The Bank of Japan Maintained its Loose Stance & Dovish Outlook

Central Bank

Economic

Summary:

The Bank of Japan maintained its uber-loose stance, which includes interest rates at -0.1%, yield curve control (YCC) and quantitative and qualitative easing (QQE).

The Bank of Japan maintained its uber-loose stance, which includes interest rates at -0.1%, yield curve control (YCC) and quantitative and qualitative easing (QQE). It also reaffirmed its dovish outlook, saying it will "patiently continue with monetary easing" and will not hesitate to take additional action if necessary, in order to achieve the 2% inflation target "in a sustainable and stable manner".

Earlier today, CPI ex-fresh food steadied at 3.1% y/y in August and although it has moderated from the recent four-decades peak, it has been printing above the central bank's 2% target for seventeen straight months. The BoJ itself over the summer raised the median inflation projection, to +2.5% for FY2023, from +1.8% previously.

Having been troubled by decades of deflation, policymakers struggle to create a virtuous price-wage cycle, which makes them hesitant to call it a day. They believe that "sustainable and stable achievement" of the 2% target "has not yet come in sight", requiring the continuation of monetary easing.

Back in July the central bank took a step towards normalization by loosening its grip on the yield curve control, but that change also allows it to sustain its dovish stance. Earlier this month, Governor Ueda opened the door to an eventual exit from negative rates, saying that officials could have enough data to make that determination by the end of the year. This marked a hawkish shift in rhetoric, but no imminent action was indicated.

The BoJ's loose monetary setting places it on the opposite side of it major counterparts, especially the U.S. Fed, which has been a great source of strength for USD/JPY. The Fed delivered a hawkish hold on Wednesday, keeping another hike on the table and pointing to a tighter 2024 policy path than previously expected. The latest round of decisions sustains the favorable monetary policy differential.

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Samantha Luan

Economic

Stocks

Energy

Contrarian investors were rewarded for betting on the beaten down U.S. energy sector earlier this year with a blazing rally. Some believe a tight oil market and resilient U.S. growth will keep energy stocks rising for the rest of 2023.

The largest U.S. energy exchange traded fund, the Energy Select Sector SPDR Fund, is up nearly 15% over the last three months and stands near its highest level in nine years.

The move follows a rally in oil that has taken the price of U.S. West Texas Intermediate crude (WTI) up more than 30% since June on supply concerns from extended production cuts by Saudi Arabia and Russia, as well as unexpected strength in the U.S. economy.

Bullish investors argue that energy stocks are still cheap by historical standards - and far less richly valued than other areas of the market. The energy sector currently trades at a forward price to earnings ratio of 12.2, well below its historical median forward P/E of 15.3, according to LSEG DataStream. The S&P 500 trades at a forward P/E of 20.

"Valuations can go up even if the oil price stays static because on a cash flow basis these stocks are very reasonably priced," said Charles Lemonades, head of hedge fund Value Works LLC, who is overweight the sector.

Energy stocks surged last year as inflation jumped to 40-year highs but landed with a thud at the start of 2023, when expectations of a U.S. recession and oversupply encouraged investors to take profits.

Both forecasts failed to materialize: economic growth in the U.S. proved far more resilient than many had predicted, despite the Federal Reserve's most aggressive monetary policy tightening in decades.

Meanwhile, drillers have been taking rigs offline, contributing to what is widely seen as a tight market, while Russia and Saudi Arabia have curtailed production.

The U.S. rig count is about 16% below where it was this time last year, according to data from U.S. energy services firm Baker Hughes. Overall, U.S. oil output from top shale-producing regions is on track to fall for a third month in a row in October to the lowest level since May, the U.S. Energy Information Administration said.

Despite recent gains, the S&P 500 energy sector is up only 4.2% year-to-date, compared with a 38% rise in technology stocks and a nearly 45% rise in communication. The broader S&P 500 index is up about 16%.

"Energy companies have newfound supply discipline" that will keep oil supply constrained, wrote Savita Subramanian, equity and quant strategist at BofA Global Investors, who has an overweight on the sector.

Citi on Monday became one the latest banks to predict that global benchmark Brent crude could exceed $100 a barrel this year.

