Bank of Japan keeps policy rate unchanged at -0.1%

The Bank of Japan kept its benchmark short-term rate unchanged at -0.1% as expected this morning and maintained its yield curve control parameters of 0-1%. Forward guidance was left unchanged, with no hint of when the Bank may look to raise its policy rate above zero. Most analysts expect the BoJ to begin tightening monetary policy in April 2024.

Germany’s IFO Business Climate Index fell to 86.4 in December from 87.2 in November, as both the current assessment and expectations components softened. The survey follows weaker than expected PMI data at the end of last week which pointed to another quarter of negative GDP – and a technical recession - in the Eurozone in Q4. The Bundesbank expects only a modest rebound in growth of 0.4% in 2024.

Egypt’s President Sisi won the December 10-12 election by a landslide, as expected. His new term will run through 2030. Further progress on structural reforms, including asset sales and another devaluation of the pound, is expected in the coming weeks. The central bank meets to set monetary policy on Thursday, and the consensus forecast is for the deposit rate to be kept on hold.

Today’s Economic Data and Events

14:00 Eurozone CPI (Nov final) forecast 2.4% y/y

17:30 US housing starts (Nov) forecast 1360k (-0.9% m/m)

Fixed Income

• More Fed officials have pushed back against market expectations for almost six 25bp rate cuts in 2024. Chicago Fed Austan Goolsbee said he was “surprised” by the market’s reaction to the dot plot last week, while Mary Daly said that expectations for rate cuts next year were “premature”. 2y yields rose fractionally to close at 4.45% on Monday while 10y yields rose 2bp to close at 3.93%.
• 10y benchmark bond yields rose in Europe as well yesterday, with bunds up 6.4bp to 2.1%, similar to moves in French and Spanish yields.

FX

• The Bloomberg USD index was broadly unchanged yesterday. Gains in EUR and CHF and were offset by weaker JPY and GBP. JPY is trading weaker this morning after the BoJ kept its short-term rate unchanged at -0.1%, with no change to its forward guidance.
• AUD and NZD gained 0.3% against the US dollar yesterday while CAD was largely unchanged from last week’s close.

Equities

• US equities continued their bull run at the start of the week, with the S&P500 up 0.5% and the Nasdaq Composite up 0.6%. European markets were mixed with the FTSE100 closing higher while mainland European indices closed lower.
• Regional markets were mixed with Dubai and Abu Dhabi benchmark indices down -0.3% and -0.2% respectively. Saudi Tadawul closed 0.7% higher while Egypt’s EGX30 index gained 2.2% on Monday.

Commodities

• News that BP would pause all shipments through the Red Sea due to security concerns provided support for oil prices on Monday. While other shipping companies had already decided late last week to avoid the Red Sea and Suez Canal due to drone attacks, the announcement by BP was the first tangible disruption to oil and LNG supplies from the region since October 7.
• Brent oil prices ended the day 1.8% higher while WTI was up 1.5%. Given the importance of the Red Sea route for LNG shipments in particular, European natural gas prices jumped 7% yesterday.