Summary: The Bank of Japan was going to surprise overnight no matter what it decided, and with the market leaning for some kind of further tweak in policy after a December move, Governor Kuroda and company surprised by indicating no change at all in the initial statement, sending the JPY sharply lower. Elsewhere yesterday, the euro was marked lower on a story that the ECB is set to slow the pace of hikes already after the February ECB meeting. US December Retail Sales on tap today.
US equities continue to trade in a pivotal area ahead of the heart of earnings season set for the coming couple of weeks, with the 200-day moving average and 4,000 area in focus for the S&P 500. Financial conditions remain very easy as corporate credit spreads and the VIX continue to poke into the low range of the last year as the market hopes for a soft landing for the economy and as the Fed is seen as easing away from its tightening regime after another two 25 basis point hikes at coming meetings.
Hang Seng Index ticked up by 0.3% and CSI300 edged down by 0.1%. Online and mobile gaming names led in both the Hong Kong and mainland bourses. China released 88 new licenses of online/mobile games, including one title from Tencent (00700:xhkg), up 1.2%. and one title from NetEase (09999:xhkg), up 4.6%. The other internet names, however, traded weak, with around 1% to 3% losses. Vice-Premier Liu He’s speech at Davos attempted to assure the audience about a 2023 recovery in the Chinese economy and stability in the real estate sector. He also sang from the same recent hymn book of other Chinese leaders to try to assure the world about China’s openness and not resorting to equalitarianism in its drive for common prosperity.
FX: JPY weakens as BoJ refuses to tweak policy, ECB surprises with dovish shift.
The market was leaning for further policy tightening from the Bank of Japan after December’s surprise widening of the yield-curve-control “band”, but the Bank of Japan failed to deliver, leading to the yen getting shocked back lower, in part on the unwinding of the largest spike in implied volatility for over-night options over the event in years. More below on the BoJ. Elsewhere, officials from the ECB were quoted late yesterday afternoon, indicating a that, while the expected 50 basis point hike is likely for February, there is increasing support for a deceleration to 25-basis point hikes at subsequent meetings. This development took the euro sharply lower yesterday as, for example, German 2-year yields dropped over 10 basis points on the news.
Crude oil edged higher, thereby erasing early January losses, after OPEC’s Secretary General Haitham Al Ghais said he’s optimistic about the outlook for the global economy and with that demand for crude oil. The oil producer group said that a potential slowdown in advanced economies is countered by accelerating growth in Asia. The market is expected to tighten as Russia’s supply suffers from G7 price caps and China’s demand recovery underpins. Russia said it expects Western sanctions to have a significant impact on its oil product exports, likely leaving it with more oil to sell. Focus today the dollar following the BOJ meeting and not least IEA’s Oil Market Report for January. EIA’s weekly stock report delayed until Thursday.
Gold correction risk with dollar the key focus
Gold traded softer overnight in response to dollar strength after the Bank of Japan failed to deliver another tweak to its interest rate policies (see above). While industrial metals such as copper continues higher on China demand hopes, the yellow metal continues to get most of its directional input from the dollar. ETF flows and risk reversals in the options market have remained flat for weeks with no sign of demand despite the recent rally, potentially signalling increased risk of a short-term correction driven by recently established speculative longs.
The Bank of Japan stood pat on its current policy mix even as the market was leaning for some further policy tweak, sending JGB’s sharply lower and taking US yields down a few notches as well overnight, with the 10-year benchmark Treasury yield poking back below 3.50%. The focus remains on incoming data and the shape of the US yield curve, with December US Retail Sales data up today.
The NY Fed's Empire manufacturing survey tumbled to -32.9 in January from -11.2 in December, well beneath the consensus -9 and marking the lowest level since mid-2020 and the fifth worst reading in the survey’s history. Both new orders and shipments plummeted sharply, and moderation in input and selling price growth was seen. Fed member Barkin (non-voter) repeated that median CPI is still too high, saying that he needs to see inflation convincingly back to target before Fed pauses rate hikes and that he is not in favour of backing off too soon
UK Dec. CPI out this morning and slightly hotter than expectations as the headline rose +0.4% MoM and +10.5% year-on-year vs. +0.3%/+10.5% expected, respectively while the core CPI level rose +6.3% YoY vs. +6.2% expected and +6.3% in November. Sterling traded slightly firmer after the data.
The ECB is considering a slower pace of rate hikes than Christine Lagarde indicated in December. While a 50bps increase next month remains the most likely outcome, a 25bps move in March is gaining support. Inflation in the Eurozone is slowing, and a sharp drop in natural gas prices suggest that we can continue to expect lower inflation in the months to come at least until the 2023 winter risks emerge. The final CPI print for December for the Euro-are will be released today and ECB’s minutes of the December meeting are due tomorrow.
The Q4 earnings season continues today with more US financial services companies reporting, including the retail-focused PNC Financial Services and Charles Schwab. Kinder Morgan is a company operating an extensive pipeling transportation and energy storage network, while EQT is a US-based natural gas producer and the second largest producer in the largest US shale gas production area in Appalachia (the Marcellus shale). Guidance on the future productivity of its reserves could be a focus there after the wild ride for natural gas this year on Russia’s invasion of Ukraine.
0900 – IEA's Oil Market Report for January
1000 – Eurozone Final December CPI
1330 – US Dec. Retail Sales
1330 – US Dec. PPI
1400 – US Fed’s Bostic (non-voter) to speak
1415 – US Dec. Industrial Production and Capacity Utilization
1500 – US Jan. NAHB Housing Market Index
1900 – US Fed Beige Book
1900 – US Fed’s Harker (voter 2023) to speak
0001 – UK Dec. RICS House Price Balance
0030 – Australia Dec. Employment Change / Unemployment Rate
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