[BOJ] Summary of Opinions: A Small Rate Hike Will Not Have Tightening Effects

Remarks of Officials

Central Bank

Summary:

According to the Bank of Japan's (BOJ) Summary of Opinions at the July 31 Monetary Policy Meeting, several members said that the small rate hike is an adjustment to the degree of monetary easing and will not have monetary tightening effects. Some believe that as the level of the neutral rate seems to be at least around 1 percent, in order to avoid rapid hikes in the policy interest rate, the BOJ needs to raise the policy interest rate in a timely and gradual manner.

On August 8, the Bank of Japan released the Summary of Opinions at the July 31 Monetary Policy Meeting. The main points are as follows:

Economic Developments

Japan's economy has recovered moderately, although some weakness has been seen in part. Structural issues of Japan's economy lie in subdued consumption due to the declining birthrate and aging population, and the industrial structure generating low profits. It is likely to keep growing at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies.

Although private consumption has not been so strong, it is likely to remain resilient. Not only is this due to factors such as cuts in income tax and inhabitant tax, but it is also because the results of this year's annual spring labor-management wage negotiations are likely to be further reflected in wages.

Prices

Underlying inflation, measured by the Consumer Price Index (CPI), is expected to increase gradually. In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. The results of this year's annual spring labor-management wage negotiations have started to be reflected in the statistics. A virtuous cycle between wages and prices has likely begun to operate, and underlying inflation has shown steady progress toward 2%.

Upside risks to prices require attention since a rising number of industries have seen supply shortages and excess demand as a result of labor shortages. In addition, import prices have risen due to overseas inflation and the past depreciation of the yen.

Monetary Policy

Japan's economic activity and prices have been developing generally in line with the BOJ's outlook. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. It should be noted that raising the rate at a moderate pace means an adjustment in the degree of monetary accommodation in accordance with underlying inflation, which will not have monetary tightening effects. Even if the BOJ raises the policy interest rate, the nominal interest rate will continue to be at a highly accommodative level of 0.25 percent, and there is no change in the Bank's stance to firmly support the economy.

Assuming that the price stability target will be achieved in the second half of fiscal 2025, the BOJ should raise the policy interest rate to the level of the neutral interest rate of 1% toward that time. After this meeting, if it is confirmed that prices will develop in line with the BOJ's outlook and that positive corporate behavior -- such as solid business fixed investment, sustained wage hikes, and a continued pass-through of cost increases to selling prices -- will be maintained, it will be necessary to proceed with further adjustment of the degree of monetary accommodation as appropriate.

Summary of Opinions at the Monetary Policy Meeting

Risk Warnings and Disclaimers

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Central Bank

Forex

Economic

USD/JPY Analysis

The Japanese central bank had adopted a slow and timid path away from its ultra-loose setting, which had failed to stem the Yen's demise, but bolstered its normalization efforts last week. It hiked rates again, pointed to more moves ahead and announced a sizeable reduction to its bond buying scheme.

Friday's soft US employment report stoked fears of recession, sent global markets into panic mode and led to calls for aggressive rate cuts by the Fed (of at least 100 bps in the next three meetings), which had earlier opened the door to a September pivot.

These developments accelerated the fall of USD/JPY, which lost more than 5.5% within four days and erased most of this year's gains. The shift in monetary policy dynamics can further pressure the pair towards 140.26 and beyond.

However, market recession fears and pricing around the Fed seems exaggerated. But even if the Fed slashes rates multiple times and the BoJ raises them again as indicated, the interest rate differential is still large and could continue to support the pair. Furthermore, Japanese policymakers are unlikely to become too hawkish and the market turmoil will give them pause. In fact, Deputy Governor Uchinda downplayed prospects of further hikes today, saying that the central bank "will not raise" interest rates "when financial and capital markets are unstable".

