Mind Bank of Japan

Market movers today

UK CPI inflation in May is due this morning. Inflation is likely to remain very high so there is definitely still a lot of pressure on the Bank of England to hike the Bank Rate further despite concerns about the economic outlook.

Simultaneously with UK inflation, we also receive Swedish unemployment data. Due to the large volatility in the unemployment numbers we refrain from providing an official forecast. However, we are having a close look at the hours actually worked, as they are an important indicator for the economic activity and thus the GDP outcome for the second quarter. Danish consumer confidence is also out this morning.

Later in the day we will look out for weekly US mortgage applications, as housing market risks are increasing because of rising interest rates. Euro area consumer confidence is due out at 16:00 CEST. Consumer confidence is likely to remain at depressed levels, as consumers still feel pain from high inflation rates.

Besides that, there are several central bank speeches. Most notably is Fed Chair Jerome Powell's testimony to Congress. We also hear from other Federal Reserve policymakers, Bank of England's Jon Cunliffe and SNB Chairman Thomas Jordan.

The 60 second overview

Markets: Sentiment has soured overnight with recession fears creeping back into markets. After a few days of relief the big equity futures are trading solidly in red this morning and also yields are moving lower. Brent crude has shown remarkable resilience this spring. Despite China weakness and record selling of strategic oil reserves oil prices have until recently managed to stay little changed or even move higher. Meanwhile, this seems to have changed over the last week amid rising global growth concerns and this morning Brent Crude has fallen to 111 USD/bbl. The USD is stronger and cyclically sensitive currencies are trading on the back-foot again. It is difficult to pinpoint the mood change to any single event this morning. Instead it highlights the more general challenging macro backdrop for risky assets amid central banks forcefully tightening policy into a cyclical slowdown.

Bank of Japan (BoJ): Amid a window of opportunity to finally lift inflation and inflation expectation to target, BoJ remains one of the very few global central banks that so far have not signalled a need to tighten monetary policy. BoJ still operates with a yield curve control targeting 10Y Japanese government bonds at 0.25% - far below current market levels for government bonds in the rest of the world. In order to defend its yield target BoJ must buy massive amounts of bonds and thereby adding equivalent amounts of JPY into the Japanese money market system. This has contributed to a record weakening of the JPY and an interesting connection to Fed monetary policy: the more Fed tightens, the more BoJ is forced to ease.

The JPY slide has resumed this week and while souring risk appetite overnight has supported JPY slightly, USD/JPY yesterday traded through 136.5 - the highest level since 1998. The renewed pressure on JPY comes from markets realising that the Bank of Japan (BoJ) is not planning on giving in to the global pressure for higher yields. The yield curve control remains in place. Last week BoJ decided not to alter its policy stance and this week Prime Minister Kishida has confirmed his backing of BoJ's yield curve control.

Long-end Japanese inflation expectations have risen over the last year but remains below 1% and hence still far below BoJ's 2% inflation target. For this reason we do not expect BoJ to scrap its yield curve control in the near-term. Yet we still highlight that this is one of the biggest single global macro and market event risks for the coming years. Lessons from the Swiss National Bank in 2015 show that scrapping market price targets can yield substantial market volatility. When BoJ ultimately decides to scrap its policy it would act as a global duration shock not only to Japan but also to the rest of the world.

Sweden home prices: Given that Danske Bank's home-price indicator for flat prices in Stockholm showed a price decline of 3% (-1.3% SA) during May, it was not of surprise that this morning's HOX Valuegard Home-Price Index revealed a country-wide downturn for the housing market of 1.6% (-1.2% SA). Among the big cities, flat prices in Stockholm fell the most (-3%) according to HOX Valuegard. First indications for June show a further decline at the same time as transaction volumes during May and June (so far) are substantially lower than normal.

Equities: Equities were almost 2% higher yesterday and basically without any news. This tells of course something about the volatile period we are in and the massive uncertainty among investors. As this has been the case for most of 2022, we see a more or less continuously lowering of equity share in balanced funds and we are at a level were pessimism is extremely high. When pessimism is at the current level, it does not take that much good news to bring a rally of 5-10% in equities. Defensives made a small outperformance to cyclicals, which in itself is not so special however, as markets were up 2% we would typically see cyclicals outperforming if investors were becoming more optimistic. As defensive outperforming it tells us investors are not convinced about a sustainable rally being ahead of us. In US, Dow +2.2%, S&P 500 +2.5%, Nasdaq +2.5% and Russell 2000 +1.7%. Asian markets are lower across the continent this morning and the same goes for European and US futures that have been sliding steadily overnight.

FI: The global bond markets are still caught in deciding whether to increase the recession risk into the pricing of the yield curves or whether the tightening of global monetary policy can manage to get a "soft landing". The support for more front-loading in the US continues to be strong. Yesterday, the Federal Reserve member from Richmond supported the "75bp" strategy as he stated that policy rates should be raised as fast as possible. We have more speeches tonight from Federal Reserve members including Fed Chairman Powell.

The discussion of the anti-fragmentation tool has brought stability to the BTPS-Bund spread that is now again below 200bp. Hence, it has brought some stabilization short-term.

FX: Amid souring risk appetite overnight the USD has gained while commodity and cyclically sensitive currencies have weakened.

Credit: The European credit markets had a relatively uneventful day Tuesday with iTraixx main tightening by 1bp to 107bp and Xover tightening by 4bp to 538bp. Overall the credit market seems to be in consolidation mode currently after steep spread widening in recent weeks.