While higher oil prices tend to eventually weigh on demand, that is unlikely to happen until Brent rises to between $110 and $120, said Bjarne Schieldrop, chief commodity analyst at SEB Research.

At the same time, continued production caps by Russia and Saudi Arabia will keep a floor under oil prices for the time being, he said.

Parts of the market appear skeptical energy stocks have much further to run.

Bearish investors point to the sector's earnings, where growth rates are expected to decline by 37% in the third quarter, followed by double-digit declines in both the fourth quarter and the first quarter of 2024, according to LSEG estimates. Sizzling Rally in U.S. Energy Stocks Has Room to Run, Bulls Say_1

Sizzling Rally in U.S. Energy Stocks Has Room to Run, Bulls Say_1

Energy demand could suffer if a rebound in the economy of top commodity consumer China fails to materialize. A 2024 recession in the U.S. - which many strategists still view as a possibility despite growing hopes of a soft landing, could also weigh on oil prices.

Persistently high oil prices could also lead to worries over a rebound in U.S. inflation, bolstering the case for the Fed to cool economic growth by keeping rates higher for longer.

"A supply driven increase in oil prices brings the prospect of both a renewal in inflation … and a slowdown in real consumer expenditures," analysts at Macquarie wrote.

Still, Rodney Clayton, a portfolio manager at Duff & Phelps Investment Management, believes the energy sector's large dividends will attract income-seeking investors - especially if the economy falters and bond yields fall.

"Companies are building up the trust of investors and are very reluctant to cut those dividends," he said. "That should result in a ... smoother ride for energy stocks than we've been accustomed to."

Source: Reuters

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Devin

Economic

Forex

There's no respite for struggling European currencies as a likely pause in central bank interest-rate rises and a weakening economic outlook puts the focus on prospective rate cuts ahead.

Sterling slid to a more than six-month low against the dollar on Thursday, even after the Bank of England held rates at a 15-year high and pledged to raise borrowing costs again if it cannot tame inflation.

The Swiss franc, one of this year's best performing major currencies versus the dollar, fell almost 1% at one point after Switzerland surprised markets by pausing its rate rise cycle.

Meanwhile, Thursday's quarter-point rate rise in Sweden failed to provide much respite for the battered Scandinavian currency, which is down over 6% against the greenback so far this year.

In short, the outlook for currencies in Europe is bearish, analysts and investors say, citing a strengthening dollar and stagnant economic growth in European nations as oil prices rise.

"We are turning to a bigger focus on growth than what central banks do," said Kit Juckes, global head of currency strategy at Societe Generale.

Sounding Hawkish

The BoE offered mixed messages by pledging to stay tough on inflation, still more than triple its 2% target, while noting that economic growth was slowing.

The European Central Bank last week lifted rates to a record 4% and upgraded its inflation forecast for 2024, but the euro fell and has lost almost 2% against the dollar this month.

SocGen's Juckes said the euro was "headed for a look at parity," in a reference to the $1 marker.

The ECB, like the U.S. Federal Reserve, has pushed the idea of rates staying higher for longer. This backdrop should support a currency but in the euro's case, traders are homing in on the region's economic underperformance and betting the ECB will be forced to cut before the Fed.

Overall, Europe's central banks "would like to portray this idea of higher for longer (rates)," said Ed Hutchings, head of rates at Aviva Investors. But markets, he said, were "getting ahead of this." Europe's Currencies Feel Fresh Pain as Central Bank Support Fades_2

Europe's Currencies Feel Fresh Pain as Central Bank Support Fades_2

Sweden's Riksbank raised its key rate by 25 bps to 4% and said it may need to do more to bring inflation lower. The currency, which the central bank labeled "unjustifiably weak," barely caught a break and remains near a record low against the euro.

Sweden's economy, hurt by turmoil in the real estate market, is expected to contract this year.

In fact, the only central bank whose hawkish tones have struck a chord with markets is the Fed, which on Wednesday held rates steady but signaled one more rate rise this year.

The dollar index which measures the U.S. currency against peers, is near its highest in over six months.

This, said Manulife Investment Management chief investment officer Nathan Thooft, is because "the data suggests the U.S. economy right now is much better than much of Western Europe."

He expected one the of big European central banks to be the first to cut rates.