This commentary helps USD/JPY rebound and give it the opportunity to tackle the 38.2% Fibonacci of the recent slump. However we are cautious around the ascending prospects, as the road ahead contains significant hurdles. Strong catalyst would be needed to surpass the resistance cluster provided 50% Fibonacci and 200Days and 200H4 EMAs (blue and black lines respectively). USD/JPY Rebounds from Sell-off after Supportive BoJ Remarks_1

USD/JPY Rebounds from Sell-off after Supportive BoJ Remarks_1

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Samantha Luan

Economic

Forex

XAUUSD trading key points

Market focus: markets are under pressure from weak US employment dataCurrent trend: gold is undergoing a downward correction as part of a long-term uptrendXAUUSD forecast for 7 August 2024: 2,417 and 2,380

Fundamental analysis

XAUUSD quotes have undergone a downward correction on the daily chart, falling below 2,400 after rising to an all-time high of 2,483 USD amid weak US employment data. This decline may be attributed to profit-taking by buyers and local strengthening of the US dollar against other currencies.

Overall, the potential for XAUUSD growth remains as the US dollar will soon come under pressure from an interest rate reduction. Given gold's status as a popular safe-haven asset, another round of geopolitical tensions in the Middle East may positively impact gold prices.

XAUUSD technical analysis

XAUUSD quotes are currently hovering just below the 2,400 level, where bulls are attempting to push the price higher following the downward correction. The trend remains upward. However, whether the downward correction will continue or end at these levels remains to be determined.

The 2,453-2,463 USD area is now vital support. The short-term XAUUSD price forecast suggests that the downward correction could extend if bears break through this level, potentially reaching 2,300. Conversely, if bulls push the price above 2,400 USD, XAUUSD could rise to the 2,417 resistance level and higher. Gold (XAUUSD) Undergoes Downward Correction, But Growth Potential Remains_1

Gold (XAUUSD) Undergoes Downward Correction, But Growth Potential Remains_1

Summary

After testing an all-time high of 2,483 USD, gold corrected downward. Growth potential remains as long as prices stay above the 2,453-2,463 USD support area.

Source:RoboForex

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Damon

Economic

Investors in large consumer-goods companies are having to up their stock-picking game, as a post-pandemic spending splurge dries up and increasingly price-sensitive shoppers start to erode corporate pricing power.

Profit warnings in sectors ranging from luxury to food and airlines have fed into worries about a slowdown in the United States and other major economies.

These growth concerns were one of the factors behind a selloff that stripped around $4.8 trillion off global equities in just three days this month.

Stock pickers now need to identify those businesses that won't suffer from a normalisation of spending patterns, let alone from an economic recession.

"Consumers have been able to absorb price increases thanks also to the exceptionally high level of savings accumulated (during the pandemic). It seems that now this is coming to an end," Chiara Robba, head of LDI equity at Generali Asset Management in Paris, said.

"The second-quarter reporting season is showing some signs of consumer slowdown with consequent attempt from companies to reduce prices to boost consumption," she said.

S&P Global's business activity surveys in July suggested firms in the United States and the euro zone weren't able to pass on higher costs quite as easily as before.

There's now a long list of company earnings that point to a softening of pricing power or weakness in consumer spending.

Notable examples include Nestle and Ryanair in Europe and McDonald's in the U.S., along with payment firms such as Visa and Worldline. In many cases, share prices have tumbled.

Forty companies have cut guidance so far this season in Europe, BofA said on Tuesday, the most in over a year, with a majority citing weak demand, including, surprisingly, in the U.S.

"Signs of consumer weakness have caused concern," it said.

Sobering-Up Luxury Spending

The high-margin luxury industry hasn't escaped and while companies point to the long downturn in China, investors are also paying close attention to spending patterns elsewhere.

Kering's Saint Laurent cut prices of its Loulou bag in France, the UK, U.S. and China by 10-15% in May in a "very rare" move for the sector which Barclays said could reflect the brand acknowledging its earlier price hikes had been too aggressive.

Following three years of above-average increases, luxury price inflation is showing signs of returning to its long-term range of 5-7%, or below, said Luca Solca, an analyst at Bernstein in London.

"Weak brands that had been jumping on the bandwagon and increased prices materially are forced now to correct through discounts and promotions," he said. "This is happening because middle-class consumers in the West are sobering up from the post-pandemic euphoria."

Burberry, which sacked its CEO and warned on profit in July, has been cited as one example. Its shares erased almost one fifth of their value on earnings day.

