Author: Zhou Ailin
On Christmas Eve, traders have already gone on vacation one after another, and no one thought that the Bank of Japan would make a surprise attack at this moment.
The Bank of Japan, the last dovish bastion of central banks in developed countries, has also collapsed.
When it issued an interest rate resolution on December 20, it unexpectedly substantially revised the yield curve control plan (YCC), which triggered a sharp rise in the yen. The Nikkei stock index once fell by more than 800 points, and the decline has narrowed since then.
The Bank of Japan held a monetary policy meeting on the 20th and announced that it will increase the yield target from ±0.25% to ±0.5% (the yield was controlled around 0 through bond purchases earlier), but at the same time it will purchase Japanese government bonds from January to March. The scale is increased to 9 trillion yen/month.
"At present, there are still three months before Governor Haruhiko Kuroda's term ends, and traders have begun to take vacations one after another. No one expected that the Bank of Japan will suddenly increase its tactics. In fact, only the Japanese yen is rising sharply against the US dollar." A foreign brokerage firm foreign exchange A strategist told the first financial reporter, "Many institutions overweight Japanese stocks at the end of the year. Because of the sharp depreciation of the yen, it is expected to support the earnings of Japanese companies and benefit the prospects of Japanese stocks. This strategy may now need to be revalued."
Since 2022, every move of the global central bank has been the focus of attention of the global market.
2023 is approaching, and the Federal Reserve, which raised interest rates by 425 basis points (BP) in one breath in 2022, is far from stopping the rate hike process; the European Central Bank and the Bank of England, which have raised interest rates by 75BP and 50BP several times, are still facing severe inflation tests; After the control is relaxed, whether China's inflation will rise, which will trigger a shift in monetary and fiscal policies, has also become the focus of attention from all walks of life.
Bank of Japan's dovish bastion collapses
Looking back on 2022, only the Bank of Japan will stick to YCC's easing policy unchanged, even if inflation has exceeded 3%, which also caused the USD/JPY to depreciate to around 150 at one point.
Earlier, many traders shorted Japanese bonds on a large scale, betting that the Bank of Japan could not keep the yield of 0, and then the Bank of Japan had to increase the scale of bond purchases.
Earlier, due to the sharp depreciation of the yen, the central bank even stepped in to intervene.
Antje Praefcke, foreign exchange and emerging markets analyst at Commerzbank, told reporters that the market interpreted today's decision as the first step to exit the expansionary monetary policy.
"But I'm still a little divided on how to assess today's action. When yields are all rising globally, it makes sense to allow a wider range of target yields that are pushing higher. But at the same time increase buying To better defend the new target again dilutes what appears to be a hawkish decision."
In its statement, the BOJ said its goal is "to improve market functioning and encourage a smoother formation of the overall yield curve while maintaining accommodative financial conditions," adding that by implementing these measures, the central bank will strengthen the currency within this framework Sustainability of policy easing to achieve price stability goals.
The Bank of Japan will continue to implement quantitative and qualitative easing (QQE) to control the yield curve.
Japan's core CPI is only around 3%, while the United States once approached 6%.
In the view of the Bank of Japan, the real demand in Japan is sluggish, and the inflation rate will be pulled back to the 2% target in the near future. There is no need to decide to cancel negative interest rates because of other countries.
But the Bank of Japan is undoubtedly facing increasing pressure.
Traders also told reporters that perhaps this is the first time the Bank of Japan has acknowledged that yields are facing upward pressure, and it also paves the way for Haruhiko Kuroda's successor, who will take office in the spring.
As early as the day before the Bank of Japan's action, UBS told reporters that it has recently raised the forecast value of the yen in March, June, September and December next year to 140, 135, 130 and 125, which were originally 155, 150, 140 and 140 respectively. .
“We have previously warned that if the USD/JPY pair continues lower, the Dec 2 trendline near 135 forms the first level of support. Below this, USD/JPY could fall to the Dec 2 low 133.62 (it has fallen to around 133.33 on the 20th), and then the 50% retracement level between the low on March 4 and the high on October 21 at 133.30." Joe Perry, senior analyst at Jiasheng Group told reporters.
The Fed will continue to push the final interest rate
Compared with the Federal Reserve, which has aggressively raised interest rates by more than 400BP a year, these adjustments by the Bank of Japan are simply insignificant.
In 2023, the Fed will continue to raise interest rates.
The Fed’s rate hike slowed to 50 basis points (BP) in December, but raised its forecast for the peak fed funds rate in 2023 by 50 BP to 5.1% (from 4.6% at the September meeting).
