Bank of Japan surprises markets

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Published Date 1/18/2023

The Bank of Japan was expected to increase rates at its meeting, they didn’t. Consensus was the bank would continue to normalize policy as inflation in Japan accelerates. The yen dropped over 2% versus the dollar, its government bonds surged.

At 8:30 am Dec PPI, the estimates were for a big decline in wholesale prices, that is what we got. PPI m/m expected -0.1% as reported -0.5%, yr./yr. expected 6.8% declined to 6.2% and down from 7.4% in November; the core, ex food and energy thought to be +0.1% reported a +0.1% down from 0.4% in November, yr./yr. estimates 5.6% from 6.2% increased 5.5%.

Also at 8:30 am Dec retail sales, thought to be -0.8% declined 1.1%; excluding vehicles expectations were -0.5% as released -1.1%, excluding vehicles and gas -0.7% against forecasts of -0.1%.

At 9:15 am Dec industrial production expected -0.1%, another confirmation manufacturing is slowing, production fell -.7% and manufacturing expected -0.2% declined 1.3%. Capacity utilization expected at 79.5% from 79.4% in November declined to 78.8%.

At 9:30 am the DJIA opened +27, NASDAQ +71, S&P +12. 10 yr. note -17 bps to 3.39%. FNMA 5.5 coupon at 9:30 am +64 bps and +49 bps from 9:30 am yesterday.

The reaction to the two key 8:30 am data points dropped the 10 yr. note from 3.47% to 3.44% -10 bps from yesterday, MBS price at 8:45 am +28 bps. The outlook for the economy has been sliding, the forecast for a recession is growing on Wall Street, manufacturing is weakening based on the recent Fed data, and inflation continues to slow although still above what the Fed wants. Recent remarks from Fed officials and Jerome Powell remain that more rate increases are coming, 25 bps on Feb 1st and another 25 at the March FOMC meeting.

The dollar weakening again on news from Japan’s central bank. Crude oil higher again today as demand is expected to increase as China gets back to work. Gold continues to increase as the dollar weakens.

In Davos, Switzerland there are worries that the world may be headlong into protectionism. European Commission President Ursula von der Leyen complained that the bloc is a victim of both China, which is “openly encouraging energy-intensive companies in Europe and elsewhere to relocate all or part of their production,” and the U.S. There, a recent climate, healthcare, and tax package, called the Inflation Reduction Act, will subsidize electric vehicles only if they are assembled in North America. As growth slows global competition will increase, the fight for the cheese will increase.

Source: TBWS

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