Economists polled by Reuters expect the euro zone economy to grow 0.6% this year, the UK to expand 0.4% and the United States by 2%.

"As we become more data dependent, currencies swing around with every bit of data that's available," said Bjoern Jesch, global chief investment officer at DWS Group.

The push and pull in market expectations ahead of rate decisions, as has been the case in Britain and the euro area this month, highlights rising volatility around central bank meetings.

Nomura expects sterling to weaken to $1.22 by end-October, from $1.23 now; ING economists said the Swedish crown remained "vulnerable."

Volatility

Another driver of dollar strength is oil prices, trading near 10-month highs above $90 a barrel.

"The U.S. is an oil producer so it tends to get hurt very little by higher oil prices whereas Europe and Japan get hit more," said Barclays global head of FX strategy Themos Fiotakis.

European central banks were "in a bind," Fiotakis added, as higher oil prices also threatened to push inflation higher.

This made rate cuts bets in Europe seem vulnerable, said Orla Garvey, senior fixed income portfolio manager at Federated Hermes.

"Growth and inflation data will be more volatile going forward and this in itself will create higher market volatility," she said.

Source: Reuters

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Devin

Central Bank

Economic

SNB's Rate Decision

The Swiss National Bank has taken the unexpected step of maintaining its policy rate at 1.75%. This decision has caught markets off guard, as the consensus had been leaning toward a 25 basis point interest rate increase. The SNB's rationale for this move is rooted in its assessment that the "significant tightening of monetary policy over recent quarters is countering remaining inflationary pressure." Swiss National Bank Shocks Markets with Rate Pause: Swiss Franc Tumbles_1

Swiss National Bank Shocks Markets with Rate Pause: Swiss Franc Tumbles_1

Market Reaction

The repercussions of the SNB's unanticipated decision were swift and pronounced. Swiss bond yields experienced a sharp decline, and the Swiss Franc's exchange rate suffered notable setbacks. Notable changes include the Pound to Swiss Franc (GBP/CHF) exchange rate surging by 0.45% to 1.1145, the Euro to Swiss Franc (EUR/CHF) appreciating by 0.73% to 0.9651, and the US Dollar to Swiss Franc (USD/CHF) strengthening by 0.78% to 0.9058.

SNB's Stance

While the SNB has temporarily suspended its interest rate hikes, it has left the door open for future rate increases. The central bank underscored that additional monetary policy tightening may be necessary to ensure price stability over the medium term. However, the market's interpretation suggests that the SNB is unlikely to pursue further rate hikes in the immediate future.

Market Expectations

The unexpected pause in the SNB's rate hikes has prompted a swift adjustment in market expectations. Traders and investors are now reevaluating their assumptions, with a growing belief that the SNB may have concluded its interest rate hiking cycle and may even contemplate future rate cuts.

SNB Intervention

The SNB is renowned for its proactive intervention in the foreign exchange market to manage the Swiss Franc's valuation. While the currency may face downward pressure due to the rate decision, the SNB's demonstrated willingness to intervene in the forex market is expected to cap the Franc's depreciation.

The SNB's surprise rate decision has sent reverberations throughout financial markets, emphasizing the central bank's commitment to balancing its monetary policy against inflationary pressures. The Swiss Franc's trajectory, in particular, will remain a focal point for traders and investors as they assess the SNB's next moves in the ever-evolving global economic landscape.

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FastBull Featured

Daily News

[Quick Facts]

1. Swiss National Bank and Bank of England unexpectedly pause rate hikes.

2. Russia banned gasoline and diesel exports to most countries from Sept. 21.

3. "Bond King" Gross warns U.S. bond investors that pain isn't over yet.

4. Japan's core CPI has been above the BOJ target for the 17th consecutive month.

5. U.S. initial jobless claims hit a new low in nearly 8 months last week.

[News Details]

Swiss National Bank and Bank of England unexpectedly pause rate hikes

The Bank of England (BOE) kept interest rates unchanged on Thursday local time, which was the first time in nearly two years that it had chosen not to raise interest rates in fight against the stubbornly high inflation. In a statement, BOE Governor Andrew Bailey said inflation had fallen sharply in recent months and that would continue. "But there's no room for complacency," he said. According to the minutes of the policy meeting, interest rates would need to remain "sufficiently restrictive for a sufficiently long period" to bring inflation back to the central bank's 2% target, while it also downgraded the economic outlook. Prior to that, the Swiss National Bank (SNB) also unexpectedly announced a pause in interest rate hikes and would expand liquidity supply to banks, but SNB governor Thomas Jordan said if the inflation outlook worsens, interest rates will be raised again.

