Boulevard of Broken Dreams

June 14, 2024

Boulevard of Broken Dreams

  • The BOJ failed to deliver the anticipated reduction in its purchase amount of JGBs today. The BOJ delayed the decision to end-July.
  • Sweden inflation ran a little hotter than expected in May.
  • Peru central bank unexpectedly kept the policy rate at 5.75%.

 

JPY underperformed and JGB yields had a kneejerk downside reaction following the outcome of the Bank of Japan (BOJ) meeting. As was widely expected, the BOJ left the policy target range at 0 to 0.10%. However, the BOJ failed to deliver the anticipated reduction in its purchase amount of JGBs.

Instead, the BOJ said “It will collect view from market participants and, at the next Monetary Policy Meeting (July 31), will decide on a detailed plan for the reduction of its purchases amount during the next one to two years or so.” In the meantime, the BOJ plans to continue its JGB purchases with broadly the same amount as before (roughly ¥6 trillion/month pace).

In our view, the BOJ is unlikely to tighten more than is currently priced-in (30bps over the next 12 months) because underlying inflation in Japan is in a firm downtrend. In fact, the BOJ still projects CPI (all items less fresh food and energy) to drift lower to its 2% price stability target in the second half of the 2024 fiscal year. Bottom line: Japan real yields will remain negative and a drag on JPY.

USD is extending its post Fed meeting gains against all major currencies in line with widening US bond yield spreads relative to other major economies. The Fed’s guidance that it plans to keep the funds rate higher for longer while other major central banks have started to cut rates is USD supportive.

Yesterday, Donald Trump announced plans to slash taxes and raise tariffs if elected. This combination is inflationary and could force the Fed to keep policy restrictive for longer. A loose fiscal/tight monetary policy mix is generally positive for a currency.

Today, the University of Michigan preliminary June consumer sentiment report is the focus (3:00pm London). Headline is expected at 72.0 vs. 69.1 in April. If so, it would be the first improvement since March but would fall short of that month’s cycle high of 79.4. Keep an eye on 1- and 5 to 10-year inflation expectations, which have been moving higher and should keep the Fed cautious. While consumer confidence measures softened in recent months, continued job growth should continue to fuel consumption.

On the Fed speaker front today we have Cleveland Fed President Loretta Mester (voter, leans hawkish) and Chicago Fed President Austan Goolsbee (non-voter, leans dovish).

EUR/USD is heavy near recent lows around 1.0735 on USD strength and French political uncertainty. Germany-France 10-year bond yield spreads widened to around -70bps, the most negative since 2017 due to heightened fiscal concerns in France. Polls suggest the French National Assembly could be even more divided following the upcoming legislative elections making it harder to get the fiscal house in order. Key ECB speakers today include Chief Economist Philip Lane (10:00am London) and President Christine Lagarde (6:30pm London).

GBP/USD is also weighed down by USD strength. The Bank of England (BOE) quarterly inflation attitudes survey will be reported today (9:30am London). Inflation expectations have generally been trending lower, offering the BOE some support for starting the easing cycle sooner rather than later. We believe the swaps market is under-pricing the likelihood of a BOE policy rate cut in August (about 50% priced-in) which is a headwind for GBP.

SEK barely budged after Sweden inflation ran a little hotter than expected in May. Both CPI and CPIF rose 0.2% m/m (consensus: -0.1%) driven by price rises in transport services and package holidays. On an annual basis, CPI inflation slowed to 3.7% (consensus: 3.5%) from 3.9% in April and the policy-relevant CPIF remained at 2.3% for a second consecutive month (consensus: 2.1%). Overall, CPIF inflation is close to target and should not derail the Riksbank’s guidance to cut the policy rate two more times during the second half of the year. The swaps market has more than fully priced-in a 25bps rate cut in August and implies a 70% probability of a 50bps cut.

Peru central bank unexpectedly kept the policy rate at 5.75%. A large majority of analysts polled expected a 25bps cut. The Bank justified standing pat by noting that “core inflation shows some persistence derived from some service components”. Meanwhile, the bank projects inflation to stay around its 2% target over the forecast horizon. Bottom line: Peru’s positive real policy rate and a current account surplus on top of net FDI inflows bode well for PEN.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2