latest data confirmed a slowdown in GDP growth to 0.3% q/q in the Spring after the 0.6% q/q recorded at year-start and partly inflated by exceptional calendar and weather effects. July business surveys (IFO, PMI, ISTAT and the EU Commission ESI) have remained at levels consistent with euro area GDP growth in the 0.3%/0.4% q/q in the summer and did not indicate a significant impact on morale of the British vote so far. Meanwhile, euro area inflation has surprised on the upside on pressures from domestic prices. If the ECB were to decide today it is likely that would opt to extend the wait and see mode. The announcement of fresh stimulus in September remains conditional on the evolution of data and financial conditions in the next month. For now there is no sense of urgency.

Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld.ch