I have a few things on my mind this week. We have to talk about Japan and the BOJ. Last week’s decision by the BOJ to raise its deposit rate above zero for the first time in 17 years cements Japan and its central bank as a counter cyclical indicator, of sorts. While major central banks have spent the majority of the past 18 months raising interest rates, the BOJ has stubbornly resisted calls to exit NIRP, despite rising inflation. Now that the ECB, BOE and Fed are on the cusp of lowering interest rates, the BOJ is pulling the trigger on a hike. The BOJ’s decision raises a number of fundamental questions for global macro traders and thinkers. The most obvious one is whether the twin inflation shock from Covid and shifting geopolitics is now pulling major developed rate markets out of their ZIRP/NIRP funk. And if they are, does this mean that the idea of long-term gravity of rapidly ageing population weighing on inflation and interest rates is wrong? Is Japanification now reversing? I am sceptical, but if Japan manages to escape, it would go a long way to falsify the idea of a determinist link between ageing and disinflation.
Read MoreIn a nutshell, this is what my models are telling at the moment: the three-month stock-to-bond ratios in the U.S. and Europe have soared, indicating that equities should lose momentum in Q2 at the expense of a further decline in bond yields. That said, the three-month ratios currently are boosted by base effects from the plunge in equities at the end of last year. They’ll roll over almost no matter what happens next. Moreover, the six-month return ratios are still favourable for further outperformance of stocks relative to fixed income. Looking beyond relative returns, my equity valuation models indicate that the upside in U.S. and EM equities is now limited through Q2 and Q3, but they are teasing with the probability of outperformance in Europe. Finally, my fixed income models are emitting grave warnings for the long bond bulls, a message only counterbalanced by the fact that speculators remain net short across both 2y and 10y futures. This mixed message from my home-cooked asset allocation models is complemented by a mixed message from the economy. The majority of global growth indicators still warn of weaker momentum, but markets trade at the margin of these data, and the green shoots have been clear enough recently. Chinese money supply and PMIs showed tentative signs of a pick-up at the end of Q1, a boost reinforced by data last week revealing that total social financing jumped 10.7% y/y in March.
Read MoreMy main job on these pages is to distil the market Narrative™ for my readers, and recent events have made this week’s missive a layup. The debate on whether to fire, and how to arm, the fiscal bazooka has continued, and now monetary policymakers have joined the party. For a while, it seemed as if the world’s biggest central banks were sleepwalking into coordinated tightening, or in the case of the PBoC, failing altogether in the attempt to counter a sustained cyclical slowdown. To the extent that the Q4 chaos in equities was investors’ vote on this strategy, they should consider their message received. In Japan, signs of wage growth briefly alerted markets to the prospect that the JGB market would be un-frozen by further loosening of the yield-curve-control. But the truth is that Kuroda-san is stuck. With global headline inflation pressures now easing, manufacturing and exports struggling, and the looming consumption tax, the BOJ isn’t going anywhere fast; zero rates and (modest) balance sheet expansion will continue as far as the eye can see. In Frankfurt, the ECB recently downgraded its assessment of the economy—the convoluted shift from “broadly balanced” to “downside” risks—and expectations are building that the TLTROs will be extended, or even renewed and expanded.
Read MoreOne of the more enjoyable aspects of being an independent macroeconomic researcher—at least for a geek like me—is the road trips when you get to speak to clients and prospects. Sure, you see more airport lounges and hotel rooms than you need to. But there is no better way to gauge the zeitgeist than to spend a week in meetings with portfolio managers and asset allocators. I have done just that in New York, and I sense a cautious optimism that the positive trend in equities and credit and the economy will continue for a bit longer. In my capacity as a Eurozone economist, my central message to the wardens of our capital was that the European economy is just fine. But I also spent time floating the following proposition: Monetary policy divergence is back with a vengeance, and macro traders will make, or lose, their money on this theme in the next 12 months. The ECB and the BOJ recently have signalled to markets that they will be stuck with negative interest rates for a while. Meanwhile, the the Fed is on the move, a point highlighted by Friday’s robust advance Q3 GDP report, which suggests that growth in the U.S. economy was a punchy 3% annualised, despite a drag from two hurricanes.
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