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Bank of Japan rattles markets in surprising yield curve policy change By Reuters

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© Reuters. FILE PHOTO: A Japanese flag flies over the Bank of Japan building under construction in Tokyo, Japan September 21, 2017. REUTERS/Toru Hanai

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by Leika Kihara

TOKYO (Reuters) – The Bank of Japan shocked markets on Tuesday with a surprise adjustment to bond yields that allows long-term interest rates to rise further, in a move aimed at mitigating some of the costs of prolonged monetary stimulus.

Stocks fell, while yen and bond yields rose after the decision, which sparked interest among investors who had been expecting the Bank of Japan to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move interpreted as seeking to breathe life back into the dormant bond market, the Bank of Japan decided to allow the 10-year bond yield to move 50 basis points either side of the 0% target, wider than the previous range of 25 basis points.

But the central bank kept its yield target unchanged and said it would sharply increase bond buying, signaling that the move was an adjustment to the current ultra-loose monetary policy rather than a withdrawal of stimulus.

Kuroda said the move aims to remove distortions in the shape of the yield curve and ensure that the benefits of the bank’s stimulus program are directed to markets and companies.

“Today’s move aims to improve market functions and thus help enhance the impact of our monetary easing. So it is not an increase in interest rates,” Kuroda told a news conference.

“This change will enhance the sustainability of our monetary policy framework. It is absolutely not a revision that will result in abandoning YCC or exiting easy policy.”

GRAPHICS: BoJ expands scope on yield cap (https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/lgvdkkamdpo/chart.png)

As widely expected, the Bank of Japan kept its YCC targets unchanged, set at -0.1% for short-term interest rates and around zero for the 10-year yield, at its two-day policy meeting that ended on Tuesday.

The Bank of Japan also said it would increase its monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) per month from 7.3 trillion yen previously.

The benchmark stock average fell 2.5 percent after the decision, while the dollar fell 3.1 percent to a four-month low of 132.68 yen. The 10-year Japanese government bond yield rose briefly to 0.460%, near the Bank of Japan’s new implied maximum and the highest level since 2015.

Unconvinced

Kuroda stressed that this step was not a prelude to a larger amendment to the YCC and a final exit from the ultra-easy policy, sticking to his opinion that the fragile Japanese economy still needs support.

But some players in the market were not convinced.

said Bart Wakabayashi, branch manager at State Street (NYSE: In Tokyo. “I think we’re seeing the first toe in the water.”)

Already, markets are guessing what the BoJ’s next move might be as the Kuroda term draws to a close and with inflation expected to remain above its 2% target next year.

Moh Seong Sim, currency analyst at Bank of Singapore, said.

Japanese banking stocks bucked the broader market’s downtrend, rising 5.12%, highlighting investor expectations that years of ultra-low interest rates that have slashed profits from loans and deposits may be coming to an end.

The sudden decision to widen the yield band, rather than wait for the right timing to make bolder adjustments to the YCC, highlights the challenges the BoJ faces in addressing the mounting cost of prolonged easing.

It also reflects the biggest challenge central banks have faced globally in attempting to effectively communicate a shift towards less accommodative policy after a prolonged period of unconventional monetary conditions.

“The way the Bank of Japan has moved surprisingly without contacting the markets makes the BoJ’s course of action unpredictable, making it almost impossible to read its mind,” said Atushi Takeda, chief economist at Itochu Economic Research. “Whoever becomes the next BoJ governor should strive to make monetary policy more transparent and predictable.”

The Bank of Japan’s ultra-low interest rate policy and its relentless buying of bonds to defend its yield ceiling has drawn mounting public criticism for distorting the yield curve, draining market liquidity, and causing an unwelcome drop in the yen that has inflated the cost of raw material imports.

Much of that public anger has centered on Kuroda, who was handpicked by former Prime Minister Shinzo Abe as governor of the Bank of Japan a decade ago to boost stagnant consumer demand with massive monetary stimulus.

In a rare acknowledgment of his policy downsides, Kuroda said the decision to widen the yield band now came from surveys showing a sharp deterioration in bond market functionality.

He also said that the Bank of Japan should look not only at the downside but also at the upside risks to growth and inflation, suggesting that there is room to withdraw stimulus next year if economic conditions allow.

“It is too early to discuss details about changing the monetary policy framework or exiting from easy policy,” Kuroda said.

“When the achievement of our objective appears on the horizon, the Bank of Japan’s policy board will hold discussions on exit strategy and provide communication to the markets.”

($1 = 133.3200 yen)

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Economic

We need to pay more attention to skewed economic signals

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3 weeks ago

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January 11, 2023

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

Video: Divided Markets: The Great Threats to the Financial System

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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3 weeks ago

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January 10, 2023

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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Economic

German automakers point to easing supply chain problems

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3 weeks ago

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January 10, 2023

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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