This means that the Fed will peak interest rates even higher, albeit at a slower pace.
Goldman Sachs predicts that the Federal Reserve is still expected to raise interest rates three times in February, March, and May next year, with a range of about 25BP.
Although the CPI in the United States rose by 7.1% year-on-year in November, which was lower than the expected value (7.3%) and the previous value (7.7%), the core CPI in November was lower than expected for two consecutive months, but it was far from the target of the Fed. Fed Chairman Powell Also shows -- need to see inflation back to 2%.
It is not difficult to understand why the Fed does not retreat: the slowdown in economic and employment data has not yet posed enough threats, while inflation is still high.
On a breakdown-by-item basis, the housing category rebounded to a very high pace in November (+0.77% monthly rent vs. +0.69% in October), but leading indicators such as Zillow, a real estate appraisal service, show that rents are starting to fall (long-term leases and market prices with a lag).
However, according to Goldman Sachs, price weakness in hospitals (-0.3%) and physician services (flat) does not appear sustainable in the face of mounting cost pressures in the healthcare system.
There are also views that the oil price next year will still remain uncertain.
Therefore, whether inflation can fall back to the Fed's target value is still an unsolved mystery.
Since November, U.S. stocks have experienced a rebound in the first six weeks. The S&P 500 once rebounded from the range of 3,500 to around 4,100. This is more because the market began to price the "Fed Pause" earlier.
However, Morgan Stanley's chief U.S. stock strategist, Michael Wilson, has recently become bearish on U.S. stocks again, and believes that the driving force for U.S. stock valuations to continue to increase is disappearing.
Given the bear market rally of the past 6 weeks (driven by falling U.S. bond yields), yields may not have much room to fall right now.
Additionally, the market is reluctant to price in what seems to be an obvious risk to earnings.
Earnings glut is fairly common across industries -- 85% of S&P 500 industries expect EPS to be 10% above pre-pandemic levels, which seems overly optimistic.
ECB continues to confront energy crisis
Turning to the euro zone, which is deeply troubled by the energy crisis, the European Central Bank may also maintain a hawkish stance in 2023.
The European Central Bank raised the deposit facility interest rate by 50BP to 2% last week, in line with expectations.
In addition, the statement emphasized that the European Central Bank will start quantitative tightening at a rate of 15 billion euros per month from March 2023.
The ECB's Governing Council also tightened its inflation target to 6.3% in 2023 from 8.4% in 2022 (from 8.1% previously).
At the press conference last week, European Central Bank President Lagarde issued hawkish language, saying that it is "obvious" that interest rates will be raised by 50BP in the future, and that the European Central Bank needs to take more measures that exceed market expectations.
At present, wage growth and the energy crisis may be the key factors pushing up inflation in the euro zone.
"From the transport sector to the National Health Service system, there are strikes almost every day in the UK before Christmas." The "strike calendar" sorted out by the British media on December 1 shows that railway workers, nurses, school teachers, postal employees, bank security guards, etc. People and other groups will hold strikes of different sizes in December, demanding wage increases and improving working conditions.
Although the current natural gas inventory in Europe is sufficient, as the temperature in various parts of Europe dropped sharply in December, falling below the average level of the same period, the European natural gas inventory began to show an inflection point, and the absolute level of inventory began to decline.
This puts the already fragile energy supply network to the test again.
China will remain relatively accommodative
The recent Central Economic Work Conference has made a series of arrangements for next year's economic work, pointing to boosting the economy and restoring confidence.
Some people are also worried that with the relaxation of epidemic control measures, China's inflation may rise rapidly next year, leading to a significant contraction of policies in the second half of the year.
However, Lu Ting, Chief Economist of Nomura China, recently told Yicai Global that China will continue to support monetary and fiscal policies next year, and inflation is not a concern.
In the early days of the outbreak, the Federal Reserve printed a lot of money, and the government even implemented a large amount of fiscal stimulus for residents, resulting in high inflation. However, China has always been more cautious in this regard.
Cirrus Group believes that although some well-known economists advocate China's QE (quantitative easing), the Central Economic Work Conference emphasizes that monetary policy should be "precise and powerful", and re-added the expression "maintaining a reasonable and sufficient liquidity".
In view of this, the expansion of liquidity will be structural and targeted, rather than a package of comprehensive easing.
In order to offset weak domestic demand and buffer the downward pressure on the property market, the macro leverage ratio is likely to increase.
Further rate cuts and RRR cuts should also be planned.
But this is not the same as quantitative easing.