The Bank of Japan is on the verge of change. Financial markets are waiting for new CPI data

February 14, 2023

The Federal Reserve may have to keep raising interest rates to curb price increases, which could slow economic growth and affect the labor market, FOMC spokeswoman Michelle Bowman said yesterday. Bowman noted that continued labor market tightness is putting upward pressure on inflation, even if some components of inflation are declining because of improved supply factors. Officials in December projected that rates would peak at 5.1% this year, according to their average forecast. But they will update those estimates next month. Such comments did not affect investor sentiment to buy stocks. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.11, and the S&P 500 Index (US500) added 1.14%. The NASDAQ Technology Index (US100) jumped by 1.48%.

Meta (META) jumped about 3% after the Financial Times reported that the company is preparing to announce a new round of job cuts.

Today, investors are focused on January inflation data (CPI) to revise their bets on the central bank’s monetary policy trajectory. The consumer price index is expected to fall from 6.5% to 6.3% year-over-year, with core inflation (which excludes food and energy prices) also falling from 5.7% to 5.4%. If the actual data is in line or at least not worse, the dollar index will probably start to lose ground, giving confidence to stock indices, and conversely, rising inflation will return panic sentiment to the market, causing indices to fall and investors to return to the dollar.

Equity markets in Europe were mostly up yesterday. German DAX (DE30) gained 0.58%, French CAC 40 (FR40) added 1.11%, Spanish IBEX 35 (ES35) jumped by 1.02%, British FTSE 100 (UK100) was up by 0.83% on Monday.

With inflation slowing faster than expected in Europe, the new quarterly forecast is likely to signal a slowdown in price growth, the head of Portugal’s central bank said Monday. He said the quarterly GDP data would be “very important” in determining the course of monetary policy, especially the peak in borrowing costs. While record Eurozone inflation is receding, the ECB is set to raise rates by another 50 basis points at next month’s meeting. Officials are worried about price pressure caused by rising salaries, which are not yet weakening.

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Concerns about another hot US inflation figure have led to speculation that the Federal Reserve may have to be more hawkish than previously thought. Any rally in the US currency puts pressure on commodities, led by oil and gold. The dollar index will get fundamental support if today’s inflation data are worse than forecast.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.88% yesterday, China’s FTSE China A50 (CHA50) gained 1.08%, Hong Kong’s Hang Seng (HK50) ended the day down by 0.12%, India’s NIFTY 50 (IND50) decreased by 0.48%, and Australia’s S&P/ASX 200 (AU200) lost 0.21%.

BlackRock downgraded Japanese stocks on expectations of a monetary policy reversal. According to analysts, inflation in the country is starting to take root, and the Bank of Japan continues to maintain its ultra-soft monetary policy, including limiting bond yields, which requires significant bond purchases. Therefore, a policy change could occur at any moment. Meanwhile, there is growing speculation about what a change in BOJ leadership in April would mean for policy. Kuroda’s last meeting as governor will be on March 10. BlackRock believes that regardless of who takes over, wage and inflation dynamics mean that the current policy stance is likely exhausted, and a change in monetary policy is inevitable.

Reserve Bank of Australia (RBA) Governor Philip Lowe will appear before Parliament on Wednesday and Friday for hearings on his anti-inflationary campaign, which has raised interest rates by 325 basis points in just 10 months. Disputes in the press have increased speculation that Lowe may not be appointed to a second term as governor because of the government’s independent investigation into central bank management and policy. Consumer price inflation in Australia is now at a 32-year high of 7.8% and is projected to return to the upper limit of the bank’s target range of 2-3% by mid-2025.

S&P 500 (F) (US500) 4,137.29 +46.83 (+1.14%)

Dow Jones (US30)34,245.93 +376.66 (+1.11%)

DAX (DE40) 15,397.34 +89.36 (+0.58%)

FTSE 100 (UK100) 7,947.60 +65.15 (+0.83%)

USD Index 103.28 -0.35 (-0.34%)

Important events for today:

– Australia Westpac Consumer Confidence Index (m/m) at 01:30 (GMT+2);
– Japan GDP (q/q) at 01:50 (GMT+2);
– New Zealand Inflation Expectations (m/m) at 04:00 (GMT+2);
– Japan Industrial Production (m/m) at 06:30 (GMT+2);
– UK Average Earnings Index (m/m) at 09:00 (GMT+2);
– UK Claimant Count Change (m/m) at 09:00 (GMT+2);
– UK Unemployment Rate (m/m) at 09:00 (GMT+2);
– Switzerland Producer Price Index (m/m) at 09:30 (GMT+2);
– Eurozone GDP (q/q) at 12:00 (GMT+2);
– US Consumer Price Index (m/m) at 15:30 (GMT+2);
– US FOMC Member Williams Speaks at 21:05 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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The Bank of Japan is on the verge of change. Financial markets are waiting for new CPI data