BoJ Pushes Back, UK Inflation Not Falling Fast Enough

Stocks were flat in early trade in Europe on Wednesday as markets looked ahead to US retail sales and several Fed speakers later in the session. The FTSE 100 was barely changed as it resists for now the temptation to strike a fresh all-time high even as we seem to be hearing whispers of optimism from Davos about the world economic outlook. It follows a mixed day on Wall Street as Goldman Sachs’ huge earnings miss weighed on the Dow, whilst the Nasdaq eked out a small gain. By contrast, Morgan Stanley was among the top performers on the S&P 500 after its wealth management division performed strongly. Yields are down a bit with the US 10yr back under 3.5%, gold doing little as it hovers around the $1,910 area and the dollar is weaker.

Yen slides as BoJ pushes back

Not an exit strategy: the bank of Japan stuck to its ultra-loose monetary policy, pushing back against the market by sticking to its yield curve control policy. Outgoing governor Kuroda stuck to the mantra that expanding the envelope for the 10yr Japanese government bond yield to 50bps either side of zero was about smoothing market functioning and not the off-ramp for the current policy. The move triggered a sharp pull back in the 10yr benchmark yield to 0.368% from 0.523%, whilst the yen tumbled 2% or so versus the dollar, USDJPY bouncing above 131.50 from a low of 128.0 yesterday. Stocks in Tokyo rallied with the Nikkei 225 up 2.5%.

Traders had been front-running a potential policy move ahead of Kuroda’s exit after ten years in April after the central bank set up a potential move last December when it widened the trading range for the 10yr. Stick, twist or bust: The BoJ went with stick, and it also left the overnight rate at –0.1%. The BoJ did however tweak its loans to financial institutions from fixed rate to floating rate “to encourage the formation of a yield curve that is consistent with the guideline for market operations”. The BoJ also raised its inflation outlook to 3%.

Not an exit strategy? Surely this just sets up Kuroda’s successor for a bigger challenge. I think it would have been easier to go with the market flow a bit here. Now we have the market thinking one thing and the BoJ saying and doing - for now - something different. It seems the exit strategy will be one for Kuroda’s successor.

Sterling rallies as UK inflation cools

Cable rallied to a fresh month high as UK inflation slid for a second month. December’s CPI inflation rate fell to 10.5%, down from 10.7% in the previous month and extending the decline since the 41-year high of 11.1% struck in October. But it’s not coming down fast enough, leaving the Bank of England all but certain to move with another 50bps hike in February. Core inflation, however, remained steady at 6.3%. We’ve talked endlessly here about the peak in inflation and how persistent core inflation is likely to be. In essence, my view is that inflation may have peaked but it is not going to come down nearly as quickly as central banks – and consumers – would like. Higher wages and structurally tight labour markets will ensure it proves sticky.

ECB slowing rate hikes?

Remember Christine Lagarde, the president of the European Central Bank, sounding rather hawkish in December? The ECB said interest rates would “still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target”. This was a step-change from the “substantial progress” hailed in the October statement. Lagarde went further in the press conference, effectively outlining at least another 100bps of hikes by March. Now sources are pushing back – 50bps in Feb and just 25bps in March, perhaps. De Villeroy says this morning that there is good news on inflation as energy costs come down and he does not see a wage price spiral...the old transitionary argument in new clothes. Final CPI data is due shortly.

Empire State of decline

Business activity contracted sharply in New York State, according to the January 2023 Empire State Manufacturing Survey. The headline general business conditions index fell 22 points to -32.9, the lowest level since May 2020, at the height of the pandemic. New orders and shipments declined substantially, the New York Fed said, while employment growth stalled, and the average workweek shortened. Inflation pressures eased - input price increases slowed considerably and selling price increases also moderated, the NY Fed said. Does this survey point to the shift from stagflation to deflationary recession? I don’t know, some wags point out it might just be do with the Democrats in charge of the state rather than a wider problem for the US economy.

Tesla things...

Elon Musk is a “little off his rocker”, according to one potential juror in a class action lawsuit brought by Tesla investors over his famous ‘funding secured’ take-private tweets in 2018. Anyway, a jury of people who presumably believe Musk is at least clinging to his rocker with his fingernails was selected and the trial should last a week to ten days. Meanwhile a large debt payment for Twitter is due…presumably bankruptcy is not a viable option, but it cannot be ruled out. Tesla shares ended the day 7% higher even as price cuts weigh ahead of earnings on Jan 25th.

Bernstein says those price cuts will have a "huge impact" on the company’s financials, whilst Wells Fargo notes other companies in the EV space will be hit – price war? “TSLA’s material price cuts on Friday may force an industry-wide price correction,” writes Wells’ Colin Langan. Bank of America has lowered its price target on TSLA from $135 to $130. Jefferies wins the price though - target cut to $180 from $350 but retains a buy rating. LOL.

Crude gains

Oil continues to push up from the 50-day line support – GS again saying that commodities have the strongest outlook of any asset class in 2023. OPEC says rising demand in the East will offset declining demand in the West this year.