Russia banned gasoline and diesel exports to most countries from Sept. 21

The Russian government said it would impose a ban on gasoline and diesel exports from Sept. 21 for an unknown length of time, with the scale of exports of the two types of energy at about 1 million barrels per day (bpd). According to people familiar with the matter, Russia exported an average of about 63,000 tons of diesel and 8,000 tons of gasoline per day in the first 13 days of September, 31% lower than the average daily diesel exports compared with the first 30 days of August, as refineries were undergoing seasonal maintenance. Moreover, Russian government's efforts to curb rising domestic fuel prices has prompted producers to divert more fuel to the domestic market. Russia's temporary export ban on the fuel could exacerbate the current shortages in the global oil market as the two OPEC+ leaders, Saudi Arabia and Russia, are restricting crude supplies.

"Bond King" Gross warns U.S. bond investors that pain isn't over yet

Bond investors' pain isn't over yet, even though the Federal Reserve is done raising interest rates, said Bill Gross, former Pacific Investment Management Company (PIMCO) CEO. Gross wrote in his latest investment outlook that the bond market will suffer record losses for a third year due to sticky inflation and widening deficits. He likened the government's fiscal stimulus to "throwing money out of a helicopter." Gross urged investors to reduce holdings of U.S. Treasuries and corporate bonds as 10-year U.S. Treasury bonds are overvalued.

Japan's core CPI has been above the BOJ target for the 17th consecutive month

Japan's core inflation held steady at 3.1% in August and was above the central bank's 2% target for the 17th month in a row, data released on Friday showed. This is a sign of widening price pressures that could strengthen the case for an exit from its ultra-loose monetary policy. While the Bank of Japan (BOJ) is widely expected to leave its ultra-loose monetary policy unchanged, market attention is centered on any hints from BOJ governor Kazuo Ueda on how quickly the central bank may phase out stimulus. There is speculation that the BOJ will soon end negative interest rates as well as its target of keeping the 10-year JGB yield at around 0% in response to widening inflationary pressures.

U.S. initial jobless claims hit a new low in nearly 8 months last week

U.S. initial jobless claims fell unexpectedly last week. The U.S. Department of Labor data show that initial jobless claims for the week ended Sept. 16 recorded 201,000, a new low since the week ended January 28, indicating that the job market is still tight. The weekly initial jobless claims this year ranged between 194,000 and 265,000. But it could rebound in the coming weeks as the United Auto Workers' (UAW) partial strike will lead to a shortage of some production materials, forcing automakers to temporarily lay off workers. Ford last Friday furloughed 600 workers who were not on strike, while GM said it expected to halt operations at its Kansas car plant, affecting 2,000 workers. Chrysler-parent Stellantis said it would temporarily lay off 68 employees in Ohio and expected to furlough another 300 workers in Indiana. The strike is unlikely to have an impact on nonfarm payrolls, though, as it began near the end of the nonfarm payroll survey week.

[Focus of the Day]

UTC+8 07:30 Japan Core CPI YoY (Aug)

UTC+8 11:00 The Bank of Japan announces its interest rate decision

UTC+8 14:00 U.K. Retail Sales MoM (Aug)

UTC+8 14:30 Bank of Japan Governor Kazuo Ueda holds a monetary policy press conference

UTC+8 15:15 France Manufacturing PMI Prelim (Sept)

UTC+8 15:30 Germany Manufacturing PMI Prelim (SA) (Sept)

UTC+8 16:00 Eurozone Manufacturing PMI Prelim (SA) (Sept)

UTC+8 16:30 U.K. Manufacturing & Services PMI Prelim (Sept)

UTC+8 20:30 Canada Retail Sales MoM (SA) (Jul)

UTC+8 20:50 Federal Reserve Governor Lisa Cook speaks

UTC+8 21:45 U.S. IHS Markit Manufacturing & Services PMI Prelim (SA) (Sept)

UTC+8 01:00 Next Day: San Francisco Fed President Mary Daly speaks

UTC+8 01:00 Next Day: Minneapolis Fed President Kashkari delivers a speech

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Damon

Economic

Market acknowledges the risk of a final hike, but it will depend on the data

The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting.

