Minutes of the June 2024 Monetary Policy Meeting

Summary:

The employment and income situation had improved moderately. Inflation expectations had risen moderately.Japan's economy had recovered moderately, although some weakness had been seen in part.

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, June 13, 2024, and on Friday, June 14.The main contents of the monetary policy meeting minutes are as follows:

Labor Market and Wages:

The employment and income situation had improved moderately. Regarding the number of employed persons, that of regular employees had been on a moderate uptrend, albeit with fluctuations, mainly in the information and communications industry, which had been facing severe labor shortages. The number of non-regular employees had also been on a moderate uptrend, albeit with fluctuations. Nominal wages per employee had increased moderately, reflecting the recovery in economic activity and the results of the 2023 annual spring labor-management wage negotiations. With regard to the outlook, nominal employee income was likely to continue to see a clear increase in reflection of an acceleration in nominal wage growth.

Economy and Economic Growth:

Japan's economy had recovered moderately, although some weakness had been seen in part. Regarding the outlook, it was likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensified against the background of factors such as accommodative financial conditions.

Exports had been more or less flat. Regarding the outlook, they were projected to continue showing similar developments for the time being. Thereafter, as overseas economies continued to grow moderately, exports were projected to return to an uptrend, mainly due to a pick-up in global demand for IT-related goods.

Inflation:

The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) had been in the range of 2.0-2.5 percent recently, as services prices continued to rise moderately, reflecting factors such as wage increases, although the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices had waned. Inflation expectations had risen moderately.

Monetary Policy:

The Bank had been conducting money market operations in accordance with the guideline for money market operations decided at the previous meeting on April 25 and 26, 2024... Meanwhile, regarding purchases of Japanese government bonds (JGBs), CP, and corporate bonds, the Bank conducted the purchases in accordance with the decisions made at the March 2024 meeting.

Monetary Policy Meeting Minutes

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Kevin Du

Cryptocurrency

"Never sell your bitcoin," Donald Trump told a cheering crowd at a crypto convention in Nashville, Tennessee in late July.

The Republican presidential candidate's speech was the latest overture in his effort to court crypto-focused voters ahead of November's election and offered a bevy of campaign promises, including a plan for a state bitcoin reserve.

"If elected, it will be the policy of my administration to keep 100% of all the bitcoin the U.S. government currently holds or acquires into the future," Trump said, adding the funds would serve as the "core of the strategic national bitcoin stockpile."

Indeed, Trump isn't the only one with such a proposal. U.S. Senator Cynthia Lummis has introduced legislation that would see the U.S. government purchase one million bitcoin, around 5% of total supply, while independent candidate Robert F Kennedy Jr has suggested a government stockpile of four million bitcoin.

A strategic reserve would be one use for the massive amount of bitcoin held by the U.S. government. The jury's out on what it would be used for, whether it's feasible, or if it's even welcome for the broader crypto market, though.

The U.S. government holds a bumper cache of crypto: around $11.1 billion worth which includes 203,239 bitcoin tokens, according to data firm Arkham Intelligence which said the pile came from criminal seizures, including from online marketplace Silk Road, which was shut down in 2013.

At current levels, the U.S. holds about 1% of overall global bitcoin supply - which stands at about 19.7 million tokens, according to Blockchain.com. Bitcoin's total supply is capped at 21 million coins.

To compare against big non-state investors, Michael Saylor's Microstrategy holds about 226,500 bitcoin tokens, as per second-quarter results. BlackRock's iShares Bitcoin Trust and Grayscale Bitcoin Trust hold 344,070 and 240,140 tokens respectively, according to data site BitcoinTreasuries.

A government bitcoin stockpile could shore up bitcoin's price.

"It would have a positive impact on price. It would have to because we've never had such a limited supply commodity, albeit digital, assume a new state of a reserve asset," said Mark Connors, head of global macro at Onramp Bitcoin.

Yet such a reserve also means fewer tokens for crypto investors to trade with and could leave them exposed if the government ever sold part of its reserves.

