Bank of Japan hikes rates

The Bank of Japan raised its target rate to ‘around 0.25%’ at its meeting this morning, from 0.0%-0.1% previously. Consensus predictions had been for a hold, but rumours of a hike had widened in the previous 12 hours, and this was reflected in moves in markets prior to the decision. The bank’s communiqué noted that ‘moves to raise wages have been spreading’ and that a rise in import prices meant that ‘upside risks to prices require attention.’ Even with this hike, however, real interest rates remain significantly negative, helping ‘support economic activity.’

The Eurozone registered real q/q GDP growth of 0.3% in the second quarter according to the preliminary figures, in line with Q1 and beating expectations of a 0.2% expansion. The outperformance was driven largely by above-expectations growth in both France (0.3% q/q compared with the predicted 0.2%) and Spain (0.8% q/q compared with 0.5%). Germany, however, saw a surprise q/q contraction of 0.1% in the period, missing the predicted 0.1% expansion as the single currency bloc’s largest economy has continued to struggle with weak export demand, from China in particular. Spain also had a positive surprise on the inflation front as CPI inflation fell to 2.8% y/y in July, down from 3.4% in June and beating the predicted 3.0%. However, Germany had a negative surprise again here, with price growth of 2.6% y/y, up from 2.5% the previous month and missing expectations that it would remain at the same pace. The German data complicates matters for the ECB, but there is another round of indicators scheduled for release prior to its next meeting in September.

The US conference board confidence index rose to 100.3 in July, up from 97.8 the previous month and beating the predicted 99.7. The beat was driven by an uptick in the expectations component of the survey, while the present situation reading deteriorated modestly.

China’s official PMI manufacturing survey was almost unchanged at 49.4 in July, in line with predictions and down from 49.5 in June. This marked the third month in a row where the index came in below the neutral 50.0 line, indicating a contraction in the manufacturing sector. Non-manufacturing remained expansionary at 50.2, but this was down from 50.5 the previous month and missed the predicted 50.3. The measure was held up by government-supported construction activity, while services lagged. The composite reading was also 50.2.

Key Economic Data and events

10:45 France CPI inflation, % y/y, July. Forecast: 2.4%

22:00 FOMC rate decision (upper bound). Forecast: 5.50%

Fixed Income

• Treasuries rallied yesterday as yields on USTs fell across the curve. The 2yr yield fell 4bps to 4.3585%, while yields on the 10yr also fell 4bps to 4.1394%. We expect the FOMC to hold rates steady at the meeting tonight but that the press conference will lay some groundwork for a September cut.

FX

• The dollar index closed flat against its basket of peers yesterday suggesting a calm before the storm as the three major central bank meetings of Japan, the US, and UK kick off this morning. This masked some wider underlying moves, however.
• There was significant movement from the yen, as it gained 0.8% to close at a multi-month low of 152.77 yesterday as expectations of a hike from the BoJ rose.

• EUR closed down just 0.1% against the greenback at 1.0815, while GBP lost 0.2% to 1.2836.

Equities

• The NASDAQ was under pressure yesterday as major tech stocks took another hit, with the index dropping 1.3%. The S&P 500 fell 0.5%, while the Blue Chip Dow Jones closed up 0.5%.
• The Nikkei closed up 0.2% yesterday but is down around 0.5% this morning after the BoJ’s decision.
• In Europe, the FTSE 100 ended the day 0.2% lower, but the other major indices closed up, with the CAC adding 0.4% and the DAX 0.5%.

Commodities

• Oil prices saw another day of selling pressure yesterday, with Brent futures falling 1.4% to USD 78.6/b, a seven-week low, while WTI dropped 1.4% to USD 75.5/b.
• Both benchmarks are up by around 1.0% so far this morning, however, boosted by a report showing another week of declines in US crude stockpiles. The weekly API report stated that crude inventories fell by 4.5mn bbl last week, the fifth week in a row that they have fallen,