Column: Three changes that became apparent at the beginning of the year, the transformation of the Bank of Japan is a burden on Japanese stocks = Norihiro Fujito | Reuters

[Tokyo19th]- “Three changes” are becoming apparent in the market early in the new year. The “first change” is a move to evaluate the future recovery of the Chinese economy.

In the short term, the lifting of coronavirus restrictions is putting downward pressure on the Chinese economy. According to the official announcement of the Chinese authorities, the number of deaths due to the corona infection jumped to 59,938 between December 8 last year and January 12 this year. Peking University has announced an estimate that “as of January 11, there are about 900 million infected people in China.”

In response to the rapid spread of the corona infection, the December PMI (Purchasing Managers’ Index) announced by the National Bureau of Statistics was 47.0 for the manufacturing industry, 41.6 for the non-manufacturing industry, and 42.6 for the general industry. It is well below the branch point of 50.

However, looking at the examples in Europe, the United States, and Southeast Asia, it has been confirmed that the new coronavirus infection acquires “herd immunity” after a rapid spread, and eventually follows a process of calming down after peaking out.

Since the stock market is ahead of the curve, the market is starting to factor in the normalization of the economy after the spread of the infection. The Shanghai Composite Index recovered 12.7% from its low of 2,855 points in October last year to its high of 3,251 points on January 16.

Also noteworthy is the rebound in non-ferrous metal prices. Copper futures prices on the London Metal Exchange (LME) plunged 35.9% from a record high of $10,845 per metric ton in March last year to a low of $6,955 in July against the backdrop of a slowdown in the Chinese economy. There was a situation. After that, the price continued to struggle, but after the corona restrictions were lifted, it turned to rebound, and on January 18th this year, it temporarily rebounded to a high of $ 9,550.5, rebounding 37.3%.

Aluminum futures are moving in the same way, and as China holds about half of the global demand for non-ferrous metals, there is a noticeable move to buy a recovery in the future.

The same is true for iron ore, coking coal, and Chinese steel prices. Australian iron ore export spot prices for China rose 58.4% from a low of $80.50 per metric ton on November 1 last year to a high of $127.50 per metric ton on January 13 this year.

China’s hot coil (hot-rolled steel) prices are also showing signs of recovery, and this trend is spreading to material stocks around the world. .

In addition, US coffee chain stores, shoes, luxury cosmetics, and French luxury brand stocks, which are strongly related to personal consumption in China, are all rebounding.

In other words, despite the fact that the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the World Bank, and others have all expressed concern about severe economic slowdowns and recessions, typical cyclical stocks, even China-related stocks are all on the verge of rebound.

The “second change” is the downward trend in US long-term interest rates. At the US Federal Open Market Committee (FOMC) meeting in December, Powell, chairman of the US Federal Reserve Board (FRB), strongly suggested that interest rates would continue to be raised, and the US 10-year Treasury yield reached 3.903% on December 30, last year. And, again showed a movement to watch the 4.0% level.

However, after passing two important events, the US employment data in December and the US consumer price index (CPI) in December, it temporarily fell to 3.366% on Jan. .

First, the US employment statistics for December showed that the number of non-agricultural employees increased by 223,000 from the previous month, and the unemployment rate fell to 3.5%, showing strong evidence of tight employment. However, the average hourly wage, which the market is paying attention to, increased by 4.6% from the previous year, and the preliminary figure in the US employment statistics for November was 5.1% (later revised downward to 4.8%). The view that it was an unexpected decline strengthened. It suggests that the “wage inflation” aspect that investors were worried about has begun to ease gradually.

The December CPI grew 6.5% for the composite and 5.7% for the core compared to the previous year, almost in line with market forecasts. Looking at the breakdown, we can see that the decline in the price of energy, including gasoline, was large, and the fall in the price of used cars and the slowdown in the rise in food prices were also factors that softened the inflation rate.

It should be noted that the core index increased by 0.3% from the previous month, and it is difficult to say that it is a clear slowdown. It seems possible to evaluate the 5% as “declining trend confirmed”.

Even after the October and November CPI announcements, which showed a slowing trend, the Federal Open Market Committee (FOMC) members led by Chairman Powell said, “The trend is positive, but the level of inflation is still too high. I need proof,” he repeated cautiously.

However, it can be said that “considerable evidence” has been gathered, such as the softening of the average hourly wage in the US employment statistics in December and the continuing declining trend in the CPI in December.

In response to this, FOMC members also said, “A rate hike of 0.25% is appropriate going forward,” “It makes sense to steer more cautiously in the future,” and “We are approaching the level where rate hikes will stop.” We are starting to see signs of a softening of the tightening policy.

