Daily Market Update: BoJ inaction sends yen higher and equities lower
Overnight, the Bank of Japan’s decision to keep its monetary policy settings on hold has taken markets by surprise.
The central bank policy inaction follows confirmation that the Japanese economy slipped back into deflation territory last month for the first time since May 2013. Consumer prices fell by 0.1% y/y in March following a 0.3% y/y print the previous month. Meanwhile Japanese core-inflation fell by 0.3% y/y. The BoJ’s efforts to drive inflation up through a weak Japanese currency have been unsuccessful. This has led markets to assume that governor Haruhiko Kuroda would announce additional policy stimulus this morning. Instead governor Kuroda and his colleagues have opted for more time to assess the impact of negative interest rates. Financial markets have reacted in the usual way with a sell-off in equities and the Japanese currency strengthening. The Nikkei 225 closed some 3.6% lower this morning. Meanwhile the yen has strengthened the most in 8 months following the BoJ’s announcement.
Central bank policy inaction was also in play in the US. The Federal Reserve held rates steady at 0.25% to 0.5% last night, as it noted a slowdown in US economic growth and more sluggish household spending. The central bank signalled that its concerns about global economic and financial hazards have eased since its meeting in March, even as it continues to closely watch developments overseas as well as mixed indicators at home. This afternoon the key release in the US is Q1 GDP. Economic growth is expected to slow markedly from 1.4% (on an annualised basis) in Q4 to just 0.6% for Q1. The latter represents a quarterly growth rate of just 0.15% using the European convention of expressing growth rates.
Yesterday it was confirmed that UK economic growth slowed from 0.6% q/q in Q4 to 0.4% q/q in Q1. This was in line with analysts’ expectations. UK house price growth is also decelerating. According to Nationwide’s house price survey released this morning, prices rose by 0.2% m/m in April. This represented the weakest rate of growth in five months and lowers the annual rate of house price inflation from 5.7% in March to 4.9% in April. George Osborne is due to appear before Westminster’s Treasury Select Committee this morning. The Chancellor will be questioned on the Treasury’s recent warning that the UK economy would suffer permanent damage if voters decided to leave the European Union in the 23rd June referendum. So far, the economic arguments surrounding the forthcoming EU referendum have largely focused on the economic costs of a Brexit. This morning a group of UK economists (including the Mayor of London’s economic adviser, Gerard Lyons) plan to launch the economic arguments for a Brexit. There are no other key UK data releases scheduled today. Today in the Eurozone the key releases are German CPI and the various Eurozone confidence surveys.
European equities markets are down in early trading with the Euro Stoxx index down 1.3% as I write. On the currency markets a strengthening Japanese yen has been the main story. Looking at the main currency pairs, EUR/USD is trading at $1.134 up from $1.131 at yesterday’s open. The single currency is also firmer against sterling with EUR/GBP currently changing hands at 77.7p. GBP/USD is up marginally over the last 24 hours at $1.458. Outside of currencies, the oil price continues to drift higher. The Brent crude benchmark is up almost 2% this morning at $47.2pb.