From Marc to Market:
The Bank of Japan defied expectations and its economic assessment to
leave policy unchanged. The inaction spurred a 3% rally in the yen and
an even larger slump in stocks. The financial sector took its the hardest
and dropped almost 6%. The yen's surge helped underpin other Asian
currencies, especially the South Korean won, which gained nearly 1%.
At the end of January, the BOJ surprised by adopting negative interest
rates for a small part of Japanese banks' excess reserves. The yen
strengthened markedly. Now the BOJ disappoints in not easing
policy. Prior to the
BOJ's announcement, and in response to poor data that showed the most deflation
in three years (-0,3% year-over-year on a core
measure of CPI that excludes fresh food), a larger than expected slide in
overall household consumption (-5.3% year-over-year), the dollar had approached
JPY112.00. The dollar dipped briefly below JPY108 in early European
activity. The greenback sits near its lows ahead of the start of the
North American session.
The BOJ did do something. It cut its inflation and growth
forecasts and delayed for the fourth time in around a year when it would
achieve its inflation target. It now stands at some time in the next
fiscal year. We have long argued that it is unhelpful for the BOJ cast
its inflation target as a near-term objective. Other major central banks are talking about their inflation target
as a medium-term objective, and this
provides more degrees of freedom.
BOJ Governor Kuroda sounded dovish,
and the pressure to ease policy in the coming months, perhaps in July, remains
possible. The ostensible argument for standing pat is to monitor the
impact of the recent easing. However, the BOJ's economic forecasts are
consistent with the aggressive easing having little positive impact. Some
speculate the Kuroda was sending a message to the Abe government, consistent
with the G7/G20 concerns about the over-reliance on monetary policy. The
lack of new monetary action may add pressure on
the government for a bolder fiscal policy initiative.
The Nikkei sold off hard. We had warned yesterday that should
the BOJ disappoint, the Nikkei could fall toward 16773. In fact, it fell
to 16652 and closed on its lows. Depending, of course, on what happens over the next 12 hours, the Nikkei could
gap lower tomorrow. The downside risk extends toward 16000 now.
Most Asian markets fell, and the
MSCI Asia-Pacific Index slipped 0.2%, extending its declining streak to the
fifth consecutive session. Recall losses at the start of last week
snapped an eight-day advance.
European bourses are lower, and the Dow Jones
Stoxx 600 is off 1.25%, led by health care and financials.
The S&P 500 is trading nearly 0.8% lower.
The push higher in global bond yields ended with a bang today.
Core 10-year benchmarks in Europe are off six
bp. Of note so is the 10-year Portuguese bond. Tomorrow DBRS will
review Portugal's credit rating. It is the only rating agency that the
ECB uses that give Portugal an investment grade. If it takes it away,
Portuguese bonds will not qualify for
purchases under the ECB's bond-buying
program. It would join Greece and Cyprus.
The US 10-year yield, which had been approaching 2.0% earlier this week,
fell yesterday after the FOMC failed to alter investors skepticism about a June
hike. Perhaps in anticipation of easier BOJ policy would spur
Japanese demand for US Treasuries also weighed on yields. Today the yield
is
close to 1.80%....
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