Tag Archives: #JPY

Buyers’ Chagrin

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Last month everything was just fine

As stocks traded up on cloud nine

But this week has been, 

To buyers’ chagrin,

Less fun, and perhaps e’en malign



While soft is the landing of choice

And one where the Fed would rejoice

As data keeps slipping

The narrative’s flipping

Said some, in a very low voice

Oops!  ADP Employment fell further last month, down to 103K, well below forecast and moving into a more dangerous territory for the growth story.  Last month’s outcome was revised lower as well and the 3-month moving average is now 99K.  This is certainly not a level that inspires confidence in future economic activity.  Now, we all know that ADP is not the really important number, that is Friday’s NFP, but of late, the story there has also not been that fantastic either.  Last month printed just 150K, and revisions for virtually the entire year have been lower.  All I’m saying is that I get a soft landing requires slowing growth which will impact the employment situation.  But this is a $27 trillion economy, and not something that is steered so easily.  Be prepared for the narrative to start to slip from soft-landing to recession and perhaps onto deep recession.  

One number does not a trend make, but as I discussed yesterday, the weight of evidence is beginning to pile up on the slowing growth story.  The market that really is buying the recession story is the oil market, where prices fell a further 4% yesterday with WTI settling below $70/bbl.  That is not a market that is convinced demand is going to be robust!

I guess the question is, at what point does the data stop confirming the goldilocks wishes and point to a more significant economic decline?  With respect to the employment situation, I suspect we will need to see a series of negative NFP prints as the Unemployment Rate rises.  While the former has not yet been seen, the Unemployment Rate has risen by 0.5% over the past seven months.  While tomorrow’s rate is forecast to be unchanged at 3.9%, there will be much angst in some circles if it goes higher.  As far as other metrics, Retail Sales, which had a very strong run in Q3, slipped last month and is forecast to be -0.1% when released next week.  Currently, the GDPNow forecast from the Atlanta Fed is calling for a 1.3% growth rate in Q4, much weaker than last quarter but not recessionary.

Combining these ideas, plus the other ancillary ones that come from the plethora of data released each month, it is easy to understand the belief in the soft landing.  But remember this, monetary policy famously works with long and variable lags.  That is just as true when the Fed is easing policy as when they are tightening policy.  Currently, there is an ongoing debate over whether the Fed’s 525 basis points of tightening is fully embedded in the economy, or if there is still more pain to come.  But if we are already seeing economic activity slow and the Fed continues to expound its higher for longer mantra, it is easy to make the case that the slowdown will be far deeper than a soft landing.  

One other thing, all this is happening while measured inflation remains well above the Fed’s target which is likely to remain a constraining factor on their behavior going forward.  If pressed, I would say the economy is heading toward a more significant recession, probably starting in Q1 or early Q2 of next year unless we see a remarkable turn of events in the US.  Given the intransigence that the current House of Representatives is demonstrating with respect to funding Ukraine, it appears that fiscal help may be a quarter or two later than hoped.  Be prepared.

Is the BOJ

Ready to change policy?

No breath-holding please!

One other thing of note was an article in Nikkei Japan that discussed recent comments from Governor Ueda as well as Deputy Governor Himino, where the implication seems to be that the committee there is contemplating the idea of raising their base rate to 0.0% or even 0.1% from its current -0.1% level.  Certainly, the market is willing to believe this story as evidenced by the moves last night where 10-year JGB yields jumped 11bps while the Nikkei fell 1.75%.  As to the yen, this morning it is the outlier in the FX market, with a 1.4% rally and is now trading back to its strongest level (weakest dollar) since August.  While the most recent inflation data from Japan has continued to show consumer prices rising above the BOJ’s 2% target, 19 straight months now, wages remain more benign and that is a key metric there.  While I’m sure that the BOJ will alter policy at some point, it still feels like it is a mid 2024 event.

