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Japan signals end to ultra-loose policy as global stocks march higher.

 

Records Keep Tumbling  

Nikkei 225 broke 40k overnight, the Nasdaq Composite and S&P 500 both closed at all-time highs on Friday. Gold too broke out to new highs as US economic data was softer-than-expected, whilst oil was bid as OPEC+ extended its production curbs, worth about 2.2m bpd on paper, for another three months.  

Nevertheless, London remains on the sidelines for this monster rally in Japan, Europe, and the US, with the FTSE 100 down 0.3% at the open on Monday as it continues to struggle to sustain any kind of bid above 7,700. Can the Chancellor pull a rabbit out of the hat to give the city a boost this week?  

  

Land of the Rising Sun 

Emphasis on the ‘rising;’ Japan’s government is considering calling an end to deflation – a move that would undoubtedly herald an end to the extraordinary easy monetary policy. Figures this morning showed capital spending in Japan rose 16.4% in the fourth quarter, suggesting that the country’s technical recession may not be as bad as all that.  

Eyes remain on the yen with Tokyo core CPI inflation data due up later. Last week Japan's core consumer inflation slowed for a third month in January, though it topped expectations. Core CPI slid to 2.0% from 2.3% in December but the Bank of Japan is still expected to begin normalising policy in April.  

It is still the base case, but the more inflation slows the harder the BoJ will find it to move on time. Swiss inflation data and German import prices will also be watched by the market. Hot on the heels of the inflation report from Japan we hear again from the BOJ’s Ueda, who is walking a fine line towards normalising policy this spring.  

 

Overinflated 

Last week we had a sense that inflation remained stubbornly high – core PCE +0.4% month-on-month, 3-month annualized 2.8%, 6-month annualized 2.6% - pre-COVID 2020, it was 1.5%. Euro area inflation likewise remains sticky – headline falling to 2.6% from 2.8%, but above the 2.5% expected, whilst core was notably stubborn at 3.1% vs 2.9% forecast (down from 3.3% in the prior month).  

EURUSD has edged lower this week and twice tested the 1.08 round number support and held as it clings to the longer-term trend line, but the 200-day line is now acting as resistance.  

 

ECB Day on Thursday 

The European Central Bank left rates on hold at its January meeting and pushed back against chatter about early rate cuts. "All in all, members signalled that continuity, caution and patience were still needed," the ECB minutes read. "There was broad consensus among members that it was premature to discuss rate cuts at the present meeting."  

And it would be a big shift were the ECB to change tack this week. "While the initial inflation shock had largely reversed, the task that lay ahead was the reversal of second-round effects, which might prove to be more stubborn," the ECB said. However, it does seem likely that the ECB will adopt a slightly more dovish outlook by opening the door to a potential cut in the summer.  

 

Of interest this week  

Budget Day in the UK on Wednesday may be of interest – watch for new forecasts on borrowing and tax cuts that could affect gilts and sterling. Also, anything designed to boost investment in UK equities could affect the FTSE.  

Meanwhile, Fed chair Jay Powell begins a two-day testimony about monetary policy before the House Financial Services Committee – an event usually closely followed by market participants for clues about where the FOMC may go next.  

All that matters to the market it seems is the timing of the first rate cut and how far they expect to go with policy easing.  The Bank of Canada’s latest decision on interest rates is expected to see policymakers leave the rates on hold.   

Marine Le Pen launched the RN party’s European parliament campaign on Sunday with a clear lead in the polls…is Europe ready for an earthquake in June?

 

Jobs Day Friday 

January’s jobs report saw payrolls booming, wages surging and unemployment falling. Will the February report convey a similar message of underlying strength in the labour market that belies some other indicators – for example, that all the jobs being added are part-time and that the average workweek fell to 34.1 hours.  

Nevertheless, the strength of the headline numbers ensures the Fed will be cautious about cutting too soon. More strength in February would support the wait-and-see narrative that has seen expectations for rate cuts this year significantly dialled down.  ADP payrolls on Wednesday and JOLTS job openings on Thursday are also to be monitored. 

 

Charts  

Gold rallied strongly to fresh highs after Friday’s weaker-than-expected US ISM manufacturing report pushed the dollar and Treasury yields down. The headline number fell to 47.8 vs 49.5 expected, defying a more robust S&P Global report just a few minutes earlier. 

Gold rallied strongly

 

Sterling continued its run higher this morning after rallying off 1.260 after the US ISM report. 

Sterling continued its run higher this morning

 

WTI – clear extension off the 200-day line with OPEC and co extending roughly 2m bpd of paper cuts to the end of June. CFTC data showed speculators added to their net long positions for a third week in a row.  

WTI clear extension off the 200-day line with OPEC

 


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