Japanese Central Bank Drops a Bombshell of a Surprise

January 29, 2016

The Bank of Japan adopted a negative interest rate after repeated officials comments from central bank officials earlier that they weren’t contemplating such.

In response, Japanese share prices advanced 2.8% and the yen has fallen 2.2% against the dollar and 0.9% relative to the euro.  The 10-year Japanese JGB yield declined 12 basis point to 0.09%, as central bank officials identified that a goal of today’s action is to reduce Japan’s entire yield curve.

The BOJ action had long coat-tails.  In other stock market action, the DJIA is up 1.4%, China’s Shanghai Composite index rose 3.1%, the Hang Seng closed 2.6% stronger, the French, British, Spanish, and Italian markets show rises between 2.0% and 2.6%.  The German Dax is up 1.6%, and Greece’s market has risen 1.7%.

Among other 10-year sovereign debt yields, there have been declines today of 11 basis points in the U.K., 7 bps in the U.S. and Canada, and 3 bps in Germany.

The dollar strengthened 1.2% against sterling, 1.1% versus the euro, 0.9% relative to the Swiss franc, but just 0.1% against the commodity-sensitive New Zealand, Australian and Canadian currencies.

WTI oil continues to trade above $33/barrel and is 27% above its low of $26.19 earlier this month. Gold edged 0.1% higher to $1,116.85 per ounce.

Several Japanese economic indicators were reported:

  • Core CPI inflation ended 2015 at 0.1%.  Tokyo’s total inflation rate swung from 0.1% in December to -0.3% in January.
  • Industrial production fell 1.4% on month in December and 1.6% from end-2014.  Output had dropped 0.9% in November and recorded an average 0.8% contraction in 2015.
  • The jobless rate stayed at 3.3% in December, having risen 0.2 percentage points from 3.1% in November.  There were 0.4% more jobs than at end-2014.
  • Real household spending rose 0.9% on month in December but posted a larger-than-forecast 4.4% 12-month rate of decline. Real disposable incomes contracted 3.1%.
  • Housing starts unexpectedly recorded a December-to-December drop of 1.3% following November’s 1.7% on-year advance.
  • Construction orders grew 14.8% on year in December after a dive of 25.2% in October and a smaller on-year rise of 5.7% in November.

The Bank of Japan revised its fiscal 2016 growth forecast to 1.1% from a 1.2% projection released three months ago and slashed its core CPI forecast for FY2016 to 0.8% from projections of 1.4% made last October and 1.9% assumed six months ago.

U.S. real GDP grew at only a 0.7% annualized rate last quarter, down from 2.0% in 3Q and 3.9% in 2Q.  As a consequence, 2015 growth of 2.4% was no different from the result in 2014.  The last calendar year to see as much as 3.0% growth was 2005, and 2000 was the last year to achieve growth of at least 4.0%.

The U.S. personal consumption price deflator posted a 0.4% year-over-year rise last quarter, down from 1.1% in 4Q14.  The core PCE deflator rose 1.4% in the year to 4Q15, same as in the year to 4Q14.

The U.S. employment cost index in the fourth quarter matched results in the third quarter, increasing 0.6% from the quarter before and 2.0% from a year earlier.

The Chicago and Milwaukee regional purchasing managers indices in manufacturing each swung from sub-50 readings in December to 55.6 and 50.4, respectively, in January.

The U. Michigan/Reuters consumer sentiment index for January was revised lower.  At 92.0, such constituted a 2-month low after scoring 92.6 the month before.

Eurozone consumer price inflation ticked up 0.2 percentage points to 0.4% in January.  Harmonized consumer prices rose 0.8% in the year to January 2014 but fell 0.6% in the year to January 2015.  Core inflation now stands at 1.0%, up from 0.6% in January 2015  and 0.8% in January 2014.

M3 money growth in Euroland slowed to 4.7% in December from 5.0% in November and 5.2% in October.  M3 expanded 5.0% between the final quarters of 2014 and 2015 versus a 2.3% gain in the previous year.  But loans to the private sector remain very subdued, climbing 0.4% in the year to December versus a contraction of 0.5% in the previous year to December 2014.

French GDP last quarter climbed 0.2% on quarter and 1.3% on year.  Growth averaged 1.1% in 2015 versus 0.2% the year before.

Spanish GDP rose 0.8% between 3Q and 4Q, the same quarterly pace as last summer.  Average Spanish growth in 2015 was 3.2%.

German retail sales volume in December slipped 0.2% on month, trimming the 12-month increase to 1.5%.  Sales in 2015 expanded 2.7%, about four times greater than the 0.6% per year pace in 2011-14.

Canadian real GDP increased 0.3% in November but was only 0.2% greater than a year earlier.  Industrial production contracted 3.2% between November 2014 and November 2015, including a 5.4% slide in energy.

The Bank of Russia left its key interest rate at 11.0%.  The last change was a 50-basis point cut six months ago.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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