And one other thing to note with respect to USDJPY, tomorrow the December futures options on the CME expire and there is some very substantial open interest at strike prices right here.  Apparently, a single buyer purchased upwards of $2 billion notional of JPY calls with strike prices ranging from 145.50 down to 144.75 back in mid-November, which are now at- and in-the-money.  The thing to look for here is a choppier market as dealers hedge their gamma risk.  And don’t be surprised if we see another leg lower in USDJPY before they expire tomorrow.

Ok, let’s look at how all the other markets have behaved overnight as we await today’s Initial Claims data, but more importantly, tomorrow’s payroll report.  After another soft showing in the US yesterday regarding equity markets, Asia, aside from Japan were broadly weaker, albeit not dramatically so.  In Europe, the screens are all red too, but the losses are quite small, between -0.1% and -0.2%.  Adding to the idea that there is very little ongoing, US futures, at this hour (7:30) are essentially unchanged.

Turning to the bond markets, Treasury yields, which had fallen below 4.10% briefly yesterday, have bounced on the day and are firmer by 5bps.  But European sovereign bonds are little changed on the day with only UK Gilts (+5bps) an outlier here.  Perhaps that move was on the back of the Halifax House Price Index, which rose slightly more than expected, but I suspect it has more to do with position adjustments ahead of tomorrow’s US payroll data.  After all, remember, the US is still the straw that stirs the drink.

After a horrific day yesterday, oil (+0.6%) is trying to stabilize although WTI remains below $70/bbl.  There is now talk in the market that OPEC+ is going to cut production further, although given they just held their monthly confab last week, this seems premature.  Gold (+0.4%) is finding support again after its wild ride earlier in the week, and copper and aluminum are both showing green today.

Finally, the dollar, away from the yen, is mixed with modest weakness vs. most G10 currencies, and a completely uncertain picture in the EMG bloc.  For instance, MXN (-0.5%) is under pressure this morning while ZAR (+0.9%) is putting in quite a performance.  Looking at the entire space, it is hard to characterize a general theme here today.  As such, it strikes me that choppiness ahead of tomorrow’s data is the most likely outcome in the session.

As mentioned before, Initial (exp 222K) and Continuing (1910K) Claims are the only data this morning although we do see Consumer Credit ($9.0B) this afternoon at 3:00pm.  Right now, the dollar is trendless, except perhaps against the yen, although that means that hedging should be quite viable right now.  As to the broader economic trend, tomorrow’s data will really set the tone for the FOMC meeting next week, and for Q1 next year.

Good luck

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Problems Squared

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As the yen weakens
Suzuki-san tries to warn
This time he means it!

Another day, another new low for the Japanese yen.  USDJPY traded above 149.00 early this morning for the first time since October 2022 (chart below) and this clearly has the Finmin, Shunichi Suzuki spooked.  While I don’t understand the actual comment he made, “As I said at the morning press conference, I’m watching market trends with a high sense of urgency,” based on the fact the dollar did pull back a bit, I guess market participants got the message.  But how can you watch something urgently?  

Source: Tradingeconomics.com

Regardless of his fractured English, the fact remains that USDJPY has risen near the levels it reached last autumn and which resulted in aggressive intervention in the FX markets.  The point is we know they will step into the market so for those of you with immediate needs, be wary.

However, there is exactly zero indication that the BOJ is going to alter its monetary policy stance at this time, nor any indication that the Fed is going to do so either.  Ultimately, those diverging policies are the driver here and without a change in the underlying conditions, this trend should continue.  Perhaps Ueda-san will recognize that CPI running at 3.3% for the past twelve months is an indication that it is sustainable at these levels and change his tune.  But not so far.  With spot at this level, I am a strong proponent of utilizing options to hedge against further yen weakness.  Using them will allow hedgers to take advantage of a pullback, if it comes, but remain protected in the event that their new target is 160, for example.

Said Dimon, nobody’s prepared
And frankly, we all should be scared
A quick rates ascent
To seven percent
Will end up with our problems squared

I guess the question becomes, to whom should we listen, Jamie Dimon or Jay Powell?  In an interview with the Times of India yesterday, Dimon indicated he thought Fed funds could rise as high as 7% and that nobody was prepared for that outcome.  I certainly agree nobody is prepared for that outcome (I wonder if JPM is?) but of more interest is the fact that his comments are quite different than what we have heard from the ostensible powers-that-be at the FOMC.  Last week Chair Powell indicated they remained data dependent but that another hike was reasonable.  Yesterday we heard from erstwhile dove, Austan Goolsbee, the Chicago Fed president, that higher for longer was appropriate, a sign that even the doves are willing to wait a long time before pushing for rate cuts.  But Dimon was clear he thought things would play out differently.

Considering the two sources, I am more inclined to accept Dimon’s worldview than Powell’s as Dimon has fewer political restrictions.  In addition, given JPMChase is the largest bank in the nation, he is likely privy to a lot of information that may not be clear to the Fed.  But, boy, 7% would really throw a monkey wrench into the works.  While equity markets have worked very hard to ignore the ongoing rise in interest rates thus far, Fed funds at 6%, let alone 7% would seem to be a bridge too far.  If the Fed does feel forced to keep raising rates because CPI/PCE continues above target and the Unemployment Rate remains low, 4% or lower, it feels to me like the equity market would reprice pretty dramatically lower.  This is not my base case, but at this point, I would not rule out any outcome.

So, how have markets behaved with this new information?  Well, equity markets, which had a late rally in the US yesterday, have been under pressure around the world.  Meanwhile, bond yields continue to rise and the dollar remains in fine fettle.  Let’s take a look.

Asia was almost entirely in the red last night, certainly all the major markets were down led by the Nikkei (-1.1%) but all Chinese and Korean shares as well.  As to Europe, while the FTSE 100 has managed to stay relatively unchanged, the continent is entirely under water with losses on the order of -0.6% or so.  Finally, US futures are currently (7:30) lower by -0.3% or so, although that is off the worst levels of the overnight session.  It seems that the continued grind higher in yields around the world is taking its toll on the equity bull story.

Speaking of yields, yesterday saw the 10yr Treasury yield touch 4.56%, a new high for the move, although it has since backed off a few basis points and is currently around 4.50%.  But Treasury yields aren’t the only ones rising as we are seeing German bund yields at their highest levels since 2011, during the Eurozone bond crisis, and the same is true with French OATs and most of the continent.  Gilts, too, are pressing higher overall, and while this morning they have backed off 3bps-5bps, the trend remains clearly higher.

Oil prices are finally backing off a bit, down 1.1% this morning and 2% in the past week, although they remain quite high overall.  This movement has all the earmarks of a trading correction rather than a fundamental shift in the supply/demand balance.  The latest data that is out shows that global daily demand is up to ~102 mm bbl/day while supply is just under 100 mm bbl/day.  That trend cannot continue without oil prices rising substantially over time.  As to the metals markets, base metals continue to feel the pressure of a weakening economy while gold continues to suffer on the back of high interest rates, although it remains firmly above $1900/oz.

Lastly, the dollar is just a touch softer this morning although it remains near its recent highs.  We discussed the yen above, which is now unchanged on the day, although off earlier session highs for the dollar.  The euro has regained 1.06, although its grip there seems tenuous and a fall to 1.05 and below seems likely as the autumn progresses.  The pound, meanwhile, is below 1.22 and looking at the charts, a move to 1.18 or so seems very realistic, especially if we continue to hear hawkishness from the Fed.

As to emerging market currencies, the PBOC continues to try to hold back the yuan, although it is trading quite close to its 2% band from the CFETS fixing.  Meanwhile, KRW (-0.8%), IDR (-0.6%) and THB (-0.4%) are all falling as they are not getting that central bank support.  EEMEA currencies are also under pressure led by ZAR (-1.25%) which is suffering on the commodities market selloff.

On the data front, we see our first data of note this week with Case Shiller Home Prices (exp -0.3%), Consumer Confidence (105.5) and New Home Sales (700K).  We also hear from Fed Governor Bowman this afternoon and will see oil inventories late in the day, where continued drawdowns are expected.

