We have another couple of big central bank meetings later this week.
On Wednesday evening (our time), the US Federal Reserve delivers its latest decision on American monetary policy. A rate rise isn't expected, but the decision will be watched closely for any "hawkish" noises.
Then, early Friday morning, the Bank of Japan has a big decision to make hold off for another meeting, or unleash monetary havoc?
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Don't be surprised if the Federal Reserve is more dovish than expected
I get fed up keeping an eye on central banks, and I'm sure you do too. But like it or not, they have an outsize impact on how the markets run and anyone who takes any sort of active approach to investing has to consider the impact of that.
Even if it's just to say "I'm aware of this: now leave me to select my carefully chosen deep value stocks in peace, you irritating macro obsessive".
We have the Federal Reserve's next meeting coming up on Wednesday. Remember all the talk was of raising interest rates earlier this year. Then the markets panicked and rate rises were scrapped. So markets relaxed again, and it was off to the races.
The Fed had a bit of a chance to raise again in June, but it was put off by the prospect of Brexit. Now that it's post-Brexit, no one expects the Fed to raise.
Trouble is, it's getting really tricky for the Fed to justify leaving rates on hold the US stockmarket is at a record high, economic data is healthy, even wage inflation by some measures is picking up fast. That argues for the Fed to make a few "hawkish" noises, and maybe try to prime the market for a rate rise later this year.
However, as I've mentioned many times before, that's not necessarily what the Fed wants. The US dollar is perking up again. That's what caused all the trouble at the start of the year, so that's the last thing the Fed wants to encourage.
And the trouble is that the Fed is still way ahead of the game when it comes to interest rate policy. Of all the developed world central banks, it's the only one that's firmly on the upward path. Investors expect the next moves from Japan, Europe and Britain to all be rate cuts or money printing.
To me, that key differential means the Fed will be extraordinarily wary of letting investors start to believe that it's going to start raising rates seriously at any time in the near future. So don't be surprised if the Fed is actually more "dovish" than anyone quite expects.
The Bank of Japan could surprise us all
Meanwhile, the really eventful (or entirely damp squib) meeting could be the one on Friday. That's when the Bank of Japan (BoJ) takes the stage, as it were.
Everyone is expecting great things of the BoJ at some point. They're just not sure quite what. And they're not convinced it'll happen at this meeting.
The idea of directly printing money to pay for government spending helicopter money has been much cited in recent months. Now, BoJ boss Haruhiko Kuroda dismissed the idea in a recent interview (the interview was carried out in June, but only released last week).
Trouble is, Kuroda is very much in the Alan Greenspan school of central banking. "If I seem unduly clear to you, you must have misunderstood what I said", as the ex-Federal Reserve boss once put it.
Kuroda also denied that the Japanese central bank was considering turning interest rates negative. Within a few months, he'd turned Japanese interest rates negative.
The point is that all central bankers understand that markets work based on expectations.
Sir Mervyn King always described it with a footballing analogy: you feint left and right to persuade the defenders and the goalie to think that's where the ball's going. You then punt it straight down the middle, and thus achieve your objective. The central banker is the striker, and the market is the hapless opposition team.
So the last thing that Kuroda wants before he does something dramatic is for the market to be expecting something dramatic.
At first, that might not seem to make sense. If the market is already going where you want it to go, then why not just meet its expectations?
But these things are tricky to calibrate. A central banker needs the market to be living in mild fear of what he or she might do, not dismissing it with cavalier disregard. There really is a "Wizard of Oz" element to it a great deal of the power of central banking is that it works because markets believe it does.
If you disappoint the market once, then it starts to expect to be disappointed. It stops believing you when you say that you're going to "do what it takes", or that you can definitely get inflation back up to a 2% target.
Basically, as with anyone else, if a central banker breaks their promises, they take reputational damage. The market stops believing them. That means that in future, if they want to have a market-moving impact, they need to do something even more drastic.
This is pretty much precisely the BoJ's problem right now: it is battling to throw off decades of institutional disbelief. Japanese savers don't believe in stockmarkets anymore, as Leo Lewis points out in the Financial Times today. Global investors struggle to believe that the BoJ and the Japanese government are able to make Japan a long-term investment again.
The BoJ needs to make sure that whatever package it next comes up with is pure "shock and awe". It can't afford another disappointment.
Markets don't expect much on Friday (the strengthening yen shows that). But the longer the BoJ delays, the bigger the expectation will become. So maybe now is the best time to act particularly if the Fed stubbornly refuses to allow the dollar to rise, which is one of the yen's biggest problems right now.
This might not happen. The Fed might go along with the market script and risk letting the dollar tick higher. The BoJ might not yet have decided on a masterplan and had it approved yet and a more hawkish Fed would also take some pressure off the BoJ by allowing the yen to weaken.
But say we do get the unexpected outcomes what would happen? A money-printing bonanza from Japan would undoubtedly send the yen lower and Japanese stocks higher. Dovishness on the part of the Fed would be good news for gold, emerging markets, and stocks in general.
None of it would be overly positive for bonds. But I suspect it'll take a few more straws to break that camel's back.
Anyway I'm not suggesting you should take a punt on these outcomes this week that's all it would be, a punt. But in the longer run, I suspect this is the direction of travel, which is why I own Japanese stocks, gold and a fair bit of emerging markets, but not many bonds.
