If market participants wanted more reason to feel uncertain about the market outlook, they found it today after the Bank of Japan (BOJ) sprung a surprise tweak to its yield curve control (YCC) policy on capital markets.
Briefly, the BOJ will now allow the 10-yr JGB yield to move +/- 50 basis points from 0.00% versus its prior band of +/- 25 basis points to improve market functioning. That doesn’t sound like a big switch — not in this day and age when central banks are moving their benchmark lending rates 50 basis points and 75 basis points at a time — but it was big news nonetheless, evidenced by the massive swing in the dollar-yen pair.
USD/JPY is down 3.3% to 132.29 but it had been down as much as 3.6%. The scope of that move implies currency traders were not expecting the BOJ “tweak.” The same can be said for sovereign bond markets, which saw knee-jerk selling (and rising yields) in the wake of the news.
The 10-yr note yield, which settled yesterday at 3.58%, flirted with 3.70%. It is now at 3.67%. The 2-yr note yield, which settled yesterday at 4.25%, moved up to 4.29%. It is currently at 4.27%.
In conjunction with the YCC tweak, the Bank of Japan left its benchmark policy rate unchanged at -0.1%, as expected, and said it continues to plan to make significant purchases of JGBs.
The People’s Bank of China (PBOC), meanwhile, left its 1-yr and 5-yr loan prime rates unchanged, although there was speculation in the China Securities Journal that the rates could still be cut in coming months along with the reserve requirement ratio.
Given the lingering effects of COVID restrictions in China, and now the aftereffects of rapidly spreading COVID cases from loosening those restrictions, it is understandable that there would be increased speculation about the PBOC embracing more policy stimulus.
For now, market bulls in the U.S. aren’t embracing much of anything.
Currently, the S&P 500 futures are down nine points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 55 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 12 points and are trading in-line with fair value.
The lackluster indication is telling given that the Nasdaq Composite is down 8.0% this month, the Russell 2000 is down 7.8%, and the S&P 500 is down 6.4%. Bargain hunters are still missing in action along with Santa.
Maybe they will show up today, heartened by the S&P 500’s ability yesterday to hold its weakening line at 3,800. It’s hard to say, especially since the November Housing Starts and Building Permits Report left much to be desired in terms of the economic growth outlook.
Total housing starts declined 0.5% month-over-month to a seasonally adjusted annual rate of 1.427 million units (Briefing.com consensus 1.395 million), yet single-unit starts fell by 4.1% to 828,000. Total building permits declined 11.2% month-over-month to a seasonally adjusted annual rate of 1.342 million (Briefing.com consensus 1.480 million), with permits for single-unit dwellings dropping by 7.1%.
The key takeaway from the report is the weakness in building permits, which are a leading indicator. There wasn’t growth in any region of the country for single units. That speaks to the waning confidence among homebuilders who recognize the affordability constraints for prospective buyers due to building cost inflation and much higher mortgage rates.
Growth concerns of course have been at the heart of the selloff seen in December, as participants have been worried about the Fed overtightening and triggering a deeper economic setback. Those concerns, in turn, have fed into earnings concerns.
Accordingly, investors have not been chasing stock prices higher. On the contrary, they have been running away from stocks, concerned that they are overvalued.
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Originally Posted December 20, 2022 – A BOJ tweak adds to market uncertainty
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