Swatch and Hugo Boss have become the two most shorted stocks on the pan-Europe STOXX 600 index following disappointing numbers, data from Mediobanca shows.

Even sector leader LVMH, Europe's second-largest listed company behind Danish drugmaker Novo Nordisk, isn't immune.

"There is certainly a sense of consumer resistance to higher prices, given the ongoing cost of living crisis," Sanjiv Tumkur, head of equities at Rathbones Investment Management, said.

"This appears to be felt across all income segments – for example the luxury goods companies are seeing more challenging and volatile consumer conditions in many geographies, notably China, in all but the top end of the market."

Consumer Polarisation

Gillian Diesen, senior client portfolio manager at Pictet Asset Management, believes the latest earnings releases point more to consumer polarisation than a generalised loss of pricing power.

"At the highest end, most premium brands... are raising pricing again this year, although at more normalised levels," she said, adding that the trend extended beyond the luxury sector.

Carmaker Ferrari beat expectations thanks to sales of its pricier models, even though consumer demand in the auto sector has been variable.

Differentiation is a big factor too - sectors with low levels of differentiation, such as personal care and food and beverages, could be most at risk, said Generali's Robba.

In sporting goods, Diesen said higher-end innovative brands like On and Deckers' Hoka continue to benefit from pricing and sales growth, in contrast to mainstream names like Nike and Puma, which cut its profit outlook on Wednesday, sinking its shares to a six-year low.

In airlines, Rathbones' Tumkur cautioned against extrapolating Ryanair's warning to the rest of the industry, citing better demand at rivals Easyjet and Jet2.

"Ryanair is also more of a pure low-cost carrier, whereas its rivals have more exposure to package holidays, which seems to be currently prioritised more highly by customers," he said. "As ever stock selection will be key."

Source: Reuters

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Warren Takunda

Economic

Asian stock markets bounced between gains and losses on Thursday, while the yen and U.S. bonds attempted to rebound, as global investors struggled to find their footing in a wild week for markets.

Japan's Nikkei share average swung from early losses of as much as 2.5% and gains of 0.8% before trading 0.6% lower as of 0445 GMT. That left the index down 2.8% for the week, following Monday's 12.4% plunge, despite the ensuing two-day rebound.

Tech shares were notable underperformers on the Nikkei, following a 1.1% overnight slide for Wall Street's Nasdaq Composite overnight.

Taiwan's tech-heavy stock benchmark sagged 1.5% and South Korea's Kospi lost 0.9%.

However, gains for Hong Kong's Hang Seng, which reversed earlier losses to rise 0.7%, and for mainland blue chips helped to keep declines for MSCI's broadest index of Asia-Pacific shares to 0.3%.

Nasdaq futures were volatile, last trading flat after swinging between gains and losses.

Pan-European STOXX 50 futures sagged 1.1%.

"Today's Asia session could be important, as many had bought the dip with the hope that we see real follow-through buying and the upside momentum building," said Chris Weston, head of research at Pepperstone.

"It's clear that we have not been given all clear just yet."

The yen generally benefits when market sentiment sours, and was last up about 0.5% at 145.98 per dollar in a volatile session that saw it up as much as 0.86% at one point but also down 0.14%.

U.S. stocks ended lower on Wednesday as technology shares declined, with investor jitters stoked by weak demand in a 10-year Treasury auction.

The Swiss franc , another traditional haven, added 0.3% to 0/8592 per dollar.

The dollar-yen pair also tends to be sensitive to moves in long-term U.S. Treasury yields , which retraced about half of their overnight jump to 3.977% and last stood at 3.91% in Asian hours.

The dollar index , which measures the currency against the yen, franc, euro and three other major peers, was down 0.08% at 103.03, while the euro gained by the same margin to $1.0931.

Currencies, and the yen in particular, have been upended by a shift last week toward bets for steady interest rate increases by the Bank of Japan and aggressive cuts by the Federal Reserve, which helped send the dollar as low as 141.675 yen on Monday for the first time since the start of this year.

The move snowballed as some investors unwound yen carry trades, with a ripple effect on Japanese stocks. While much of that has run its course, traders are still struggling to find an equilibrium level.

