Author: Zac Martin, Senior Investment Analyst
Week Ending July 31st – YEN and Yang
FOMC Meeting: The FOMC decided to leave rates unchanged, however, three members dissented, favoring a 25-basis point increase to the Federal Funds Rate. More notably, Fed Chair Warsh continued to emphasize the committee’s dedication to price stability. However, multiple journalists pressed Warsh as to why the Federal funds rate remained unchanged, despite inflation being above the Fed’s target of 2%. His response was that rates have increased via the market. Indeed, since Warsh’s inauguration on May 22nd the level of yields has increased as the market appears to be picking up any slack from the Fed. Chart below.
Yen Carry Trade: An additional source of upward pressure for interest rates may also be the unwinding of the so called “Yen Carry Trade.” Backing up briefly, this trade was a multidecade strategy of borrowing in Yen and then converting the borrowings into other currencies to buy higher yielding assets, like US assets. Now with Japanese rates beginning to rise, the carry trade has started to unwind. The problem with this unwinding is the adverse macro on the Yen and subsequently Japan. The Bank of Japan, over the past several months, has been discussing selling US Treasuries to buy back the Yen, effectively strengthening their currency to dampen the adverse economic effects. The risk to US investors is meaningful as Japan holds ~$5 trillion in US Treasuries and is the largest foreign holder. Selling this much in Treasuries has an adverse impact to the market and effectively pushes yields higher. Higher yields mean a potentially weaker economy and stock market.
The Week Ahead:
- JOLTS (8/4)
- ISM PMIs (8/5)
- Unemployment & Nonfarm Payrolls (8/7)
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