"RFK talked about having 19% of bitcoin, the same amount of the gold supply - I can't imagine a single bitcoiner would be happy about that," Connors added.

Governments besides the United States also boast bumper hoards of bitcoin, with BitcoinTreasuries reporting China is the second largest government holder, with 190,000 coins. Trump's Bitcoin Stockpile Plan Stirs Debate_1

Trump's Bitcoin Stockpile Plan Stirs Debate_1

'A lot to figure out'

While the prospect of a national bitcoin reserve is uncertain, crypto watchers are nonetheless pondering what form it could take.

Connors suggested the Federal Reserve could manage the reserves for the Treasury Department, as it does with gold. On the other hand, the stockpile could be more akin to the Strategic Petroleum Reserve, where both the president and Congress have varying amounts of control, according to Frank Kelly, senior political strategist at asset manager DWS Group.

"There's a lot to parse and figure out there," Kelly said.

There's also an irony that jars with many true bitcoin believers: the digital asset intended to be decentralized and free of government control becoming part of a state reserve.

Regardless of what happens with a bitcoin stockpile, many market players are happy enough to see crypto becoming a significant campaign talking point.

"There's a general view in the industry that both parties are paying much more attention to digital assets," said Raoul Mewawalla, CEO of Mawson Infrastructure Group which operates data centers for bitcoin mining.

"The expectation is that will continue post November."

Source: Reuters

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ING

Economic

ISM services index suggest no immediate recession threat

The US ISM non-manufacturing index has risen to 51.4 from 48.8, above the 51.0 consensus. New orders jumped to 52.4 from 47.3 while employment is back in growth territory at 51.1 from 46.1. The activity/production index is particularly strong at 54.5 versus 49.6 while prices paid rose to 57.0 from 56.3. As such this doesn't fit the impending recession narrative that has gripped markets over the past couple of trading sessions and should go some way to diminishing the pricing of an inter-meeting rate cut. As the chart below shows, the output metrics imply a slowing, but not collapsing economy.

ISM output series point to weaker YoY% GDP growth ahead

Fed to cut rates more swiftly, but market pricing looks aggressive right now

In the wake of the ISM report we have the market pricing 54bp of rate cuts by the September FOMC meeting, 92bp by November and 123bp by December. This had earlier been up above 60bp priced for September, implying a high chance of an inter-meeting rate cut, with 105bp priced for November and 138bp priced by December so we have certainly seen some calm return. Chicago Fed President Austan Goolsbee, who is viewed as the most dovish FOMC member yet voted for no change last week, didn't suggest any urgency to cut rates when he spoke on television earlier this morning and this ISM report also suggests no need for panic action.

After all the economy grew at nearly an annualised 3% rate in the second quarter, is still adding jobs in July and inflation remains above target target. There is the argument that momentum is waning and the Fed is switching from a focus on inflation to a focus on jobs, but unless there is financial system stress we don't see the need for impending action and the Fed can indeed wait and watch the data flow before deciding what to do at the Septmber FOMC meeting. Equities are down heavily again today, but are still up year to date and the Fed will be strongly opposed to be seen to be bailing out risk takers if there isn’t the pressing economic or financial system need.

We have long been on the more dovish end of forecasters, expecting the Fed to cut rates more quickly and aggressively than the market. Our most recent change in the spring was to scale back our view to a mere 75bp of cuts in the second half of the year given economic resilience, which appears to have been the wrong thing to do. Instead, we can see the Fed acquiescing to some of the market worries and implementing at least one, perhaps two 50bp moves to get them on track to moving policy to a more neutral footing quickly. At the moment we are leaning in the direction of a 50bp in September followed by a series of 25bp moves that would get us back to a Fed funds rate of around 3% by next summer – broadly in line with the Fed's "neutral" viewpoint. We will be releasing new updated global macro forecasts later this week.

