BoJ keeps rates on hold as expected

The Bank of Japan kept the policy rate on hold as expected this morning at -0.1%, and left its 10y yield target at zero, maintaining its easy monetary policy stance. The BoJ’s views on inflation have shifted slightly however, with the bank saying risks to prices are now balanced. Inflation forecasts were revised slightly higher for the next two fiscal years (to 1.1% respectively) but this year’s inflation forecast remains at zero. The GDP forecast for this year was revised lower to 2.4% from 3.4% while the Bank expects growth to accelerate to 3.8% in 2023 from a previous forecast of 2.9%.
With US markets closed for Martin Luther King Day yesterday, there was little in the way of economic data. The focus today will be on UK employment data for December, where the unemployment rates is expected to have held steady at 4.2%, and the German ZEW survey. In the US session, the key release will be the Empire Manufacturing survey.
Geopolitical tensions have escalated as Yemen’s Houthis claimed responsibility for drone strikes on Abu Dhabi yesterday which killed three people and caused fires. Brent futures touched USD 87/b in early trade this morning, their highest level since 2014.

Today’s Economic Data and Events

08:30 JN Industrial production (Nov) prev 7.2% m/m and 5.4% y/y

11:00 UK Jobless claims change (Dec) prev -49.8k

11:00 UK ILO unemployment rate (Nov) forecast 4.2%

14:00 GE ZEW survey expectations (Jan) forecast 32.0

17:30 US Empire manufacturing index (Jan) forecast 25.0

Fixed Income

Treasury markets have opened on a weaker footing after not trading overnight thanks to a public holiday in the US. Yields on the 2yr UST have pushed above 1%, adding 4bps in early trade today and moving to their highest level since February 2020. On the 10yr yields have moved up above 1.8%, breaking above their 2021 highs and hitting levels last seen in January 2020.
Markets are now solidly expecting rate hikes in the US from March this year with swaps and futures markets assigning more than a 100% chance of a 25bps hike. With the first Fed meeting of the year next week, market commentary from officials is likely to be quiet.
Among emerging market bonds, Turkish 10yr local currency bonds rallied for a fifth day overnight with yields dropping well below 23%. South African bonds remain in a downswing with yields up another 3bps to 9.854% while yields on Indian bonds added almost 6bps to 6.637%.

Currency markets showed a moderate swing toward the US dollar overnight with the DXY index adding 0.1% to close at 95.258. Among the major pairs against the greenback, USDJPY showed the biggest movement, rising by 0.39% to 114.63 while EURUSD showed little move on the day, closing at 1.1408. GBPUSD settled lower, dropping by 0.2% to 1.3647.
Commodity currencies were more mixed with USDCAD falling to 1.2516, down 0.29% thanks to another tick higher in oil prices. AUD was marginally higher at 0.7217 while NZD was almost unchanged.

Equities

Global equity markets were on the front foot for most of the day yesterday after China’s announcement in the morning that it was loosening monetary policy. In Asia, both the Shanghai Composite and the Nikkei closed up 0.7%, and both markets continue to climb this morning with the Nikkei up almost 1% in early trading.
The risk appetite continued in Europe, where the UK’s FTSE 100 added 0.9% to see its highest levels since January 2020, prior to the Covid-19 pandemic. France’s CAC added 0.8% and Germany’s DAX closed 0.3% higher. US markets were closed.
Locally, both the ADX (-0.1%) and the DFM (-0.7%) ended the day lower, while the Tadawul gained 0.5%.

Commodities

Brent futures nudged higher overnight to USD 86.48/b, spurred on by geopolitical tensions in both the Middle East and Eurasia. Oil prices are now at their highest level since 2014 when the volatility that has characterized much of the oil market’s performance in the last decade began in earnest. Should the bullish trend remain intact then the next possible target for Brent would be USD 100/b on the upside while USD 75 would be the near-term downside risk.