Morning Bid: Accentuating the positive at the BOJ

By Thomson Reuters Mar 11, 2024 | 12:32 AM

By Wayne Cole

(Reuters) – A look at the day ahead in European and global markets from Wayne Cole.

So Japan isn’t in recession after all. Revisions now put economic growth at +0.1% q/q in the fourth quarter, instead of -0.1%, so nullifying all the media lamentation about Japan’s contraction.

When it comes to about $4 trillion of annual GDP such a small revision is just statistical noise, but it fit the narrative of stabilisation that is encouraging the Bank of Japan to contemplate the end of negative interest rates.

Four sources tell Reuters a growing number of policymakers are warming to the idea of normalising rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations.

Futures now imply a 53% chance the BOJ will shift rates to zero at its meeting on March 18/19, though some still think it might wait to its April 26 meeting.

Talk is it will also refine yield curve control to target the volume of bonds it buys rather than the yield, which will presumably allow it to gradually guide yields higher and avoid a convulsive move.

Two-year JGB yields have already crept up to 13-year highs of 0.2%, while 10-year yields added 3 bps to 0.765% – a big move for this market.

There have long been fears that rising JGB yields would make Japanese investors keep more of their mountain of money at home, a potential negative for offshore markets given Japan is the world’s largest creditor nation.

It could also make the yen carry trade – borrowing yen for free to invest in higher yielding currencies – less attractive and stoke a long-awaited rally in the Japanese currency.

Yet, the BOJ has made it clear that official rates will only be going to zero and there will not be a series of hikes, so the death of the carry trade is likely overstated.

High yields will be a headache for the government, which faces a steep rise in borrowing costs, while the BOJ faces huge paper losses on the JGBs it holds.

For the Federal Reserve, all eyes will be on Tuesday’s U.S. consumer price index (CPI) report for February which is forecast to rise 0.4% for the month and keep the annual pace steady at 3.1%. Core inflation is seen rising 0.3%, which will nudge the annual pace down to the lowest since early 2021 at 3.7%.

Used car prices and rents are seen pulling the CPI down, while insurance and air fares could go the other way.

The slower core would complement the softer conditions seen in the February payrolls report, where unemployment hit a two-year high of 3.9%, and would keep the Fed on track to cut rates in the next few months.

Key developments that could influence markets on Monday:

– Participation by ECB board member Piero Cipollone in Eurogroup meeting in Brussels

– France on-year producer prices for February (prior -5.1%)

(By Wayne Cole; Editing by Christopher Cushing)