The land of production growth According to Reuters

© Reuters. A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., December 14, 2022. REUTERS/Andrew Kelly

A look into the future in the US and global markets from Mike Dolan.

Of all the financial surprises of 2022, the Bank of Japan’s decision to finally join its G7 peers in effectively tightening lending rates was driven by shocks. of the year – at least for the time being.

In the major central bank’s final decision of the year, the BOJ raised the long-term ceiling on the yield on 10-year Japanese government bonds by a quarter of a percentage point to 0.5% – making the interest rates and the yen appreciate and squeeze stocks even more .

With inflation numbers due this week expected to show a price increase approaching double the BOJ’s 2% target, there have been reports and speculation in recent days that a a change in the central bank’s super-easing policy is being implemented. However, most investors felt that was only possible when BOJ chief Haruhiko Kuroda stepped down in April.

Thursday’s move was vaguely presented – Kuroda emphasized that the 10 yield target remains at zero and all that has changed is an extension of the allowed trading range around that level to zero. 5 percentage points from the previous 0.25. He emphasized that it was a technical change to improve the functioning of the market.

But since the 10 yields hit the ceiling of the previous band, they immediately moved to a new limit. Most analysts see this as the start of a gradual tightening process.

“Despite the denials, we think Governor Kuroda is trying to pave the way for policy normalization before stepping down,” ING economist Min Joo Kang said after the decision.

Japan’s 10-year bond yields immediately nearly doubled close to the new 0.5% target, with yields on US and European Treasuries rising on trend. Yields on 10- and 30-year Treasuries rose to their highest levels of the month.

The yen gained nearly 4% against the dollar, euro and pound. The dollar/yen exchange rate has fallen nearly 3.5% from Monday’s close in New York, to its lowest level since August – down about 13% from the year-to-date peak in October. , when the BOJ was forced to intervene to buy the yen on the open market to prevent its slide.

225 fell 2.5% to a two-month low, with stock markets across Asia falling about 1%. European stocks and US futures are both in the red.

Why the shock? Beyond the timing factor, the BOJ’s move marks a pivotal moment in central bank liquidity being pumped into the world economy to support economies during the pandemic.

Although central banks in the United States, Europe, Canada and Australia and elsewhere have raised interest rates and reduced their balance sheets all year, China and Japan – the second and second largest economies three worlds – has leaned to the other side and continues to lead. global liquidity bowl.

While the BOJ’s action on Thursday may indeed suggest it buys more bonds initially to maintain the new ceiling, the beginning of an end to its loose monetary stance will have significant implications for that global liquidity pool and the behavior of Japanese investors in world markets.

However, continued concern about the scale of China’s COVID war and rising new infections could mean that the People’s Bank of China remains the only pigeon in the cage. It left its benchmark lending rate unchanged for the fourth straight month on Thursday.

China’s Xiaomi (OTC: ) has begun laying off workers in its smartphone and internet services businesses, joining a long list of Chinese tech companies cutting jobs as the country battles the coronavirus outbreak. disease outbreak.

Back in the United States, the housing gloom prevailed. With homebuilder sentiment down for the 12th straight month this month, Tuesday’s focus will be on the start of housing construction.

Basic corporate sounds and fears of an earnings recession – at least when you exclude the big energy companies and their unexpected fortunes in 2022 – are also back on the radar with new releases. Updates from FedEx (NYSE:) and Nike (NYSE:) later. The former is often seen as a hub for global activity, trade and shipping.

Controversy over the US budget is also in the spotlight. Negotiators in the US Congress unveiled a $1.7 trillion government funding bill late Monday, as lawmakers try to pass the measure, including spending military record, before temporary funding runs out over the weekend.

On politics, the House panel investigating the January 6, 2021 attack on the Capitol asked federal prosecutors on Monday to charge Donald Trump with four counts for his role in the murder. trigger deadly riots.

In the ailing crypto world, questions about the health of major exchange Binance prevail amid the messy demise of FTX and the fate of its founder.

Key developments that could provide direction for US markets late Tuesday:

* November the United States began to build housing, permits;

*December Philadelphia Fed Non-Manufacturing Business Survey

* US company earnings: FedEx, Nike, FactSet, General factory (NYSE:)

(By Mike Dolan, edited by Alexander Smith [email protected] Twitter: @reutersMikeD)

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