Market sentiment is not happy with concerns growing that the Fed really means what they are saying and that interest rates are going to remain at these or higher levels for a while yet.  While the big data points continue to show the economy is hanging on, there are a growing number of ancillary data points that indicate a less robust economic future.  Unfortunately, I think that is going to be the outcome, although it will not be enough to drive inflation down to acceptable levels.  The coming stagflation should see weakness in both bonds and equities while the dollar continues to find buyers all around the world.

Good luck

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Quickly Slowing

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We will take action
Threatened Vice FinMin Kanda
If you speculate

“If these moves continue, the government will deal with them appropriately without ruling out any options.”  So said Vice FinMin Masato Kanda, the current Mr Yen.  Based on these comments, one might conclude that ‘evil’ speculators were taking over the FX market and distorting the true value of the yen.  One would be wrong.  The below chart shows the yields for 10yr JGBs vs 10yr Treasuries.  You may be able to see that the most recent readings show a widening in that yield spread in the Treasury’s favor.  It cannot be a surprise that investors continue to seek the highest return and the yen most certainly does not offer that opportunity.

While I don’t doubt there is a place where the BOJ/MOF will intervene, they know full well that the yen’s weakness is a policy choice, not a speculative outcome.  They simply don’t want to admit it.  The upshot is that the yen edged a bit higher overnight, just 0.2%, as market realities are simply too much for words to overcome.  The yen has further to fall unless/until the BOJ changes its monetary policy and ends YCC while allowing yields in Japan to rise.  Until then, nothing they can say will prevent this move.

While ECB hawks keep on screeching
More rate hikes are not overreaching
The data keeps showing
That growth’s quickly slowing
So, comments from Knot are just preaching

“I continue to think that hitting our inflation target of 2% at the end of 2025 is the bare minimum we have to deliver.  I would clearly be uncomfortable with any development that would shift that deadline even further out.  And I wouldn’t mind so much if it shifted forward a little bit.”   These are the words of Dutch central bank chief and ECB Governing Council member Klaas Knot.  As well, he intimated that the market might be underestimating the chance of a rate hike next week, which at the current time is showing a 33% probability. Another hawk, Slovak central bank chief Peter Kazimir also called for “one more step” next week on rates.  

The thing about these comments is they came in the wake of a German Factory Orders number that was the second worst of all time, -11.7%, which was only superseded by the Covid period in March 2020.  Otherwise, back to 1989, Factory Orders have never fallen so quickly in a month.  This is hardly indicative of an economy that is going to grow anytime soon.  Rather, it is indicative of an economy that has inflicted extraordinary harm to itself through terrible energy policies which have forced producers to leave the country.  

The key unknown is whether the slowing economic growth will also slow price growth.  Given oil’s continued recent strength, with no reason to think that process is going to change given the supply restrictions we have seen from the Saudis and Russia, I fear that Germany is setting up for a very long, cold winter in both meteorological and economic terms.  With the largest economy in the Eurozone set to decline further, it is very difficult to be excited at the prospect of a stronger euro at any point in time.  It feels to me like the late summer downtrend in the single currency has much further to go.  

This is especially true if the US economy is actually as resilient in Q3 as some economists are starting to say.  Yesterday, I mentioned the Atlanta Fed GDPNow number at 5.6%, but we are seeing mainstream economists start to raise their Q3 forecasts substantially at this point given the strength that was seen in July and August.  Not only will this weigh on the single currency, and support the dollar overall, but it may also put a crimp in the view that the Fed is done hiking rates.  Consider, if GDP in Q3 is 3.5% even, it will not encourage the Fed that inflation is going to slow naturally.  And while they may pause again this month, it seems highly likely they would hike again in November with that type of data.

Which takes us to the markets’ collective response to all this news.  Risk is definitely under some pressure as the combination of stickier inflation and slowing growth around the world is weighing on investors’ minds.  The only market to manage a gain overnight was the Nikkei (+0.6%) which continues to benefit from the weaker yen, ironically.  But China, which is also growing increasingly concerned over the renminbi’s slide, remains under pressure as do all the European bourses and US futures.  Good news is hard to find right now.

