The Bank of Japan leaves its ultra-easy policy unchanged

Markets

Yesterday was supposed the be an interlude ahead of today’s payrolls with (higher than expected) US weekly jobless claims (211k from 190k) providing some ‘dovish’ distraction intraday. However, gradually the story of SVB financial, the owner of Silicon Valley Bank moved to the center as driver for US/broader markets. The group faces pressure on its funding activities as it has to compete for cash/deposits with higher yields offered at several other money market products/funds. SVB was forces to sell assets and announced a capital increase to cover the loss on its security portfolio. Markets soon raised the question whether this case would be a one-off or whether other banks/financing companies would face similar issues. This developing story caused a hefty run on safe haven assets including Treasuries. The US yield curve bull steepened with the 2-y declining 20 bps, the 10-y ceding 8.8 bps and the 30-y easing 4.5 bps. First headlines on SVB already hit the screens early in US dealings. The fall-out on European markets stayed modest. German yields declined 5.9 bps at front end (2-y). The 10-y was little changed. The 30-y yield even gained 4.6 bps. The Eurostoxx 50 closed the session almost unchanged whereas US indices in the end lost 1.66% (Dow) to 2.05% (Nasdaq). With the source of market uncertainty emerging from the US and given the steep decline in US yields, the dollar didn’t profit from the risk-off. DXY opened near 105.6 to close the session at about 105.25. EUR/USD closed at 1.0581, compared to an intraday low in Asia near 1.054.

The Bank of Japan this morning as expected left its ultra-easy policy unchanged. However, global sentiment is dominated by the uncertainty/risk-off caused by SVP. US yields are ceding another 10 bps for maturities up to 10-y. Asian equities mostly show losses between 1% and 2.5%. European equity futures are also trading in red. Today, the focus for trading was supposed to be on the US payrolls. Post this week’s appearance of Powell before Congress, a solid report could have cemented the case for a return to a 50 bps rate hike in March and for guidance of a peak policy rate near 5.50%/6.00%. Markets still expect the payrolls to confirm tight labour market conditions (payrolls +225 k, unemployment rate 3.4% and average hourly earnings at 4.7%). However, we fear that even a solid payrolls report will be overshadowed by ‘uncertainty on financial stability’ emerging from the US. It’s much too early to assess whether the topic will have impact on Fed policy going forward. However, going into the weekend, we expect the risk-off/safe haven bid for high quality assets to persist. So, core bond yields probably will ease further. The US 10-y yield already dropped below the 3.90% barrier. The case for the dollar is less obvious. For now, we don’t see a strong case to support the dollar. First important resistance in EUR/USD is still rather far away around 1.0694. Smaller, less liquid currency might face growing headwinds.

News and views

The Bank of Japan made no changes to monetary policy. The base rate remains at -0.10% and the 10y yield target at 0% (+/- 50 bps). While that decision was widely expected, some warned for risks that governor Kuroda might adjust or even scrap altogether yield curve control and as such pave the way for his successor, Ueda, to normalize monetary policy further when he takes over in April. It explains why the yen still lost following the meeting, from an intraday low of USD/JPY at around 135.8 to 136.68 currently. Japan’s 10y yield tumbles more than 10 bps. The move lower, however, is also to a large extend driven by the general risk-off environment (see text). The BoJ sticks to ultra-easy policy given the extremely high uncertainties for Japan’s economy. It downgraded its view on exports and production though left its overall economic assessment unchanged. Inflation is still considered as mainly an (energy) imported phenomenon which should fade out in coming months.

Hungarian president Orban said he’s looking for ways to bridge the policy gap between the government and the central bank, adding that the two cannot go in opposite directions without undermining the economy. His comments came a day after MNB governor Matolcsy criticized Orban for making “strategic mistakes” in economic policy that he said led to a recession and the highest inflation in the EU. Orban and his cabinet recently urged the central bank to lower current interest rates of 18% as soon as possible. The president and Matolcsy are expected to meet this week.

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