Goldman Sachs after the Fed and BOJ
The FOMC kept the funds rate unchanged, while signalling a near-term hike. Our US economists think the statement signals a clear bias to tighten in the relatively near future. The statement indicated that "the case for an increase in the federal funds rate has strengthened", and noted that risks to the outlook were now "roughly balanced". The decision also appears to have been a close call, with three committee members dissenting, the first time in five years that three voters have dissented in the same direction. The Summary of Economic Projections was a bit more dovish, showing one hike this year and two hikes next year, down from two and three, respectively.
The bigger surprise was the BoJ's decision to shift from quantity targets to price targets. The Yen, rates and equity indices all rallied in response. We expect the rally in the Yen to reverse, as this policy shift should help address market concerns about the scarcity of JGBs, thus increasing the sustainability and credibility of continued monetary accommodation. The "inflation overshoot" language is also a fundamentally dovish shift, essentially setting up QQE ad infinitum.
Our Rates team have left their end-2016 bond yield forecasts unchanged at 2% for 10-year Treasuries, 5bp for JGBs, 30bp for German Bunds and 1.25% for UK Gilts while our FX team sees considerable upside for USD/JPY in the coming days.
The BoJ is committing itself to achieve an inflation overshoot, i.e. pursuing a policy of negative real rates through bond purchases until inflation is above the two percent target. While the switch to yield curve targeting is arguably neutral, given that it aims to keep the 10-year yield around current levels, the commitment to aim for an inflation overshoot is a meaningful dovish change. Much as in Oct. 2014 when QQE was upsized, price action has been lagging. But we expect USD/JPY to move higher on these steps and move to 108 by year-end, our 3-month forecast for this cross.