Federal Funds Rate (short-term policy interest rate) futures are “definite for a 0.25% hike in February, only a 7.2% chance of a 0.5% hike” and “a 71% chance of a 0.25% hike in March.” 3%.”

The market is beginning to see that the Fed’s interest rate hike will end at “0.25% x 2 times”, and the implied overnight interest rate peaked at 4.861% in June, suggesting a “suspension of interest rate hikes” (January 18th). In other words, it is a transition from “reduction in rate hikes” to “suspension of rate hikes”.

The biggest beneficiaries of the decline in US long-term interest rates are tech stocks, which have been undergoing severe corrections since last year. The market expects IT capital investment and digital advertising to decline sharply due to concerns about economic slowdown and recession, and high-tech stocks such as semiconductors, software, high-tech equipment, SNS, e-commerce, etc., whose valuations are expensive, have been selling heavily. However, since the beginning of the year, it has shown an untimely backlash.

The “third change” is the transformation of the Bank of Japan’s ultra-easing policy. Starting with the expansion of fluctuations in the yield curve control policy (YCC) in December last year, there was a gradual increase in the market view that the BOJ had taken a step towards normalizing monetary policy. Japan’s newly issued 10-year government bond yield temporarily rose to 0.545% on January 13.

However, at the January decision meeting, although the outlook for prices and growth rates was slightly revised and the fund-supplying operation against pooled collateral was expanded, the framework of monetary policy remained largely unchanged. Some foreign investors, such as hedge funds, thought that the fluctuation range of YCC would be expanded again and that the framework of YCC itself would be abolished. The yen shook in the direction of depreciation, and the Nikkei Stock Average also rose sharply. There is a strong possibility that the speculative positions of speculative long-term bond selling, dollar selling, and Nikkei 225 selling have been unwound.

However, the implied overnight rate for overnight index swaps is still 40.6% at the new governor’s first meeting in April and 42.9% at the June meeting in terms of rate hike (0.1% range) probability. I read. The implied overnight rate at the end of 2023 December meeting is 0.246%, and it incorporates a total of about 2.6 rate hikes (as of January 18).

It is necessary to keep in mind that this is the most volatile swap, but foreign hedge funds that make heavy use of futures, options, and swaps are still considering the abolition of YCC, as well as the exit from negative short-term policy interest rates. there is

As for the exchange rate, it seems premature to conclude that the yen’s appreciation has ended. If the Fed is looking to “reduce the extent of rate hikes” or “suspend rate hikes,” while the BOJ is expected to move towards “normalization of monetary policy,” albeit slowly, there is a possibility that the strong yen bias will remain in the dollar/yen exchange rate. can be assumed.

On January 13, the yen advanced to 127.46 yen against the dollar. After the Bank of Japan meeting in January, there was a phase of rapid recovery to the 131-yen level, but the depreciation of the yen was temporary, and after that it reversed to the 128-yen level again.

Going forward, it is expected that there will be large ups and downs, but if the Bank of Japan’s policy change in December last year is seen as the first step in correcting the unconventional ultra-easing measures over the past decade, it seems that there is still a long way to go. .

The stock market since the beginning of the year clearly shows that the “first change” and the “second change” will motivate stock prices to rise in Europe, the United States, and emerging countries in general.

On the other hand, the “third change” suggests that the biggest factor, which is the observance of the Bank of Japan’s ultra-easing policy that led to Japanese stocks outperforming European and American stocks last year, will change in essence. If the trend of yen depreciation goes away in tandem with this, export-related and global corporate earnings revisions will likely become a risk.

Uncertainty remains extremely high in this year’s economic and price trends, the monetary policies of the FRB and the Bank of Japan, trends in long-term interest rates, and trends in exchange rates. It will be necessary to spend more time verifying whether the “three changes” that became apparent early in the new year will end as mere temporary phenomena, or whether they will turn into medium- to long-term trends. However, it is assumed that this year’s market will not be able to avoid volatile developments like last year.

Editing: Kazuhiko Tamaki

*This column was posted on the Reuters Foreign Exchange Forum. It is based on the author’s personal opinion.

*Mr. Norihiro Fujito is an Executive Counselor and Chief Investment Strategist at Mitsubishi UFJ Morgan Stanley Securities. Graduated from Waseda University in 1979. Joined Kokusai Securities in 1999. After that, he worked in the investment information department at Mitsubishi Securities, Mitsubishi UFJ Securities, and Mitsubishi UFJ Morgan Stanley Securities. Incumbent since July 2018. Prior to joining KOKUSAI SECURITIES, he spent nearly 20 years in the asset management business at a life insurance company, where he worked as a fund manager, portfolio manager of pension funds, and in charge of planning. He has a reputation for persuasive analysis from a buy-side perspective.

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