Macro Commentary
Boo! The US Fed spooked markets a bit this week when the minutes from their latest meeting suggested that perhaps June is on the table for the next Fed hike. We mentioned in past weekly write-ups that it seemed the market had reached near consensus about the Fed being very slow to take action next. Almost by default, when a view becomes overly consensus it becomes wrong. Janet took advantage of the complacency to wake up the bond market. Treasury yields on the long-end (10yr) and short-end (2yr) increased 0.13% for the week. The S&P 500 ended marginally higher for the week, though it was off from its high on Monday. The US Dollar (as measured by the trade-weighted index DXY) continued its rise for the week and is now up almost 3% from its recent low earlier this month. As you might expect with USD strength and rising rates, the recent market darling gold fell a little less than 2% on the week. So now the chatter is up about how strong the employment and inflation data needs to be to invoke action. Or, like a ghost story, will the market end thinking it saw something but in the end it was really nothing?
Meanwhile, we saw something out of Japan. In their release of first quarter GDP growth, they beat expectations at +1.7% quarter-over-quarter annualized. This performance was boosted by a couple of components, but most notably government spending. The Japanese economy needs a boost in the arm from something other than monetary policy which looks to have run its course. The market has stated strongly they think that negative interest rates are a bad idea in Japan as the currency quickly strengthened and unwound a lot of the work that monetary policy had taken time to do. We are of the opinion that policy makers’ three arrows strategy (monetary, fiscal, and reform) has really been a flash (monetary), a dud (fiscal), and a bomb (reform). The trick now is whether Prime Minister Abe moves forward with the planned VAT tax in April 2017. We have seen the movie before when he last raised the VAT tax despite a weak economy at the time. The impact is that a lot of consumption is pulled forward and then a vacuum is left after. Chances are, we see that movie again.