Though the picture continues to be pieced together little by little, it will be some time before policymakers – and not just those in the UK – know what they are dealing with in the post-Brexit world. Of course, there is a sense of calm across markets that many had not anticipated, but then, this can be largely attributed to central banks which have leapt to the rescue with assurances about financial stability and easy money. Select officials from the Federal Reserve maintain they are sticking to vestiges of the ‘plan’ with which they started the year: San Francisco Fed President John Williams informed the Washington Post this week that even a “gradual” approach in raising interest rates should incorporate a hike this year. But then, the market remains no more convinced of this than it has since early June, when the weak May non-farm payrolls threw a spanner in the Fed’s works. We shall see of course, but for the moment, the CME FedWatch suggests a 44.5% probability of a 25bp hike in December, a figure that is clearly below the 50% probability that, rightly or wrongly, is taken as an unofficial threshold for the Fed to consider adjusting its policy settings.
What is good for the Fed is good for other central banks although this is a moot point given that no other major central bank was on the cusp of following the Fed’s footsteps on the path to policy normalisation – far from it in fact: if anything, there has been an intensifying belief that monetary policy will remain lower for longer. Accordingly, we are in an environment where bond yields are plumbing new depths across the developed world driven in part by a prevalent debate about ‘helicopter money’. And in fact, as we have noted, the publication of some positive NFP numbers at the start of both July and August has done relatively little to dent the uptrends in gold and silver that were set in train by the May jobs figures. At such times, any investor’s strategy is likely to entail the simple quest for a more tangible ‘store of value’ – to wit, commodity currencies and the produce that underpin them.
In terms of apposite policy positions in the current environment, the biggest question mark continues to hang over Japan. Certainly, any strong print from Monday’s Q2 GDP data may lift hopes that Abenomics, which came off the rails following the sale tax hike in April 2014, could yet get back on track (although longer than usual Golden Week holidays and the leap year effect will complicate market interpretation). But then, expectations of a self-sustaining recovery are such that we have little doubt investors will look to the BoJ and MOF for a continually pro-active approach (the government’s contribution to growth in Q2 will be a focus point). Recent, fairly appreciable fiscal and monetary measures were met with some disappointment in the marketplace, but then, Abenomics, or the requisite scale of stimulus to jolt Japan back to life may have only materialized after doubts about policy initiatives became too deeply engrained on the nation’s psyche. If so, then it is hard to know what the suitable policy response should be. The need to avoid fiscal cliffs and Shinzo Abe’s quest for a positive legacy (read: pressure on the BoJ) should ensure that the latest measures will not be the last; but what hope can further measures possibly deliver that Abenomics – widely heralded as the last throw of the dice – did not?