The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.

For example, U.S. existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.

Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted. U.S. Housing Feels the Squeeze from High Mortgage Rates_1

U.S. Housing Feels the Squeeze from High Mortgage Rates_1

Leading index still indicates recession can't be ruled out

Meanwhile, the U.S. leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong. U.S. Housing Feels the Squeeze from High Mortgage Rates_2

U.S. Housing Feels the Squeeze from High Mortgage Rates_2

Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.

Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.

Source: ING

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Economic

Central Bank

Stocks

Forex

Market Recap

Market sentiments continue to reel in from the post-Federal Reserve (Fed) meeting jitters (DJIA -1.08%; S&P 500 -1.64%; Nasdaq -1.82%), as the US 10-year Treasury yields rose to another fresh 17-year high near the 4.50% handle amid a high-for-longer rate outlook. Some resilience in the US labour market, reflected from lower-than-expected read out of US jobless claims overnight, just provided more room for the Fed to retain its hawkish stance further.

For now, while Fed funds rate futures continue to reflect some doubts that the Fed may not follow through with its final rate hike this year, the timeline for rate cuts are now pushed back to a later timeline of 2H 2024. The US dollar saw some slight profit-taking (-0.1%) overnight, while gold prices remain weighed (-1.3%). On the other hand, crude oil prices have managed to eke out slight gains after a short blip from oversold technical conditions.

Major US indices are finding themselves at a critical juncture, with the S&P 500 back to retest a key support at the 4,330 level. Similarly, the Nasdaq 100 faces a key test for dip-buyers at the 14,680 level. Rate-sensitive growth sectors have been bearing a greater brunt of the sell-off lately, with the SPDR S&P Semiconductor ETF seemingly breaking below its neckline of a head-and-shoulder formation on the daily chart. There is still the potential for a bullish divergence to be formed on the daily relative strength index (RSI), provided that the index turned higher over coming days, but the neckline resistance will have to be reclaimed. Failure to do so may leave the May 2023 low on watch for a retest at the 174.00 level. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_1

Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_1

Asia Open

Asian stocks look set for a downbeat open, with Nikkei -1.16%, ASX -1.13% and KOSPI -0.90% at the time of writing, largely following through with the negative handover from Wall Street. The key focus today will be on the Bank of Japan (BoJ) meeting. With the BoJ Governor Kazuo Ueda floating the idea that the central bank could have enough data by year-end to determine whether to end negative rates, markets seem to perceive it as an imminent rate hike into early-2024. Therefore, all eyes will be on the Governor's communications at the press conference for any slightest signs of hawkishness to validate such timeline.

The USD/JPY has touched a new year-to-date high this week, with the pair still trading above the 145.00-145.80 range, where the BoJ had intervened with US$19.7 billion of yen-buying back in September 2022. With that, focus at the upcoming BoJ meeting will also be on how policymakers may address the weak yen and their willingness to tolerate a pull-ahead in the Japanese 10-year bond yields to levels last seen in 2013.

A bearish divergence on the daily RSI points to some near-term exhaustion for now, but staying above its Ichimoku cloud pattern and various moving averages (MA) on the daily chart still leaves an upward trend intact for the pair. Rising yield differentials between the US and Japan government bond yields have touched a new 10-month high, which may still provide some upward bias for the pair. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_2

Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_2

On the watchlist: Silver prices attempt to stay supported with some dip-buying

Silver prices have been resilient lately, with a post-Fed sell-off on Thursday met with some dip-buying overnight, as seen by the formation of a bullish pin bar on the daily chart. Thus far, prices have been edging higher upon a retest of an upward trendline support in place since August 2022, with higher lows on Moving Average Convergence/Divergence (MACD) pointing to some upward momentum.

Further upside may leave the US$24.50 level on watch for a retest, where the upper edge of its months-long consolidation pattern resides. Whereas on the downside, the upward trendline support will be an immediate support to defend by the bulls. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_3