To stay updated on all economic events of today, please check out our Economic calendar

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FED

Remarks of Officials

Two Fed officials commented on a recent jobs report in interviews on Monday, August 5 that the July employment data did not show a recession in the economy. Meanwhile, the Fed will pay close attention to data going forward. The Fed has been well prepared and will adjust policy according to the state of the economy and data.

Fed's Goolsbee:

July jobs report was only a number, and the Fed's duty is not to react to a month of employment data. I do think it's important to be forward-looking when making economic decisions. Jobs numbers came in weaker than expected, but not looking yet like a recession, and we should be cautious about the jobs report conclusion.

The Fed's policy is restrictive now, a position it should only be in if the economy looks like it is overheating. But if we are not overheating, we should not be tightening or restrictive in real terms. Inflation has fallen sharply, and employment is relatively good. We should be forward-looking and adjust to the overall situation. If any part of the overall situation deteriorates, the Fed will fix it.

We can wait for more data before the September meeting. If the data signals a slowdown in economic growth for a long period, we should react to this.

Fed's Daly:

The underlying data in the July jobs report was somewhat confidence-boosting, suggesting that we are slowing, but not in a meltdown. I don't see labor market weakness intensifying now. Reacting to just one data point would almost always be wrong. None of the labor market indicators I look at are flashing red at present, but I'm monitoring carefully.

Companies are not laying off workers. They are just slowing down hiring, and there are no signs of mass layoffs yet, which would be an early warning sign. We will take it extremely seriously and must not let the job market slow down to the point where it leads to an economic downturn.

The Fed can gain more confidence from other data besides the jobs report. The economy has been slowing over the past few months, and the labor market is recovering, indicating that monetary policy is working as expected. There is a risk of premature action to normalize interest rates and the Fed is open to a rate cut at the upcoming September meeting.

As more information becomes available, the Fed is ready to take action, and policy adjustments will be made in the coming quarters according to economic conditions. However, when and how much will be adjusted will depend on the data.

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Alex

Economic

Stocks

A meltdown in world equity markets in recent days is more reflective of a wind-down of carry trades used by investors to juice their bets than a hard and fast shift in the U.S. economic outlook, analysts say.

While Friday's weaker-than-expected U.S. jobs data was the catalyst for the market sell-off, with Japan's blue-chip Nikkei index on Monday suffering its biggest one-day rout since the 1987 Black Monday selloff, the employment report alone wasn't weak enough to be the main driver of such violent moves, they added.

Instead, the answer likely lies in a further sharp position unwind of carry trades, where investors have borrowed money from economies with low interest rates such as Japan or Switzerland, to fund investments in higher-yielding assets elsewhere.

They have been caught out as the Japanese yen has rallied by more than 11% against the dollar from 38-year lows hit just a month ago.

"In our assessment a lot of this (market sell-off) has been down to position capitulation as a number of macro funds have been caught the wrong way around on a trade, and stops have been triggered, initially starting with FX and the Japanese yen," said Mark Dowding, chief investment officer at BlueBay Asset Management, referring to pre-determined levels that trigger buying or selling.

"We don't see evidence in data that's saying we're looking at a hard landing," he added.

One Asian-based investor, who asked not to be identified, said that some of the biggest systematic hedge funds that trade in and out of stocks based on signals from algorithms, started selling equities when last week's surprise Bank of Japan rate hike sparked expectations for further tightening.

While exact numbers and the specific positioning shifts underlying the moves are hard to come by, analysts suspected that crowded positions in U.S. tech stocks, funded by carry trades, explain why they are suffering the most.

By 1423 GMT on Monday, the tech-heavy U.S. Nasdaq stock index was down over 8% so far in August, versus 6% for the broader S&P index.

Carry trades, boosted by years of ultra-easy Japanese monetary policy, prompted a boom in cross-border yen borrowing to fund trades elsewhere, ING said.

Bank for International Settlements data suggests cross-border yen borrowing has increased by $742 billion since the end of 2021, the bank noted.

