Wayne Cole’s outlook for European and global markets in the day ahead.
However, the Bank of Japan’s (BOJ) decision to end “Bank Governors Week” has put the yen in the spotlight even more.
Bank of Japan statements can be quite vague, so its latest statement was brief at just five paragraphs, using the word “moderate” or “moderate” eight times to describe the economic backdrop.
Finally there is a notable article in which he sheds light on the financial and FX markets, clearly mentioning the recent turmoil in the stock market and the Japanese Yen.
It said yen volatility was increasingly likely to impact prices, meaning currency weakness would fuel inflation and could be unpopular.
This was enough to push the yen slightly higher against the dollar to 142.30 , but it was still down sharply during the week. The euro and yen are up 1.7% this week and the Australian dollar is up 2.6%, so the carry trade may be on the menu again.
The market will have to wait for Bank of Japan Governor Ueda’s press conference at 3:30 pm (0630 GMT) for more details on rate tightening, especially whether a rate hike is likely at the October meeting.
Although there are still about six weeks to go, the market has priced in only 3 basis points of October tightening, so there is still plenty of time for things to turn around. Most analysts polled by Askume favor a 25 basis point rate hike in December, though the market still expects a hike of only 7 basis points.
The Nikkei is unaffected, up 1.9% at the time of writing, while much of Asia is following Wall Street’s overnight gains and enjoying sharp rate cuts from the Federal Reserve.
The People’s Bank of China surprised markets by not cutting its key interest rate and later had to intervene in the foreign exchange market to prevent the yuan from hitting a 16-month high.
Optimists believe the delay in the rate cut is part of a larger stimulus package that has been discussed but has not yet been implemented since the pandemic hit. Some also suspect that the central bank is more concerned about the collapse in bond yields and bank profit margins, and that it must first reduce the deposit reserve ratio.
One last thing on the yield curve. For two years, the inverted curve shows some slowdown, while US growth remains above trend.
Now that the curve has inverted, which orthodox economics says means a recession is inevitable even if consumers keep spending, weekly jobless claims are at their lowest level since May, and Atlanta GDP is now reliable. Growth in the third quarter was 2.9%.
You may not be successful in every aspect, and the curve may not be infallible.
Key developments that will influence markets on Friday:
– UK retail sales in August, Canadian retail sales, German PPI, EU consumer confidence
– Speech by Catherine Mann, external member of the Monetary Policy Committee of the Bank of England
– Conversation between European Central Bank President Christine Lagarde and International Monetary Fund Managing Director Kristalina Georgieva
——Speech by Patrick Harker, President of the Federal Reserve Bank of Philadelphia
– Speech by Bank of Canada Governor Tiff Macklem
