by Bill O’Grady and Kaisa Stucke
[Posted: 9:30 AM EDT] Week of meetings: the Federal Reserve, BOJ, BOE and SNB all meet this week. None are expected to change policy, although if one might, the BOJ would be the most likely. The JPY has been on a tear and the Abe government would like to reverse that trend. About the only tool available to the BOJ would be to increase the amount of QE, which might happen. Although the best tool for the BOJ would be the expansion of its balance sheet by purchasing U.S. Treasuries, this would be seen as a hostile currency event, making it unlikely, at least for now.
Of course, the big issue is the Brexit vote, which will be held on June 23. Polls are all over the place, but we note that the PredictIt betting market puts the odds of leaving at 42%. Although the leave odds have been rising, they are still comfortably under 50%. We suspect that the race may tighten a bit from here but, in general, most separation votes (Scotland, Quebec) end up failing and we suspect this one will as well. For us, the Brexit vote is very useful because it reflects the nationalism fueling the Trump campaign. If the U.K. votes to exit, it may show that the cosmopolitan position of the political elites in Europe and the U.S. is eroding. If the betting line is correct, we may be setting up for a decent rally in the GBP and risk assets in general.
On the topic of the Fed, we don’t expect any rate movement this week. To trigger a July hike, the June employment data will have to show that the May numbers were an anomaly and labor market conditions aren’t deteriorating. If the July data are not all that robust, the next hike will be pushed into year’s end. Yes, the Fed can raise rates in an election year but it raises political heat on the committee when it does so and this election cycle will be so divisive that we doubt the Fed will have any desire to inject itself into that turmoil.
China released a series of data over the weekend. In general, most of the numbers came in either near or a bit below forecast, suggesting a degree of stabilization in China. However, one number did come in surprisingly weak—foreign direct investment. Foreign direct investment is when a foreigner either buys or builds something in a nation, as compared to portfolio investment, which is the purchase of securities by a foreigner. The drop may be simply one month’s issue but losing foreign direct investment may be a sign that foreigners are becoming less comfortable with the social and political stability of China.