"It's a yen-funded carry unwind and Japanese stock unwind," said Tim Graf, head of macro strategy for Europe at State Street Global Markets. "Our positioning metrics show investors overweight Japanese stocks. They were underweight yen. They're no longer underweight yen."

Speculators have cut bearish bets against the yen aggressively in recent weeks, bringing the net short position in the yen to $6.01 billion, its smallest since January, down from April's seven-year high of $14.526 billion, most recent weekly data from the U.S. markets regulator shows.

"You can't unwind the biggest carry trade the world has ever seen without breaking a few heads," said Societe Generale's chief currency strategist Kit Juckes.

Hedge Fund Pain

As hedge funds typically fund their bets through borrowing, their adjustments are exacerbating market moves, some investors said.

Banks give hedge funds leverage, essentially a loan to fund investing, which amplifies hedge fund returns but can also increase losses.

A note sent by Goldman Sachs to clients on Friday showed that gross leverage from Goldman Sachs prime brokerage, or the total amount that hedge funds have borrowed, declined in June and July, but still sits near five-year highs.

Last week marked the third consecutive week that hedge funds' bets that stocks will fall outpaced the addition of bets that they will rise, Goldman said in a separate note, saying one long position was added for every 3.3 short bets.

It added on Monday that as of the Asian close, Japan-focused hedge funds were down 7.6% in the past three trading sessions.

While macro funds may have been involved in currency trades relating to the yen, many stock-trading hedge funds, because of a June short selling ban in South Korea and regulatory headwinds against the same practice in China, had moved focus to Japan, investors said.

Analysts added there was room for further short-term pain as positions are unwound, but the market shake-up would be limited.

Traders now expect over 120 basis points of U.S. rate cuts by the end of the year, versus around 50 bps at the start of last week, and fully price in a hefty 50 bps September rate cut.

Such expectations may be overdone if upcoming data suggests the U.S. economy is likely to avoid a hard landing.

"We think it's really wrong to start fundamentally reassessing your view on the outlook here. Doing so is simply fitting a narrative to match the price action," said BlueBay's Dowding.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Economic

Commodity

Commodities from copper and gold to crude oil tumbled, while paring back some of the losses, as global economic malaise dimmed the outlook for industrial demand and sent traders rushing to cash out of profitable positions.

Copper settled down 1.8 per cent on the London Metal Exchange after slumping as much as 3.8 per cent, with aluminium also falling. Benchmark oil futures dropped about 0.5 per cent, after trading down 2.3 per cent at the lowest level in seven months.

Raw material markets were dragged into a massive sell-off on Monday as investors reacted to US data signalling a deterioration in the world's biggest economy and speculation that Federal Reserve's long-awaited pivot to more supportive monetary policy may come too late to prevent a major downturn in the US and beyond.

The selloff tapered after fresh data showed the US services sector expanded in July.

"It's just widespread panic," said Phil Streible, chief market strategist at Blue Line Futures. "We've had record amounts of cash sitting on the sidelines," with "bargain hungers" taking advantage of lower prices, he added.

For commodities linked to industrial cycles, such as copper, a hard-landing scenario would put fresh pressure on bulls who made bold bets on a surge in global demand earlier this year.

Prices have already retreated about 20 per cent from a peak seen in May as investors bailed out, and Monday's fresh bout of selling took prices to the lowest in nearly four months. Mounting worries about economic growth across commodities markets have prompted hedge funds to turn predominantly bearish on a basket of key contracts for the first time since 2016.

"Markets like oil and copper appear to be pricing in a recession, which equity and bond markets are doing as well," said Matthew Schwab, head of investor solutions at Quantix Commodities, a Connecticut-based hedge fund.

Still, some agriculture markets, such as soybeans and cocoa, rose on Monday.

Gold — which is up more than 15 per cent this year and would typically benefit during bouts of economic weakness — was also hit hard earlier as investors closed out trades to cover losses elsewhere. That's a common consequence during large-scale selloffs, and analysts said that the precious metal's status as a haven should soon reassert itself if the turmoil continues.

