From Marc to Market:
Overview: With the market nearly ruling out a 50 bp hike by the Federal Reserve on February 1, the interest rate adjustment appears to have largely run its course. This may be helping to ease the selling pressure on the greenback. The general tone today is one of consolidation. There is a modest risk-off bias today. Although Japanese stocks advanced, China, Hong Kong, and South Korean equities slipped lower. Europe's Stoxx 600 is snapping a four-day advance, and US futures are trading with a heavier bias. Benchmark 10-year yields are firmer, with the US Treasury near 3.55%, up nearly 14 bp from the pre-weekend low.
The market has greeted news of stronger than expected Chinese Q4 GDP and December data with a jaundiced eye. The yuan has seen its largest two-day retreat in a couple of months. The PBOC is preparing the local money markets for next week's holiday. The outcome of the BOJ's meeting tomorrow remains a key source of uncertainty. We suspect operation changes rather than substantive policy adjustments, like abandoning the yield-curve control or widening the 10-year band further, but, of course, recognize the pressure to act.
Asia Pacific
The BOJ finds itself in an unenviable position of its own making. If it adjusts the Yield-Curve Control by widening band of the 10-year yield again or abandoning it all together, its credibility is diminished. It has spent more than $80 bln in the past three sessions defending it. It maintains the cap, it likely faces continued challenge by the markets, which has pushed the 10-year yield through the 0.50% cap, even if its tweaks the market operations, which Japanese banks and brokers think is more likely. At the end of week, Japan reports its December CPI figures. The headline and core rates are seen rising to 4.0%. Consider that the uncertainty ahead of the outcome of the BOJ meeting has driven overnight implied volatility above 50%, to its highest level since the Great Financial Crisis.China reported better than expected data....
....MUCH MORE
