Yen rallies as Bank of Japan surprises

It’s pantomime season so it’s time for some panto villains... 

Kuroda surprises 

He’s behind you…cue the Bank of Japan’s outgoing governor Haruhiko Kuroda, an unlikely foil, who’s entered stage left at the last moment to – perhaps - steal the Santa rally. Stocks fell on Tuesday, extending a run of weakness as the Bank of Japan roiled markets by tweaking its yield curve control policy. The yen surged against the dollar and Japanese equities fell as the BoJ decided to widen the range by which it allows the government 10yr yield to fluctuate. It will now allow the 10yr move between –0.5% to 0.5%, from a previous range of –0.25% to 0.25%, whilst keeping the overnight interest rate at –0.1%. 

The move is a major surprise. The chatter had been about a policy shift perhaps taking place in April when governor Kuroda’s term ends. He was keen to stress that this decision does not amount to a tightening of policy, nor is it the off-ramp towards doing so. Instead, he said it was to combat "deteriorating market functioning could threaten corporate financing". Certainly, the Japanese government bond market has become totally dysfunctional since the BoJ is now the only player.  

There is a strong chance markets start to price tighter policy ahead even if that is not the plan – markets have a habit of pushing the envelope and testing central banks’ resolve. It’s hard for the market not to see this as an implicit signal from the BoJ that the policy of the last decade has changed and needs to change. Inflation in Japan is at a 40-yr high, Japan has been a total outlier compared to the rest of developed countries, and you cannot do this kind of ultra-loose policy ad infinitum. 

Despite denials, this does look as though Kuroda is clearing some weeds out of the way to ease the path for his successor to normalise policy. April could be too late, and it’s hard for the new broom to radically alter policy immediately. There is a credibility question now with BoJ guidance and question of the timing of the move, but it could be that the BoJ felt it was behind the curve and sees inflation persisting. It’s hard to see this as anything other the start of a process, however tentative and however slow the process will be, rather than a one-off adjustment due to low liquidity in the JGB market.

The Japanese 10yr yield pushed to 0.46%, its highest in seven years, whilst USDJPY broke out from its 200-day SMA support in spectacular fashion. 

Musk ‘loses’ poll 

Oh no he didn’t! Oh yes, he did! Who knows...I thought it was a ploy to step back from day-to-day operations … like when he polled followers on selling Tesla stock. Maybe I’m wrong, maybe still right...the point is we don’t know; and making major company policy changes on the basis of irregular Twitter polls seems kind of not what a CEO should be doing. Moreover, it does kind of feel like Musk is making it up as he goes along...and he has a long history of saying one thing and doing another. Now he’s said that only blue tick accounts should vote in future polls after suggestions that fake accounts (oh the irony) might have skewed the result. Tesla shares did try to rally on the poll results investors would prefer Musk’s attention on making cars, but gave back gains as the silence and then the replies to tweets about the poll did not give anyone much confidence we would abide by the result of the poll. 

Trump trouble  

A House committee has recommended charging Donald Trump for his role in the Jan 6^th attack on the US Capitol. After about 17 months of testimony and investigation, the Democrat-led committee called for the Justice Department to charge the former president with four offences, including insurrection, which would bar him from holding public office.  

SBF extradition 

FTX founder Sam Bankman-Fried has agreed to be extradited to the US on charges of fraud following the collapse of the exchange. FTX is kind of old news now as far as the crypto space is concerned. Bitcoin is facing further pressure, retreating to the late November lows at $16,250 yesterday before recovering to around $16,800 this morning.  

Inflation has peaked! Oh no it hasn’t! 

German factory gate prices fell 3.9% on the month in November. But they were up 28.2% from the same month a year before. Expect the debate about peak inflation to continue but as I keep saying it’s not about the peak but the length of the plateau. Japan’s national core CPI is seen ticking up to 3.7% when data is released on Thursday. Then it’s onto the core PCE inflation reading in the US on Friday to set the tone for the Christmas week trading. 

The bottom is in

Oh no it isn’t. This morning, European stock markets took their cue from a weak session in Asia. US futures are weaker after Wall Street fell for a fourth straight day on Monday. The S&P 500 tested 3,800 round number at the lows yesterday and the next test is around the 3,700 support, the November 3^rd low.