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Daily Market Comment – Yen sinks after BoJ leaves policy unchanged, dollar shrugs off GDP miss
April 28, 2023 9:27 amVideo
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Ueda saves the big guns for another day
The Bank of Japan kept its monetary policy settings mostly unchanged on Friday, deciding not to rattle the markets on Governor Kazuo Ueda’s first chairing of the meeting. The decision was widely expected as it was well telegraphed in advance, as was the announcement to launch a “broad-perspective” policy review.
But whilst there were plenty of hints the BoJ wanted to conduct a comprehensive review of past easing, the timeframe of one-and-a-half years was longer than what markets had been anticipating. Investors have interpreted the long timeframe as a sign that policymakers are unlikely to make any major policy changes in the interim, completely ignoring some important details.
For one, the BoJ just ditched Kuroda’s much prized and once powerful forward guidance on interest rates. The statement no longer reads “it also expects short- and long-term policy interest rates to remain at their present or lower levels”. In addition, inflation forecasts for both this year and next were revised higher. Core CPI is expected hold around 2.0% for the next two years and although it is forecast to dip in 2025, any further upward revisions would imply the Bank sees inflation becoming sticky.
In his press conference, Ueda sounded upbeat about the prospect of hitting the 2% target sustainably, leaving little doubt that the yield curve control policy’s days are numbered.
However, the reaction in the yen suggests there was some pricing of an imminent announcement of an exit from ultra-easy policy and that is probably why the Japanese currency is sliding across the board today. The US dollar has jumped above 135 yen to a seven-week high, while the euro has scaled a more than eight-year high of 149.50 yen.
Dollar climbs as inflation worries outweigh GDP miss
The BoJ decision wasn’t the only thing markets had to digest as yesterday’s preliminary GDP data out of the United States fuelled stagflation fears. The American economy slowed in the first three months of 2023, expanding at an annualized rate of just 1.1% versus expectations of 2.0%.
But rather than up their bets of rate cuts by the Fed, investors scaled them back and the dollar spiked higher in the aftermath as the GDP deflator came in hotter than expected. Specifically, the core PCE deflator jumped to 4.9% in Q1, beating forecasts if 4.7%.
The monthly core PCE price index is due later on Friday, which may also show that there was not a lot of progress in March in getting inflation down. Personal spending data will also be watched as consumption was the main driver of growth in Q1.
The Fed meets next week and may decide to hike one more time after May if policymakers are uneasy about underlying inflation remaining so high. Although not a lot has changed in bond markets after yesterday’s numbers, which included yet another healthy jobless claims print. Treasury yields are sliding today, reversing much of Thursday’s gains.
Nevertheless, the dollar is extending its advance today pressuring even the bullish euro, which has slipped back below $1.10.
Traders are keeping an eye on a slew of Eurozone data due today and the coming days ahead of next Thursday’s policy decision by the European Central Bank. The odds of a 50-basis-point-hike have receded somewhat this week, declining even more today following disappointing French and German preliminary GDP figures for Q1. The flash CPI release out of Germany (12:00 GMT) will also be key.
Techs bounce back but Amazon earnings may cool the rally
In equity markets, US futures were in the red after hefty gains on Thursday. Both the S&P 500 (2.0%) and Nasdaq Composite (2.4%) rallied on the back of blowout earnings from the tech giants this week.
Facebook owner Meta was the latest to report better-than-expected earnings on Wednesday, sending the stock surging by almost 14% yesterday. But Wall Street could come under pressure today after Amazon.com sparked some concerns about the outlook when it reported its results after Thursday’s closing bell. Amazon’s CFO warned that the weaker economy could continue to weigh on cloud revenue growth in Q2.
On the whole though, investors don’t seem to be too worried about a recession and even if this earnings season ends up being unable to generate a higher high for the major indices, at the very least, it has put a floor under them.
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