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Japan tweaks wording of yield curve control policy, leaves rates negative

The Nikkei was the biggest winner in mixed Asian equity trading on Tuesday after the Bank of Japan (BOJ) tweaked the wording of its yield curve control policy. The yen fell against the dollar. A day earlier, Wall Street saw a strong rebound to start the week. While European stock markets ended the day mostly in positive territory, the German economy shrank again in the third quarter, signalling Europe’s largest economy could be headed for its second recession since late last year. 

Shane Strowmatt, LGT
Tempo di lettura
5 minuto
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The BOJ loosened the wording around its yield curve on Monday, taking another step in unwinding the policy. The central bank left its short-term interest rate unchanged at -0.1%. The BOJ also kept its target level of 0% for 10-year yields and an acceptable range of -1% to 1%. However, it now considers 1% to be a reference level rather than a strict limit that it must defend with unlimited bond purchases. The move is another small step towards relaxing its strict yield curve control policy after the central bank widened the acceptable yield target band in July. The decision to change the wording on Tuesday came as the central bank altered its inflation projections to be well above it is 2% target for this year and next. Inflation has been above the BOJ’s target for more than a year and a half already. The concern for investors would be that removing the cap could cause Japanese investors to pull their money out foreign investments to invest in the local Japanese bond market. But the effect on the 10-year US Treasury yield seemed muted, with yields still trading around 4.88% on Tuesday morning.

On stock markets in the Asian-Pacific region, the Nikkei 225 was up 0.6% on Tuesday. Korea’s Kospi lost 1.4%. In Australia, the S&P/ASX 200 gained 0.1%. Hong Kong's Hang Seng Index lost 1.6 %, while the Shanghai Composite was down marginally after factory activity in the world’s second-largest economy unexpectedly fell in October. The Manufacturing Purchasing Managers’ Index (PMI) dropped to 49.5 in October from 50.2 last month and was once again below the 50-mark, which indicates contraction.

In New York, stock indices soared on Monday, rebounding from some of the lowest values since March of this year. Particularly helpful for sentiment were developments in Gaza after the ground invasion there appeared to be more concentrated and controlled than many had anticipated when the offensive began over the weekend. The Dow Jones Industrial spiked 1.6% and the S&P 500 closed up 1.2%. The Nasdaq-100 shot up 1.1%.

In Europe, Germany’s gross domestic product (GDP) fell by 0.1% in the third quarter when compared to the previous three months. Lower consumer spending was largely responsible for the decrease while a decrease in demand for exports - which play a key role in Germany’s economy - as well as high energy costs have put a drag on growth this year. After falling into a recession in the last quarter of 2022, German GDP was flat in the first quarter of 2023 and only increased by 0.1% in the second quarter. Germany’s Composite Purchasing Managers’ Index has remained below 50 – the level that signals contraction – for four months in a row, which indicates the economy may be headed towards another recession to finish the year.

On a positive note for the German economy, inflation decelerated to 3% in October, the slowest pace in more than 2 years, data released Monday showed. The slowdown is a sign that the European Central Bank’s (ECB) 10 consecutive interest rate hikes are having their intended effect. Germany’s DAX ended Monday’s session 0.2% higher and the Euro Stoxx 50 gained 0.4%.

In Switzerland, the KOF Economic Barometer suggest economic activity will likely remain at a somewhat depressed level for the rest of 2023. The indicator fell to 95.8 points in October, 0.1 points lower than in the previous month and still below its long-term average. Given the relatively small movements in the Barometer in recent months, it appears as if the Swiss economy is stabilizing at a moderately weak level.

Also in Switzerland, the Swiss National Bank is lowering interest rate payments to banks for cash they store at the central bank. The policy change is expected to save the SNB about 600 million francs in interest payments annually. The move comes after the SNB made a record loss of 132 billion francs in 2022. Most years, the bank makes a profit that is distributed in the form of a pay-out to the government, but last year falling valuations of its foreign currency holdings took a toll on the central bank’s balance sheet.

Corporate news in focus: Quarterly earnings from BBVA, Straumann, OMV, Anheuser-Busch InBev, BASF, Klöckner & Co, BP, Caterpillar, Pfizer, AMD. Revenue figures from Carlsberg, Stellantis.

Economic data in focus: French gross domestic product (07:30 CET), German retail sales (08:00), Swiss retail sales (08:30), French harmonized index of consumer prices (08:45), Italian gross domestic product (10:00), euro area gross domestic product (11:00), euro area consumer prices (11:00), Conference Board Consumer Confidence Index (15:00).


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.