A slump in the dollar could also boost gold and other commodities priced in the currency by expanding purchasing power for consumers in key markets like China.

"Commodities are getting hit by this risk-off event," said Ryan Fitzmaurice, a senior commodities strategist at Marex. "But looking out on the horizon, a weaker US dollar and rate cuts could provide support for the asset class."

If there is more negative US economic data and the Fed is forced to make significant interest rate cuts, that's bullish for gold.

Conversely, robust economic signals may delay the pace of any easing by central bankers, which would weigh on the yellow metal, according to Marcus Garvey, head of commodities strategy at Macquarie.

"I guess financial markets like to fix problems in advance by trashing prices on commodities to lessen inflation," said Scott Shelton, an energy specialist at TP ICAP Group.

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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ING

Commodity

Energy - Libya supply disruption

Oil prices moved lower yesterday. ICE Brent traded to an intraday low of US$75.05/bbl, although it recovered from these lows, settling just 0.66% lower on the day. The market has continued to see a recovery in early morning trading today. Oil has been unable to escape the broader risk-off move seen across assets, as concerns grow over the potential for a US recession following some weaker macro data in recent weeks. This only adds to worries over Chinese demand. Investors have been exiting commodities in recent weeks, highlighted in positioning data and this has continued in recent days. ICE data shows that aggregated open interest in ICE Brent has fallen by more than 8% since mid-June. This souring in speculative appetite comes despite oil fundamentals still looking supportive.

Offsetting some of the macro bearishness were reports that the Sharara oilfield in Libya has fully halted production with reports of protests at the site. The oilfield has a production capacity of 300k b/d, although before the disruption it was producing around 270k b/d. In addition, markets are still waiting to see how Iran responds to Israel after it vowed retaliation for the assassination of Hamas’ political leader on Iranian soil.

In the US, the Biden administration filed an appeal after a federal judge reversed the White House’s temporary ban on new licences for US LNG exports in early July. At the start of the year, the Biden administration temporarily halted approvals for new LNG export projects to assess the impact on climate change, the economy and national security.

Metals - Slump amid global stock sell-off

LME copper settled 1.84% lower yesterday and hit its lowest level since March amid a broader sell-off in global equity markets, driven by growing concerns over the risk of recession in the US. For the metals complex, this has added to demand concerns from China and rising global inventories.

In precious metals, silver declined more than 4.5%, while gold, usually a safe haven during such uncertainty, fell more than 1.3% amid likely liquidation to cover margin calls on other assets. However, looking ahead, we believe gold should regain its footing once again, amid the ongoing geopolitical uncertainties and expectations of interest rate cuts from the US Fed.

Agriculture – Good US crop progress

The latest data from the International Coffee Organization (ICO) shows that global coffee exports stood at 10.8m bags in June, up 3.8% YoY. This includes Arabica exports of 7.1m bags (+14.4% YoY) and Robusta exports of 3.7m bags (-11.8% YoY). This leaves shipments between October 2023 to June 2024 at 103.5m bags, up 10.1% YoY.

The latest crop progress report from the USDA shows that the US corn crop is in relatively good condition with 67% of the crop rated good-to-excellent, up from 57% at the same stage last year. Similarly, 68% of the soybean crop is rated good to excellent, compared to 54% at the same stage last year. Finally, 88% of the winter wheat crop is harvested, above the 85% harvested at the same stage last year and also above the 5-year average of 86%.

Weekly export inspection data from the USDA for the week ending 1 August shows that US corn shipments rose while wheat and soybean exports slowed over the last week. US weekly inspections of wheat for export stood at 440.9kt, down from 453.9kt in the previous week but up from the 318.6kt reported a year ago. Similarly, export inspections for soybeans stood at 261.2kt over the week, lower than 408.6kt in the previous week and 290.7kt reported a year ago. Meanwhile, US corn export inspections rose to 1,213.4kt, compared to 1,070.3kt a week ago and 388kt a year ago.

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