Meanwhile, bond investors are in a tough spot.  High inflation continues to weigh on prices, but softening growth, everywhere but in the US it seems, implies that yields should be softening with bond buyers more evident.  This morning, 10yr Treasury yields are lower by 2bp, but that is after rallying 16bps in the past 3 sessions, so it looks like a trading pullback, not a fundamental discussion.  But in Europe, sovereign yields are edging higher as concern grows the ECB will not be able to rein in inflation successfully.  As to JGB yields, they seem to have found a new home around 0.65%, certainly not high enough to encourage yen buying.

Oil prices (-0.1%) while consolidating this morning, continue to rally on the supply reduction story and WTI is back to its highest level since last November.  Truthfully, there is nothing that indicates oil prices are going to decline anytime soon, so keep that in mind for all needs.  At the same time, metals prices are mixed this morning with copper a bit softer and aluminum a bit firmer while gold is unchanged.  It seems like the base metals are torn between weak global economic activity and excess demand from the EV mandates that are proliferating around the world.  Lastly a word on uranium, which continues to trend higher as more and more countries recognize that if zero carbon emissions is the goal, nuclear power is the best, if not only, long term solution.  The price remains below the marginal cost of most production but is quickly climbing to a point where we may see new mining projects announced.  For now, though, it seems this price is going to continue to rise.

Finally, the dollar is mixed this morning, having fallen slightly vs. most G10 currencies, but rallied slightly vs. most EMG currencies.  This morning we will hear from the Bank of Canada, with expectations for another pause in their hiking cycle, but promises to hike again if needed.  Meanwhile, the outlier in the EMG bloc is MXN (-0.7%) which seems to be a victim of the overall risk situation as well as the belief that its remarkable strength over the past year might be a bit overdone.  In truth, this movement, five consecutive down days, looks corrective at this stage.

On the data front, we see the Trade Balance (exp -$68.0B) and ISM Services (52.5) ahead of the Beige Book this afternoon.  We also hear from two FOMC members, Boston’s Susan Collins and Dallas’s Lorrie Logan.  Yesterday, Fed Governor Waller indicated that while right now, the data doesn’t point to a compelling need to hike, he is also unwilling to say they have finished their task.  However, that is a far cry from the Harker comments about cutting in 2024 seems appropriate.  I suspect Harker is the outlier for now, at least until the data truly turns down.

Net, the big picture remains that the US economy is outperforming the rest of the world and the Fed is likely to retain the tightest monetary policy around, hence, the dollar still has legs in my view.

Good luck

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Down in Flames

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The nation that built the Great Wall
Has lately begun to blackball
Its best and its brightest
For even the slightest
Concerns, causing prices to fall

Last night it was TenCent’s new games
Which suffered some unfounded claims
Concerns have now grown
They’ll need to atone
So their stock price went down in flames

The hits keep coming from China where last night, once again we were witness to a government sanctioned hit on a large private company, in this case Tencent.  In fact, Tencent is was the largest company in China by market cap but has since fallen to number two, after an article in an official paper, Xinhua News Agency’s “The Economic Information Daily” wrote about online gaming and how it has become “spiritual opium” for young people there.  While the government did not actually impose any restrictions, the warning shot’s meaning was abundantly clear.  Tencent’s stock fell 6.5% and Asian equity markets overall fell (Nikkei -0.5%, Hang Seng -0.2%, Shanghai -0.5%) as investors continue to fret over President Xi’s almost nightly attacks on what had been considered some of the greatest success stories in the country.  Apparently, that has been the problem; when companies are considered a greater success than the government (read communist party) they cease to serve their purpose.  It seems that capitalism with Chinese characteristics is undergoing some changes.

There is, perhaps, another lesson that we can learn from the ongoing purge of private sector success in China, that it has far less impact on global risk opinion than the activities in other geographies, namely the US.  While China has grown to the second largest economy in the world and is widely tipped to become the largest in the next decade or two, its capital markets remain significantly smaller on the world stage than those elsewhere.  So, when idiotic idiosyncratic situations arise like we have seen lately, with ideological attacks on successful companies, investors may reduce risk in China, but not necessarily everywhere else.  This is evident this morning where we see gains throughout Europe (DAX +0.15%, CAC +0.9%, FTE 100 +0.4%) as well as in the US futures markets (DOW and SPX +0.4%, NASDAQ +0.2%).  Despite last night’s poor performance in Asia, risk remains in vogue elsewhere in the world.