"Positioning is much cleaner across the board," said Tony Sycamore, an analyst at IG.

"I know of very few funds, if any, that would allow their traders to hold positions given the magnitude of the moves we saw earlier in the week, particularly in the long 'Japan Trade,' i.e. long Nikkei and short JPY."

BOJ officials have sent conflicting signals since springing a surprise rate rise a week ago. Deputy Governor Shinichi Uchida on Wednesday played down the chance of another near-term hike, but a summary of the meeting released earlier Thursday revealed a hawkish slant among the board.

Meanwhile, weekly U.S. jobless claims data due later in the day could prove market moving following soft monthly payrolls figures on Friday that exacerbated fears of a U.S. economic downturn.

Traders are currently pricing in 111 basis points of cuts to the Fed funds rate over the remaining three meetings this year, which many analysts see as overdone.

"During recent volatility episodes going back to the banking crisis in March 2023, the promise or pricing of aggressive Fed rate cuts has proven to be as effective as actual rate cuts, via the loosening in financial conditions," said IG's Sycamore.

"That's enabled the Fed to save its rate cut bullets."

Elsewhere, leading cryptocurrency bitcoin gained more than 3% to $56,877.

Crude oil continued to rise following data the previous day that showed a bigger-than-expected draw in U.S. crude stockpiles.

Brent crude futures added 0.1% to $78.42 a barrel, following Wednesday's 2.4% jump. U.S. West Texas Intermediate crude gained 0.3% to $75.45, building on a 2.8% rally from overnight.

Source: Reuters

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FxPro

Cryptocurrency

Economic

Market picture

Crypto market capitalisation is back above $2 trillion, up 1.3% over 24 hours. On Wednesday, the Crypto Fear and Greed Index retreated from extreme fear territory at 17 (the lowest in over two years) to 29.

The sharp declines in Bitcoin and Ethereum, sustained by the rumblings of falling stock indices since late July, accelerated the formation of a powerful bearish signal—the death cross—as the downward sloping 50-day MA accelerated its decline in recent days, promising to cross the 200-day MA in the next few days. Often, this signal triggers a new wave of declines, but now both coins look locally oversold as the financial markets lick their wounds after the recent sell-off. Bitcoin: From Shock to the Death Cross_1

Bitcoin: From Shock to the Death Cross_1

However, even in case of a technical rebound, a return above the 200-day MA would be needed to prove that the bull market has returned. For Bitcoin, that level now stands at $61.5K, and for Ethereum, it is at $3200. Bitcoin: From Shock to the Death Cross_2

Bitcoin: From Shock to the Death Cross_2

Meanwhile, bitcoin’s share of all cryptocurrencies continues to rise, standing at 55.8%, up from 53.7% a month ago and 48.7% a year ago. This is normal, as altcoins are obviously in weaker hands at this stage of the market. Bitcoin: From Shock to the Death Cross_3

Bitcoin: From Shock to the Death Cross_3

News background

Abra warned of the risks of increased volatility in the cryptocurrency market, noting that the VIX fear index has risen to its highest level since the 2020 market collapse. Implied volatility (IV) will remain high until the macroeconomic situation calms down.

An analyst at Rekt Capital said that based on Bitcoin’s historical fluctuations, the bearish trend could continue for another two months. In his opinion, BTC’s bullish trend will resume as early as October, but don’t expect a renewal of the historic high anytime soon.

Factor founder Peter Brandt drew parallels between BTC’s recent collapse and the 2016 crash, which was followed by a bullish rally. If BTC follows the trajectory of past post-halving bull cycles, it will reach $130K-$150K by the end of August 2025.

UK hedge fund Capula Investment Management reported owning $464 million worth of bitcoin ETF shares. Capula is the fourth largest hedge fund in Europe, with $30 billion in assets under management.

Japanese Metaplanet will spend $59 million to buy Bitcoin. The decision was made amid volatility in the local stock market and a significant strengthening of the local currency.

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Alex

Stocks

Economic

Investors are tiptoeing back into shares of U.S. tech stocks following a sharp tumble, even as some still-elevated valuations threaten to punish dip buyers if markets stumble again.

