BoJ pulls the trigger, Unilever’s share price soars and Nvidia releases new monster chip

The Bank of Japan hiked interest rates for the first time since 2007 on Tuesday. The world no longer has a major economy with a negative interest rate, and it could herald the end of a period of unprecedented loose monetary policy for Japan.  This move was expected by the market, although analysts had, on balance, expected the BOJ to remain on hold for yet another month. Instead, the BOJ hiked rates from -0.1% to a 0-0.1% range. However, in the aftermath of the announcement, the yen has been in freefall and USD/JPY is back above 150.00.

BoJ monetary policy still far from normal

The Bank of Japan may have ended negative interest rates, but Japanese monetary policy is far from normal. The announcement was accompanied by a dovish statement that suggests this is not the start of an aggressive rate hiking cycle, even though wage inflation is set to pick up strongly in the coming months. Toyota announced the largest wage increase for 25 years, and Rengo, Japan’s largest group of labour unions, won an average pay increase for its members of 5.2%, the highest level since 1991.

Why Japan won’t follow the US and UK with higher interest rates

Right now, the market thinks that it could be one and done for the BOJ, however, with such large increases in wages, the BOJ could be forced into hiking again. The market does not expect any immediate change in rates in the coming months and has taken the BOJ’s dovish rhetoric at face value, even if wage increases such as those given to Japanese workers would strike fear into the hearts of UK and US central bankers. If a central bank’s job is to tell the narrative of an economy, then the narrative the BOJ is telling is that there is some need to scrap zero interest rates, but Japan’s economy is still not ready for interest rates to accelerate into positive territory. The last time interest rates in Japan were at 5.25% - the level they are in the UK – was the early 1990s.

Bond market volatility on the BoJ’s mind

The BOJ also need to be wary of creating too much volatility in the Japanese government bond market. Decades of loose monetary policy and intense purchases of Japanese assets, including ETFs, which was only ditched at this meeting, means that the BOJ’s balance sheet is 4 times the size of the Fed’s balance sheet on an asset to economy ratio. The BOJ holds a huge number of government bonds, and rising yields (falling bond prices), could be destabilizing to the JGB government bond market, and the broader Japanese economy. The 2-year Japanese government bond yield is down 1 basis point on the back of this meeting. After climbing 27 basis points in the past year in anticipation of a rate hike, the yield has backed away from the March high, as sell the rumour, buy the fact impacts the Japanese bond market.

Overall, Japan may have ended its negative interest rate policy, but we could be back in the realm of ZIRP (zero interest rate policy) for some time. This may only change if we see wage pressures feed into national CPI, which may take some time due to the cautious nature of Japan’s consumer.

Unilever’s waves goodbye to Ben and Jerry’s and Magnum

Elsewhere, Unilever’s shares jumped a whopping 5% at the start of trading on Tuesday, after it waved goodbye to its ice cream division, including Ben and Jerry’s and Magnum. The demerger could create a new listed business, and it could impact 7,500 jobs. This is one of Unilever’s biggest actions to reduce costs by $800mn over the next 3 years. The plan to revitalize growth will see Unilever focus on four key areas: beauty, homecare, personal care and nutrition. The stock price is lower by more than 6% in the past year and is underperforming the lacklustre FTSE100. However, the market likes the de-merger news, and it is a strong vote of confidence in the new CEO’s strategy of streamlining the business and cutting costs, which is a winner in the current market environment.

Nvidia’s new mega chip fails to lift the share price

The GTC conference for developers hosted by Nvidia was the location chosen by the chip giant to announce their latest mega chip. The new chip will be called the Blackwell, and it is a monster in the chip world. The Blackwell has 208bn transistors. It is so big that it is actually two chips married together, and it will require a whole new set of production techniques. It is many times faster than Nvidia’s current GPU, and the hope is that it will herald a new era in the development of models that underpin the AI infrastructure landscape.

Market reacts cautiously to Nvidia’s latest product launch

The market is less impressed, Nvidia’s share price rose only slightly on the news, and futures pricing suggests that it will open down by approx. 1% at the time of writing. Perhaps the market is intimidated by its size, or the complexity of the production process – the Blackwell won’t be easy to make, and this could cause 1, delays, 2, slower uptake. Added to this, Nvidia has so far managed to avoid the glare of regulators, largely because they have not been able to keep up with the speed of development in the AI space. However, this new chip could ultimately supercharge the AI revolution and could bring it closer to having a real-world impact. This is likely to lead to intense regulatory scrutiny. This is also a chip that the US authorities are unlikely to allow to be exported to China, which limits the market reach of Nvidia’s latest product. All of this may also be on investors’ minds as the market attempts to price in what this means for Nvidia's bottom line. However, the Blackwell always had a high bar for investors, since sales of its predecessor has helped the company’s share price jump by nearly 80% so far this year, and Nvidia is now the world’s third largest company. Thus, it could take a bit of time for the market to get used to the Blackwell. If can deliver for Nvidia’s bottom line in the way the current GPU does, then we think the market may push Nvidia’s stock price higher.

It is also worth noting, that this chip highlights the growing gulf between China and the US when it comes to AI. The US is pulling ahead in the race, and if AI is the future of the global economy, then the US is the epicentre.