Away from the ongoing theatrics in China, last night we also heard from the RBA, who not only left policy on hold, as universally expected, but explained that they remain on track to begin tapering their QE purchases, down from A$ 5 billion/week to $A 4 billion/week, come September, despite the recent Covid lockdowns in response to the spread of the delta variant.  They see enough positive news and incipient credit demand to believe that tapering remains the proper course of action.  While there were no expectations of a policy change currently, many pundits were expecting the lockdowns to force a delay in tapering and the result was a nice little rally in the Aussie dollar, rising 0.5% overnight.

But, as we have just entered August, the month where vacations are prominent and government activity slows to a crawl, there were few other interesting tidbits overnight.  At this point, markets are looking ahead to Thursday’s BOE meeting, where there is some thought that tapering will be on the agenda, as well as Friday’s NFP report.  One final story that is gaining interest is the US financing situation with the debt ceiling back in place as of last Saturday.  Congress is on its summer recess, and Treasury Secretary Yellen has been forced to adjust certain cash outlays in order to continue to honor the government’s debt obligations.  As it stands right now, Treasury cannot issue new debt, although it can roll over existing debt.  However, that will not be enough to pay the bills come October.  There is no reason to believe this will come to a messy conclusion, but stranger things have happened.

As to the rest of the markets, bonds are under a bit of pressure today with Treasury yields rising 1.5bps, and similar size moves throughout Europe.  Of course, this is in the wake of yesterday’s powerful bond rally where yields fell 5bps after ISM data once again missed estimates.  In fact, we continue to see a pattern of good data that fails to match forecasts which is a strong indication that we have seen the peak in economic growth, and it is all downhill from here.  Trend GDP growth prior to Covid was in the 1.5%-1.7% range, and I fear we will soon be right back at those levels with the unhappy consequence of higher inflation alongside.  It is an outcome of this nature that will put the most stress on the Fed as the policy prescriptions for weak growth and high inflation are opposite in nature.  And it is this reason that allowing inflation to run hot on the transitory story is likely to come back to haunt every member of the FOMC.

Commodity markets today are offering less clarity in their risk signals as while oil prices are higher, (WTI +0.5%), we are seeing weakness throughout the rest of the space with precious metals (Au -0.2%), base metals (Cu -0.85%, Al -0.5%) and agriculturals (Soybeans -0.7%, Corn -0.9%, Wheat -0.5%) all under pressure today.

Finally, the dollar is falling versus virtually all its main counterparts today, with the entire G10 space firmer and the bulk of the EMG bloc as well.  NOK (+0.75%) leads the G10 group as oil’s rally bolsters the currency along with general dollar weakness.  Otherwise, NZD (+0.6%) and AUD (+0.5%) have benefitted from the RBA’s relative hawkishness.  The rest of the bloc is also higher, but by much lesser amounts.  I do want to give a shout out to JPY (+0.1% today, +2.3% in the past month) as it seems to be performing well despite the risk preferences being displayed in the market.  something unusual seems to be happening in Japan, and I have not yet been able to determine the underlying causes.  However, I also must note that last night, exactly zero 10-year JGB’s traded in the market, despite a JGB auction.  If you were wondering what a dysfunctional market looked like, JGB’s are exhibit A.  The BOJ owns 50% of the outstanding issuance, and the idea that there is a true market price of interest rates is laughable.

As to emerging markets, we are seeing strength throughout all three regional blocs led by ZAR (+0.8%), HUF (+0.7%) and PHP (+0.6%), with the story in all places the sharp decline in US rates leading to investors seeking additional carry.  While BRL is not yet open, it rallied 0.7% yesterday as the market is beginning to believe the central bank may hike rates by 100 bps tomorrow, a shockingly large move in the current environment, but one that is being driven by rapidly rising inflation in the country.

