a paper tiger
market vibes
tuesday july 28…)
Wednesday July 31, 2024 was a unique day in central banking. The FOMC and BOJ met and issued rate decisions within hours of each other. Wall Street was unanimously expecting the FOMC to cut the funds rate .25 bps. But Powell did not cut because the Bank of Japan met 14 hours earlier and hiked its call rate 0.25 bps… and issued a detailed plan to reduce its government bond purchases.
NFP was due on Friday August 2. The Yen was already in vertical ascent (chart above); the yen carry was in a tailspin (chart below). If the FOMC had cut rates as the BOJ hiked, the yen rally would have caused a global volatility shock. Even so, the Nikkei had the worst day since 1987 on Monday August 5, and a global stock crash was narrowly averted.
Warsh
Kevin Warsh does not favor rate hikes. He views official BLS and CPI data as stale, backward-looking, and poorly suited to a real-time economy. He expects an imminent period of AI driven disinflation. However, a bloc of governors including Powell and Waller may push for a hike and Warsh probably doesn’t have the votes for a hold. A split vote and a surprise is therefore a live risk tomorrow. The Bank of Japan meets on Thursday July 30 this year with a rate decision on Friday.
This morning I saw a Barchart reposting on X of a note from Citadel and I couldn’t help thinking why JPM made new all time highs yesterday.
Then I saw this:
The yen carry is not more profitable than ever in 2026 but its total returns are 13% yoy because the FX legs are very profitable. COT futures positioning is not record short but it is quite close to it. US margin debt is up 54% yoy at all time highs. There is no metric or reg requirement to report cross asset leverage but… I think a lot of yen carry is the source for record high margin collateral to buy US equities.
a paper tiger
The dollar’s recent strength is almost exclusively a USD/JPY story.
