Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ received this morning – 07/12/2023.
What has happened
Yesterday’s European and US trading session saw the bond market rally continue apace however this exuberance was then curtailed by comments from the Bank of Japan suggesting an imminent change to their interest rate policy.
Bond market rally
Ahead of the Bank of Japan comments, European and US markets were becoming increasingly optimistic around the probability of a soft-landing in the US. The ADP report of private payrolls came in below expectations, supporting the view that the US labour market was cooling. Oil prices also dipped, falling to a 5-month low as weaker global economic demand was priced in. The transmission mechanism between changes in the oil price and headline inflation is rapid, particularly in the United States, so this is further good news for the market’s aggressive pricing of interest rate cuts in 2024.
Bank of Japan
Deputy Governor Himono disturbed the calm within bond markets however, observing that the negative interest rate policy of the central bank had impacted households and that a move to a positive rate would be helpful to improve household interest income. Himono said that he expected ‘there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices.’ Governor Ueda added that he saw policy management becoming ‘even more challenging from the year-end and heading into next year’, suggesting that changes were afoot. Expectations are growing that the Bank of Japan may therefore abandon its negative interest rate policy as soon as the 15th December central bank meeting. Japanese 10-year bond yields underperformed sharply as a result, leading the Japanese equity index lower in sympathy.
What does Brooks Macdonald think
The Bank of Japan is one of the last bastions of the pre 2022 ultra-low interest rate policy. The recent Tokyo CPI numbers suggested that there was less urgency to abandon the central bank’s negative interest rate policy which has been in place to disincentivise cash savings and drive consumption, in order to kickstart a moderate amount of inflation. If the Bank of Japan was to remove this policy, it would have global implications as the Yen remains one of the few markets globally where borrowing costs remain very low.
Bloomberg as at 07/12/2023. TR denotes Net Total Return
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Charlotte Clarke
07/12/2023