Data today brings Factory Orders (exp 1.0%) and Vehicle Sales (15.25M), neither of which is likely to distract us from Friday’s payroll report.  We also hear from one Fed speaker, governor Bowman, who appears to be slightly dovish, but has not make public her opinions on the tapering question as of yet.

Yesterday saw modest dollar strength despite lower interest rates.  Today that strength is being unwound, but net, we are not really going anywhere.  And that seems to be the best bet, not much direction overall, but continued choppy trading.

Good luck and stay safe
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Bred On Champagne

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In Davos, the global elite
Are gathering midst their conceit
That they know what’s best
For all of the rest
Though this year they’re feeling some heat

As growth ‘round the world starts to wane
This group, which was bred on champagne
Is starting to find
Their sway has declined
And people treat them with disdain

This is Davos week, when the World Economic Forum meets in Switzerland to discuss global issues regarding trade, finance, economics and social trends. Historically, this had been a critical stopping point for those trying to get their message across, notably politicians from around the world, as well as corporate leaders and celebrities. But this year, it has lost some of its luster. Not only are key politicians missing (the entire US entourage, PM May, President Xi, President Macron, AMLO from Mexico and others), but the broad-based rejection of globalist policies that have led to a significant increase in populism around the world has reduced the impact and influence of the attendees. Of course, this hasn’t prevented those who are attending from declaring their certitude of the future, it just puts a more jaundiced eye on the matter. As to the market impact of this soiree, the lack of keynote addresses by policymakers of note has resulted in quite a reduction of influence. But that doesn’t mean we won’t see more headlines, it just doesn’t seem like it will matter that much.

Inflation forecasts
In Japan have been reduced
Again. Is this news?

The BOJ met last night and left policy settings unchanged, as universally expected. This means that the BOJ is still purchasing assets at a rate of ¥80 trillion per year (ostensibly) and interest rates remain at -0.10%. Their problem is that despite the fact that they have been doing this for more than 6 years, as well as purchasing corporate bonds and equity ETF’s, they are actually getting worse results. Last night they downgraded their growth and inflation forecasts to 0.9% for both GDP and CPI as they continuously fail in their attempts to stoke price increases.

While the Fed has already begun normalizing policy and the ECB is trying to move in that direction (although I think they missed the boat on that), the BOJ is making no pretenses about the fact that QE is a fact of life for the foreseeable future. Policy failure at the central bank level has become the norm, not the exception, and the BOJ is Exhibit A. As such, the yen is very likely to see its value remain beholden to the market’s overall risk appetite. If we continue to see sessions like yesterday, where equities and commodities suffer while Treasuries are bid, you can be pretty sure the yen will strengthen. While this morning the currency is actually weaker by 0.3%, that seems more like a position adjustment rather than a commentary on risk. In fact, if equities continue to suffer, look for the yen to regain its lost ground and then some.

As to Brexit, the pound is trading back above 1.30 this morning for the first time since the first week of November, which was arguably more about the US elections than the UK. But the market is becoming increasingly convinced that a hard Brexit is off the table, and that some type of deal will get done, maybe not by March, but then after a several month delay. If this is your belief, then the pound clearly has further to rally, as the market remains net short, but my only advice is to be very careful as policy mistakes are well within the remit of all government organizations, not just central banks.

Beyond those stories, there has been no movement on the trade talks, although Larry Kudlow did highlight that some type of verification would be needed before anything is agreed. US data yesterday showed a much weaker than expected housing market with Existing Home Sales falling 10.0% since last year to just 4.99M in December. The Fed is silent as they prepare for next week’s meeting and the ECB is silent as they prepare for tomorrow’s meeting. In other words, it is not that exciting. Equity futures are pointing modestly higher, about 0.25%, although that is after a >1% decline in all markets yesterday. Treasury yields are higher by 2bps and oil prices are modestly higher (0.7%) after a sharper decline yesterday. Overall, the market remains unexciting and I expect that until we see a resolution of one of the key issues, notably trade or Brexit, things are likely to remain quiet. That said, it does appear that there are ample underlying concerns to warrant a fully hedged position for risk managers.

Good luck
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