BoJ finally talks of exit

Thoughts of the Day

Bank of Japan’s Governor Ueda discussed a possible “quiet exit” from ultra-easy monetary policy by year-end. This led to a 1% JPY strengthening and 5-7 basis points rise in JGB yields. It hinted at policymakers addressing JPY weakening due to recent USDJPY highs despite BOJ’s July policy tweak (increase of 10year JGB yield ceiling from 0.5% to 1.0%). Further policy adjustments might follow if inflation data remains elevated.

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Week Ahead

Monday: 

Tuesday: 
The UK unemployment rate is expected to rise slightly to 4.3% from 4.2%.

Wednesday: The US Consumer Price Index is expected to show that prices rose +3.6% Year-on-Year, up from +3.2% in July. The core index is expected to moderate to +4.3% YoY from +4.7%.

Thursday: The Australian unemployment rate is expected to decline slightly to 3.6% from 3.7%.

The ECB is expected to keep interest rates unchanged at 4.25% in its monetary policy meeting.

The US Producer Price Index is expected to show that prices rose +1.2% Year-on-Year, up from +0.8% in July. The core index is expected to moderate to +2.2% YoY from +2.4%.

Friday: The Chinese Retail Sales is expected to rise +2.8% on an annual basis, up from +2.5% in July. The Chinese unemployment rate will be released as well.


The US University of Michigan Consumer Sentiment is expected to fall off slightly to 69.2 from 69.5.

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What Happened Yesterday

Market Movements as of New York Close 8 Sep 23
  • The Canadian Employment Change showed that +39.9k jobs were added to the economy (vs 15k expected and -6.4k prev) while the unemployment rate remained at 5.5% (vs +5.6% expected). The labour force participation rate declined slightly to 65.5% from 65.6%. The CAD strengthened on the data release with the USDCAD falling -0.28% in reaction to the data.
  • The US Treasury Yield curve widened to 0.71% as the US 2 year bond yield rose +0.04% to 4.98% while the 10 year bond yield fell -0.01% to 4.26%.
  • The US Stock futures oscillated within a range during the Asian and London trading hours with the S&P 500 futures barely changed before the New York session began.
  • The US stock market opened almost unchanged from Thursday. The US stock market spiked higher upon market open but gradually fell through the day. Consequently, the S&P 500 closed the day higher at +0.14% (intraday high: +0.50%, low: -0.06%) the Dow Jones rose +0.22% on the day (intraday high: +0.37%, low: -0.08%) while the Nasdaq gained +0.14% (intraday high: +0.76%, low: -0.09%).
  • The crypto market experienced some weakness on Friday causing Bitcoin and Ether to fall -1.3% and -1.1% respectively on the day itself and then weakening slightly over the weekend for a cumulative -1.5% and 1.9% drop.
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Headlines & Market Impact

U.S., India, Saudi, EU unveil a massive rail and ports deal on G20 sidelines

Notable Snippet: Global leaders announced a multinational rail and ports deal linking the Middle East and South Asia on Saturday on the sidelines of the G20 summit in New Delhi.

The pact comes at a critical time as U.S. President Joe Biden seeks to counter China’s Belt and Road push on global infrastructure by pitching Washington as an alternative partner and investor for developing countries at the G20 grouping.

Biden said it was a “real big deal” that would bridge ports across two continents and lead to a “more stable, more prosperous and integrated Middle East.”

It aims to link Middle East countries by railway and connect them to India by port, helping the flow of energy and trade from the Gulf to Europe, U.S. officials have said, by cutting shipping times, costs and fuel use.

A memorandum of understanding for the deal was set to be signed by the European Union, India, Saudi Arabia, the United Arab Emirates, the U.S. and other G20 partners.

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BOJ Seeks Quiet Exit from Easing as Business Improves: Gov. Ueda Aims to Avoid Shocks to Market

The Bank of Japan has entered a phase of reducing monetary easing. In an interview with The Yomiuri Shimbun, BOJ Gov. Kazuo Ueda described the monetary policy modification decided in July as “a mechanism to change the balance between the effects and side effects” of monetary easing measures.
Ueda said, “It is not impossible that we will have enough by the end of the year to anticipate [wage hikes next spring].” He cited the end of the year as a possible time to assess the trend of wage increases, a key factor in setting price increases.

Ueda explained the July revision of the upper limit of long-term interest rates as a kind of risk management. “It was necessary to create room for a response so that things would not go crazy when prices swing upward,” he said, revealing that the BOJ had made the decision based on reflections that it had underestimated the price outlook until now. The central bank’s quarterly announced inflation rate forecast for fiscal 2023 was 1.6% as of October last year, but it was revised upward in April and July, and the outlook as of July was 2.5%.

“The degree of data dependency has increased.” Ueda said, indicating that the bank’s decision-making is now based more on responding to current economic conditions and less on efforts to convince the market that easing would continue.

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China’s deflation pressures ease, more steps expected to spur demand economy unexpectedly shrinks; central bank likely to hold rates

Notable Snippet: China’s consumer prices returned to positive territory in August while factory-gate price declines slowed, data showed on Saturday, as deflation pressures ease amid signs of stabilisation in the economy.

But analysts say more policy support is needed to shore up consumer demand in the world’s second-biggest economy, with a labour market recovery slowing and household income expectations uncertain.

The consumer price index (CPI) rose 0.1% in August from a year earlier, the National Bureau of Statistics said, slower than the median estimate for a 0.2% increase in a Reuters poll. CPI fell 0.3% in July.

Core inflation, which excludes food and fuel prices, was unchanged at 0.8% in August.

The producer price index (PPI) fell 3.0% from a year earlier, in line with expectations, after a drop of 4.4% in July. The drop in factory prices was the smallest in five months.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord