Markets to Watch This Week: Is Japan About to Widen the YCC?

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Market Moves

Markets are jumping the Federal Reserve’s (Fed) 25bp gun. They were quick to celebrate Thursday’s inflation data after the Consumer Price Index (CPI) matched expectations for headline (-0.1% MoM) and core (+0.3% MoM). The S&P 500 ended the day up 0.3%, with bitcoin rallying too, while the DXY was down alongside bonds (Charts 1-3). Now, several regional Fed presidents, except St. Louis Fed James Bullard, support a 25bp hike at the 1 February meeting. Dominique disagrees, still expecting a 50bp hike.

Remaining in the US, Treasury Secretary Janet Yellen told congressional leaders the US would reach the statutory limit on its debt on 19 January and requested a raise of the debt limit. She warned that the government could be unable to pay its bills after early 2023. House Republicans have vowed to raise the debt limit if public spending cuts are enacted.

Elsewhere, inflation and labour market data is yet to allow the Reserve Bank of Australia to pause. Meanwhile, in Europe, despite data marginally beating Norges Bank forecasts, we expect them to pause on Thursday.

What to Watch

It is a big week for the Bank of Japan (BoJ). Everyone is watching. It recently bought record amounts of JGBs – in its fixed rate operations – to try and keep 10-year yields below 0.5%. Now, they could be set to raise the limit – known as the Yield Curve Control (YCC) – despite equally strong arguments that it stays put. Bilal believes it is more likely to be raised than not.

Turning to the US, it is another busy week despite starting with markets closed for Martin Luther King, Jr. Day. The more influential FOMC members, and regional Fed presidents, will speak. Dominique expects Fed Board Member Christopher Waller to support a 50bp hike – since he is a hawk – and looks to Vice Chair Lael Brainard and Fed Reserve Bank of New York John Williams – both doves – for a sense of where the FOMC consensus is likely to settle.

The Fed will also release the Beige Book. Meanwhile, on data, Dominique sees scope for a positive surprise to the Producer Price Index (PPI, Wednesday) given the large positive surprise with import prices, excluding oil, last week.

And in US equities, analysts are pencilling in 2023 earnings growth of 9% for the S&P 500 and 15% for the NASDAQ 100. John is sceptical given it will require a robust economy and inflation in the face of higher rates to come. Some 42 companies report this week. Their outlooks will say much about whether recession concerns expressed in Q3 earnings reports are alive or receding.

Data in Europe will be concentrated around the UK, with Governor Andrew Bailey’s testimony (Monday), labour market data (Tuesday), inflation (Wednesday), and retail sales (Friday) all released. Henry expects the data will continue to confirm that the labour market is weakening, while core inflation momentum is slowing. If proven, there should be room for strong gilt curve steepening.

While, on the mainland, European Central Bank (ECB) speakers including President Christine Lagarde are on the airwaves, plus we get the minutes for the December 2022 meeting. Henry expects, together, they will affirm the more hawkish tone recently seen. Switching to Norway, Ben expects Norges Bank to hold the policy rate at 2.75%. He thinks, instead, they will hike in March.

Watch Andrew and Dominique discuss their thoughts on US CPI, natural gas prices, whether she still holds her 8% terminal Fed call, and much more!

Lastly, if you missed this, Bilal dived into the world of Private Equity (PE). They are performing suspiciously well and appear overvalued. Now, private flows are slowing: 2022 has already seen funds raised declining by 20%. And internal rates of return (IRR) down significantly. Moreover, higher interest rates are undermining PE, with PE firms struggling to get lending from banks. Looking forward, while it is unclear whether PE crashing could lead to systemic issues, it could lead to a political fallout – especially as pension funds appear to have been among the largest investors in PE.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.