Camelot Investment Committee Talking Points

Japans Refocuses Monetary Policy

As the Bank of Japan meetings come to an end, the monetary policy makers decided to change its strategy to fuel growth. The framework for the new policy focuses on “yield curve control” and “inflation overshooting commitment” (Bank of Japan). The Bank of Japan (BOJ) is now aggressively targeting the yield curve by completely controlling the short term rates by applying negative interest, and long term interest rates by purchasing 10 year Japanese bonds (Bank of Japan).  Along with the purchases of long term government bonds, the BOJ will purchase exchange traded funds and real estate investment trusts (Bank of Japan). Also, it will maintain its balance of corporate paper and corporate bonds. The majority of the governors for the BOJ voted in favor of these proposals. With all of this extension of quantitative easing, the BOJ hopes this will achieve a 2 percent inflation “at the earliest possible time” (Bank of Japan). 

With these remarks by the BOJ governors, the yield curve for Japan will continue to be one of the flattest curves in the developed world. Short term interest rates will most likely continue to be negative for the foreseeable future. While the BOJ focused primarily on short term rates in the past, the 10 year yield will likely line up with short term rates, because of the decisions made by the governors. Today, the 3 month rate is -.1 percent, and the 10 year rate is -.036 percent (Bloomberg). Along with the purchase of debt, the purchase of equitable positions, i.e.: ETFs and REITs, could raise Japanese stocks. This macro-economic approach is certainly an “all hands on deck” strategy, and this framework could be the method by other central banks to deal with stagnating economies. 

Yellen Decides to Wait on Hike

On Tuesday at 2 pm, the Federal Reserve decided to forego an increase in short term interest rates. The target rate will remain between .25-.50 percent. (Federal Reserve) Previously, Janet Yellen alluded to the possibility of at least 2 rate hikes in 2016, but gradual increases need to evolve with changing economic conditions (Federal Reserve). Compared to 2015, the economic indicators do not seem to line up for a full vote of confidence by the members of the Federal Reserve. According to the Federal Reserve, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives” (Federal Reserve). In this meeting, quarterly economic projections are presented by federal material, the target rate by most of the governor’s points to .5-.75 percent by the end of the year (Federal Reserve), and the indicators point in a positive direction compared to prior meetings. Another key takeaway from the meeting is the Fed firmly believes inflation will start to increase to 2 percent in the next 2-3 years (Federal Reserve). This news was to be expected by the market, and expectations are still favorable for a rate hike by the end of the year.  

Canada’s Fiscal Policy to Combat Economic Downturn

Our friendly neighbors to the north are starting to see a slump in their economy. Although both of our economies are some of the most robust in the world, Canada has started to deflate with the slowing commodities market. The Canadian annualized GDP growth shrank -1.6 percent in Q2 2016 (Trading Economics). This drop-off in the economy is the largest contraction in the Canadian economy since 2009 (Trading Economics).

To combat this slowdown in the economy, the Canadian government is starting to use a Keynesian approach to stimulate growth. The liberal government is planning a two-phase 

infrastructure program (Bloomberg). Along with this proposal, the Canadian government has increased the deficit to 1.96 billion in 2015-16 fiscal year. The Canadian government has balanced the budget on a number of occasion over the past decade, but the outlook going forward point to a continued deficit.   

Source: Statistics Canada

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Sarah Berndt, Portfolio Manager

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

References

Bank of Japan. New Framework for Strengthening Monetary Easing. 21 Sept 2016.

Bloomberg. Canada Might Get Small Boost From Fiscal Policy. 29 August 2016. 2016.

—. Japan Generic Gov 10y yield. 21 September 2016. 2016.

Federal Reserve. Press Release. 2016.

Smith, Noah. Reality Might Topple a Beloved Economic Theory. 4 Nov 2014. 2016.

Trading Economics. Canada GDP Growth Annualized. 2016. 2016.

Disclosure

The materials presented is for use by professional advisors only.  It is not intended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable.  

Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information. A268