After a searing rally this year, the tech-heavy Nasdaq 100 is down more than 13% from an all-time high hit last month in a sell-off that has been blamed on everything from U.S. economic worries to the unwinding of a global yen-funded carry trade.

The sell-off has made tech stocks less expensive based on price-to-earnings ratios, boosting their allure to investors who had previously been reluctant to jump aboard. The S&P 500 tech sector recently traded at 26.1 times expected 12-month earnings estimates. That compares with 31.3 in July, which had been its highest level since 2002, according to LSEG Datastream.

Still, even bullish investors are proceeding with caution. While valuations have edged lower, the tech sector still trades well above its 10-year average of 20.7. Its 32% valuation premium over the broader S&P 500 is more than twice as wide as it has been over the last decade.

Those valuations could make the sector vulnerable to future turbulence. Mixed earnings from some of the biggest names - including Google parent Alphabet and Microsoft - and legendary investor Warren Buffett’s Berkshire Hathaway selling of half its Apple stake are among other reasons traders are treading lightly.

"I'm not going all-in, but I've done some buying," said Robert Pavlik, senior portfolio manager at Dakota Wealth. He has started adding to some tech positions in recent days after paring holdings in companies including Nvidia, Broadcom and Amazon.com at the start of July.

"I don't think the outlook has changed for any of these companies,” he said. Slumping US Tech Stocks Tempt Some Buyers to Brave Rocky Market_1

Red flags for megacap stocks abounded last month: the technology sector reached its highest price-to-earnings ratio in more than two decades, while owning the "Magnificent 7" - the group of huge stocks including Nvidia and Apple - was deemed the most crowded trade for a 16th straight month, according to a BofA Global Research survey of fund managers.

When markets fell at the beginning of August, large tech and growth stocks were among the hardest hit. Since the Nasdaq 100's July peak, Nvidia has dropped almost 27%, Amazon has tumbled 18.5% and Alphabet has declined about 17%.

Some investors wasted little time in diving in. Global hedge funds went on their largest one-day buying spree in five months on Monday, in the midst of a sell-off in which the S&P 500 fell by as much as 4.25%, Goldman Sachs said in a note to clients earlier this week. Most of the buying was concentrated in the tech sector, with semiconductors among the most popular sectors, according to the bank, which tracks the buying of its hedge-fund clients.

Despite the latest pullbacks, the Nasdaq 100 remains up 6% in 2024, while the S&P 500 is up 9%. Bulls can point to strong financial performance: with most companies already reported, two sectors that include a number of megacaps - tech and communication services - are on pace to increase second-quarter earnings by 19% and about 28%, respectively, from a year ago.

"There's stocks that we like, we think the earnings are going to hold up and valuations have improved," said Chuck Carlson, chief executive officer at Horizon Investment Services. "When you get that recipe, it's worth putting some money back in to them."

Carlson said his firm is considering whether to buy more shares of chipmakers Broadcom and Qualcomm after the recent pullback.

Individually, some of the megacap names are trading below historical price-to-earnings averages, while others remain elevated. Facebook owner Meta Platforms, for example, is trading at 21.7 times, below its 10-year average of 25, while Microsoft is at 30 times, above its 10-year average of 25.

Slumping US Tech Stocks Tempt Some Buyers to Brave Rocky Market_2

While economic worries have been components of the recent sell-off, investors could gravitate toward megacap tech stocks if those concerns persist, said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.

The megacap companies' "bullet-proof" balance sheets and their ability to increase earnings even in rocky economic times have made them "the new, defensive safe havens" in many investors' eyes, Melson said.

To be sure, while markets have stabilized over the past two sessions, it remains to be seen if the recent bout of volatility is over. Uncertainty over the economic landscape will be tested in coming days, with weekly U.S. jobless claims on Thursday and the monthly consumer price index inflation data on Aug 14. As a result, some investors believe there may be better opportunities to buy tech stocks down the road.

"We encourage investors to use rallies in the market to sell part of their holdings in the tech and industrial sectors to raise cash and prepare for bumpy roads and better possible entry points," Michael Landsberg, chief investment officer of Landsberg Bennett Private Wealth Management, said in a written commentary.