Daily Comment (March 4, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EST] BREAKING NEWS: Former Brazilian President Lula has been detained for questioning in an investigation of corruption. So far, he has not been arrested. Interestingly enough, it’s “risk on” with Brazilian assets, the BRL is advancing and Brazilian equities are rallying. This reaction may be due to relief that the probe could be coming to an end, or the news may have led to massive short covering. If Brazilian risk assets hold their gains in the coming days, it would suggest that the worst may be over for Brazil.

Due to our coverage of the employment data, we will keep our opening comments short. There wasn’t a lot of other news overnight. Chinese officials are gathering to set economic policy for the next five years. We expect a modestly lower forecast for GDP and officials are signaling a slowdown in defense spending. We do note the government intervened in equity markets today before the meeting officially starts tomorrow.

Although BOJ head Kuroda indicated that the Japanese central bank is not planning additional dips into negative rate territory, PM Abe has bolstered the case for further monetary stimulus by replacing Sayuri Sharai, a member of the BOJ policy board whose term ends this month, with Makoto Sakurai, described as “an obscure 70-year-old economist.” Ms. Sharai voted against last month’s surprise stimulus whereas Mr. Sakurai has a reputation for being dovish. Essentially, Abe is packing the BOJ with doves and sending a clear signal that the government wants the BOJ to do more. Abe has picked three doves with his selections and assuming Deputy Governor Hiroshi Nakaso continues to vote in line with Governor Kuroda, the head of the BOJ can act with virtual impunity to implement any policy he chooses. Probably the only restraint on policy is Kuroda himself. We look for the BOJ to lean against the recent strength of the JPY, but we have doubts it will have much success in stemming the rally.

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