Bank of Japan hikes rates for first time since 2007

The Bank of Japan hiked policy rates for the first time since 2007, setting a range for policy rates at 0-0.1% and ending the country’s long-standing policy of negative interest rates. It also ended its yield-curve control policy and will stop buying ETFs and REITs and will reduce its purchases of corporate bonds and commercial paper. The BoJ will, however, continue to buy JGBs. Japan had been the last major economy to maintain an unorthodox monetary policy stance but it too has had to deal with a rise in inflation. Recent announcements on wage hikes were among the latest signs of rising price pressures in an economy that has long been beset by low levels of inflation.

Eurozone inflation for February was in line with the preliminary reading at 0.6% m/m and 2.6% y/y, with core CPI up 3.1% y/y. Food prices rose at a slower pace y/y last month, while energy prices accelerated. Services inflation remains elevated at around 4% y/y. Both headline and core CPI were slower than in January and further disinflation is expected in the coming months, opening the way for the ECB to cut rates in the Spring, most likely in June. However, this will depend on further moderation in wage growth across the bloc in Q1 2024.

Industrial production and investment data out of China was better than expected in the year to February. IP rose 7.0% y/y in the first two months of 2024, while fixed asset (ex rural) investment was up 4.2% y/y. Residential property sales were down by almost one-third compared to the first two months of 2023, reflecting continued challenges in the property sector in China. Retail sales for the year to February was only slightly below forecast at 5.5% y/y.

The RBA kept policy rates unchanged, holding the cash rate at 4.35% but did not indicate that future moves could lead to rates being even higher as it did at its February meeting. The RBA described the path of rates as “uncertain” and that it was not “ruling anything in or out.” Inflation has eased in Australia to 3.4% y/y in January 2024 from more than 8% at the end of 2022 but the RBA described the inflation outlook as “uncertain” while noting weak household consumption.

Today’s Economic Data and Events

• 14:00 Germany ZEW survey (Mar)
• 16:30 US housing starts (Feb) forecast 1440k, 8.2% m/m

Fixed Income

• US 2y treasury yields rose further on Monday to close at 4.73%, the highest level in more than three months, ahead of tomorrow’s Fed decision and release of new interest rate projections. In the last couple of weeks, markets have steadily pushed back the expected timing of the first rate cut, which is now fully priced in July. The 10y yield also rose yesterday, ending the session at 4.32%.
• Benchmark 10y yields rose across Europe as well on Monday, with the exception Italy and the UK, where they declined slightly. 10y gilt yields eased to 4.09% while 10y bund yields rose 2bp to 2.46%.

FX

• The USD index was stronger at the start of the week, up 0.14% on Friday’s close. GBP was largely unchanged yesterday while EUR and CHF were slightly firmer. JPY weakened ahead of today’s BoJ meeting to close at 149.13/USD.
• Commodity currencies were largely firmer against the dollar with the exception of CAD which was fractionally weaker. AUD gained 0.1% to 0.6568 and NZD rose 0.1% to 0.6091.

Equities

• US equity indices closed higher on Monday with the Nasdaq100 gaining 1.0% and the S&P500 up 0.6%. European equities were slightly weaker with the CAC40 losing -0.2% and the FTSE100 down -0.1%. Asian equity markets are mixed this morning with the Nikkei 225 down -0.6% as of this writing.
• Local equity markets were mostly green yesterday with the ADXGI up 0.7% and the DFM up 0.3%. The Tadawul ASI closed slightly higher at 0.1% on Monday.

Commodities

• Both Brent and WTI started the week on a firm note, rising 1.8% and 2.1% respectively. Brent closed at USD 86.89/b, its highest level since November 2023, while WTI closed at USD 82.72/b. A drone strike by Ukraine on Russian refining infrastructure has reduced Russia’s refining capacity by 600k-900k b/d.