by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] Overnight, the BOJ did as expected, leaving policy unchanged.  Governor Kuroda’s outlook for the economy was rather bleak, suggesting that there may be more policy measures coming.  Unfortunately, there is growing doubt over the efficacy of further policy easing.  The reaction to negative rates hasn’t been good; the JPY continues to appreciate.  It also isn’t clear if additional QE will really matter.  The vote to keep policy unchanged was 7-2 to maintain negative rates and 8-1 for QE.

In a bid to dampen currency speculation, China announced it is considering a transaction tax on foreign exchange.  Dubbed a “Tobin tax” after Nobel Laureate James Tobin suggested it in 1972, it is designed to increase the cost of short-term trading in the currency markets.  Sweden taxed equity and bond trading in the mid-1980s and it did act as a short-term bearish factor.  Britain had a Stamp Tax on financial transactions starting in 1808.  Changing the rate had the expected impact—higher rates lowered volume and cuts increased it.  Although their use isn’t widespread, we would not be shocked to see China implement such measures.  However, if the country’s goal is to make the CNY a global reserve currency, a tax will tend to undermine that aim.

In what has been a historic primary season, voters in Ohio, Florida, Illinois, Missouri and North Carolina go to the polls today.  Predictit, the betting site, has Trump winning Florida (92 cents to win $1), Illinois (67 cents/$1), North Carolina (87 cents/$1) and Missouri (53 cents/$1).  Kasich looks to win Ohio (74 cents/$1).  On the Democratic Party side, Clinton is expected to win Ohio (64 cents/$1), Illinois (53 cents/$1) and Florida (94 cents/$1), while Sanders is expected to win Missouri (69 cents/$1).  Ohio will be key; if Kasich wins, the likelihood of a contested convention will increase.

Tomorrow, the FOMC announces its decision.  As we noted yesterday, we get a press conference, new economic forecasts and new rate expectations tomorrow.  Our expectation is that the dots chart will show a slower pace of tightening compared to December but will still be higher than market expectations for 2017-18.  We would expect one dissent for tightening (KC FRB President George).

Russian President Putin surprised the world by announcing he will begin withdrawing troops and aircraft from Syria.  This issue deserves wider treatment than we can offer here, so we will discuss it in next week’s WGR.  Our initial reaction is that Putin, like so many before him, has discovered the leadership of Syria is difficult to manage and, driven by frustration, has decided to move on.  We believe Putin wanted Assad to step down to stabilize the region.  Assad refused and so Putin has decided to let him face IS without Russian support.  There are likely more twists and turns to this story, which we will examine in next week’s report.

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