- BoJ introduces aggressive "reflationary" strategy.
- Focus today on ECB: 25% chance of a refi-rate cut but watch out for non-standard measures to improve credit conditions. BoE to stay put.
- In the Scandi region, watch out for retail sales in Norway and a speech by Norges Bank's Olsen. Markets Overnight
Markets in ‘caution mode’ ahead of central-bank meetings today after disappointing US data and as North Korea continues to step up its rhetoric against South Korea.
Bank of Japan (BoJ) has just made its – very aggressive – announcement
after the first meeting headed by new governor Kuroda. And Kuroda definitely left his mark. First of all, there is a very strong commitment to achieve the 2% inflation target: the BoJ says that it will attempt to achieve the target at the earliest possible time with a time frame of about two years; this is a considerably stronger commitment. In addition, the monetary framework is now completely changed: instead of the overnight call rate BoJ will now target the monetary base, which it will increase with JPY60-70trn. The size of asset purchases becomes less important. Net government bond purchases will be JPY50trn on an annual basis; quite an aggressive move as well. As expected, the maturities of bond purchases will be increased, so that the BoJ can now purchase government bonds with maturities up to 40 years (previously were less than 30 years). The BoJ denotes the new programme of ‘Quantitative and Qualitative Monetary Easing’ (QQME). A first glance at the market reaction confirms that the BoJ delivered at least what the market had hoped for: a higher USD/JPY and Nikkei gains after the announcement.
Yesterday’s U.S. data came in on the weak side, hinting that a soft patch for U.S. growth as a result of the federal budget cuts will not be avoided. The non-manufacturing ISM fell short of expectations, dropping to 54.4 last month (from 56.0); the ADP report revealed private-employment growth running at a mere 158K in March, down from an (upward) revised 237K in February. Other employment indicators, however, hint at a continuously improving job market and our economists look for Friday’s payrolls report to show the 210K jobs added in March. The weaker data stories have dominated markets overnight, with very muted reactions to the Fed’s Williams who last night said that the substantial improvement in the labour market may arrive by the summer. In equity markets, the U.S. indices were in the red at the close and have been tracked in Asia; Nikkei down 1.8% on JPY strengthening ahead of the BoJ statement. U.S. bond yields fell 1-5bp with declines seen mainly in the 7-10Y segment. FX markets have beeing seeing some diverse movements: the JPY rose a little ahead of the BoJ announcement, as did the AUD after retail sales came in strong. Oil plunged after a large rise in US inventories.
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