Hopes for soft landing push up US stocks while Japan’s market outlook remains grim
US macro-economic data remain the dominant factor in determining short term stock market direction. Big swings in stocks have continued into this year with last Friday’s rally helping US stock market indices broadly move into positive territory for the first week of the year, as investors have become more encouraged by falling treasury yields.
On one hand, US labour market remains healthy enough to leave optimists predicting an economic soft landing. On the other hand, Federal Reserve Bank officials continue to warn that easing inflationary pressure although very welcome, is yet not enough to allow for a less hawkish stance with terminal rate likely to end up around 100bps higher in order to meet the ambitious 2% inflation target.
US political landscape seems equally murky with Republicans in the House of Representative finally agreeing to vote in the speaker of the house after a few failed attempts that have raised concerns about passing future legislations, especially in regards to the US debt ceiling which needs to be raised to avoid a government shutdown. One thing that seems certain though is that there is strong bipartisan support for tougher policy actions against China over the coming months.
In our own market in Japan, there is less room for optimism as BOJ’s monetary policies remain under close scrutiny following its surprise tweak in its yield curve control (YCC) last month to allow longer term rates to edge higher. It seems to us that the central bank’s outgoing chief, Kuroda-san has got himself in another pickle as he is now forced to defend JGB yield ceilings more aggressively just when BOJ itself is expected to raise its inflation targets, providing a big blow to his own scenario of falling inflation for this year.
Indeed, inflationary pressures in Japan which have lagged other developed markets is likely to continue to surprise policy makers on the upside despite the recent strength in Japanese currency which should help lower import bills. The latest research by Teikoku Databank indicates that over 4000 food items are likely to see more price hikes following a big wave of increases we saw last October.
Although Kishida’s government subsidies have helped contain energy and fuel costs, these measures look unlikely to remain sustainable given Japan’s huge budget deficit. Moreover, with broad private sector wage hikes of plus 3% looking increasing likely in April, BOJ’s ongoing policy errors are becoming ever more notable with many market participants aggressively shorting JGBs in expectations of further policy tightening once Kuroda leaves office in April.
We also continue to believe that the dollar/yen rate which peaked at 150 level in October of last year and is currently just above 130 will continue to correct towards 120 level or lower this year as rising inflationary pressures in Japan will force policy makers to further tweak their yield curve control and eventually pivot away from QE. We think this major currency trend change is going to prove a huge earnings headwind for Japan’s multinationals this year that could exert more selling pressure on the stock market.