Volatile End to a Volatile Week as Bank of Japan Declines to Join Bandwagon of Monetary Policy Tighteners

June 17, 2022

The weighted DXY dollar index is 0.8% firmer than at Thursday’s close but 1.3% below Wednesday’s multiyear high. Against individual currencies in overnight trading, the dollar jumped 1.9% against the Japanese yen but slumped 1.6% relative to the Russian ruble. The greenback also rose 0.9% versus the Australian dollar, 0.6% vis-a-vis sterling, 0.5% versus the New Zealand dollar, 0.4% relative to the euro, and 0.3% against the loonie.

Dollar demand was buoyed by a 2-basis point further increase in the 10-year Treasury yield juxtaposed against overnight drops of 7 and 5 basis points in comparable British gilt and German bund yields. Within Euroland’s bond market, investors reacted to central bank plans to protect highly indebted members from a tighter ECB monetary policy. Ten-year sovereign debt yields tumbled overnight by 28 basis points in Greece, 16 bps in Italy, and 13 bps in both Spain and Portugal.

Share prices in the Pacific Rim closed down 1.8% in Japan and Australia and 1.3% lower in Taiwan but up by 1.1% in Hong Kong and 1.0% in China. Bottom-fishing in European stock markets has lifted Italy’s broad stock index by 2.1% thus far today and markets in Spain, Germany, France and Great Britain by between 1 and 2%.

In pre-opening U.S. futures trading, the Nasdaq, SPX, and DOW have recovered 1.3%, 1.0% and 0.9% but still show drops of 30.5%, 23.1% and 18.3% from their bull market peaks.

Bitcoin, up 3.1% today but 69.5% below its 52-week high, has also performed a dead-cat bounce.

By comparison with other financial market swings, overnight dips of 0.3% in the price of WTI oil and 0.1% in the price of gold have been unremarkable.

The Bank of Japan Board met for 4 hours 35 minutes over two days and left its short-term interest rate and 10-year JGB yield targets unchanged at -0.10% and “around zero percent.” In the 8-1 vote, Board member Kataoka once again dissented, favoring more deeply negative rates and overall stimulus. Japan’s central bank launched its QQE with Yield Curve Control framework in September 2016. Officials reaffirmed their open-ended commitment to this stance:

The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.

In light of recent pressure testing the 10-year Japanese Government Bond yield’s upside potential, officials in April had pledged to buy bonds in unlimited quantities to cap the yield at 0.25%. There had been some speculation that given monetary policy tightening around the world the BOJ might soften that commitment, but that did not happen.

Among data releases this Friday, Euroland CPI inflation in May was confirmed at its initial estimate of 8.1%, highest since the joint currency bloc was launched in 1999. 8.1% represents a fourfold acceleration from 2.0% in May 2021. Likewise, core consumer price inflation climbed from 1.0% in May 2021 to 3.8% last month, and while a 39.1% rise in the energy price component of the index was the main inflationary impulse, the other main components show greater price pressure, too. Baltic members of Euroland like Lithuania (CPI now up 18.5% versus 3.5% a year ago) and Latvia (16.8 from 2.6% in May 2021) have seen particularly spectacular transformations in the inflationary environment. German CPI inflation of 8.7% compares to 2.4% a year earlier.

Portuguese producer prices jumped 7.4% on month and by a 3-month low 24.5% on year in May.

Canadian producer price inflation of 15.0% in May was down from 16.4% in April and the lowest since August 2021.

New Zealand’s manufacturing purchasing managers index recovered to a 2-month high of 52.9 in May from an 8-month low of 51.2 in April.

Unemployment in Hong Kong fell to 5.1% in March-May from 6.0% a year earlier.

U.S. industrial production data will be released later this morning.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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