Yen Weakens After BOJ Decision But Losses Limited

January 18, 2023
  • Global bond yields are lower today after the BOJ decision; December PPI will be the highlight; December retail sales will also be important; the Fed releases its Beige Book report; the U.S. manufacturing sector continues to weaken
  • Reports suggest the ECB may downshift sooner than expected; ECB tightening expectations have fallen; U.K. reported December CPI; BOE tightening expectations remain steady
  • The two-day BOJ meeting ended with no change in policy; BOJ tightening expectations have fallen; new forecasts were released in the Outlook Report; November core machine orders were very weak

The yen is the big mover after the Bank of Japan decision. USD/JPY traded at the highest since January 12 near 131.60 after the Bank of Japan left all policy settings unchanged, but the pair has since fallen back to trade near129 currently. As a result, DXY traded as high as 102.90 before falling back to trade near 102 currently and remains on track to test the new cycle low from Monday near 101.773. Elsewhere, the euro is trading higher near $1.0830 after trading as low as $1.0765 earlier and remains on track to test the new cycle high from Monday near $1.0875. Sterling is trading at a new cycle high near $1.2385 and remains on track to test the December high near $1.2445. While we believe that the current dollar weakness is overdone, we continue to respect the price action. Until a more hawkish Fed narrative emerges, the dollar is likely to remain under pressure.


Global bond yields are lower today after the Bank of Japan decision. JGB yields fell after Yield Curve Control was maintained and this had a knock-on effect. The 10-year UST yield is trading near 3.48% while the 2-year yield is trading near 4.18%, both near the recent cycle lows posted after the December CPI data. Until the less hawkish Fed narrative shifts, it will be difficult for U.S. yields to move significantly higher, which in turn is likely to maintain downward pressure on the dollar.

December PPI will be the highlight. Headline is expected at 6.8% y/y vs. 7.4% in November, while core is expected at 5.6% y/y vs. 6.2% in November. CPI data last week came in as expected and markets continue to price in a less hawkish Fed ahead. While inflation pressures continue to ease, we note that core PCE remains well above the Fed’s 2% target and more work clearly needs to be done to get it lower.

December retail sales will also be important. Headline is expected at -0.9% m/m vs. -0.6% in November, while ex-autos is expected at -0.5% y/y vs. -0.2% in November. The so-called control group used for GDP calculations is expected at -0.3% m/m vs. -0.2% in November. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q4 growth at 4.1% SAAR, up from 3.8% previously. The next model update comes today after the data. January NAHB housing index (31 expected), November business inventories (0.4% m/m expected), and November TIC data will also be reported.

The Fed releases its Beige Book report. Since the last FOMC meeting December 13-14, most indicators suggest further slowing in the real economy as well as lower price and wage pressures. However, labor market data suggests ongoing robustness in hiring and we think that will ultimately limit the drop in average hourly earnings. Overall, we expect the Beige Book to paint a mixed picture of the economy that supports a downshift in the size of its rate hikes while signaling a willingness to continue tightening further if data warrant.

We continue to believe markets are underestimating the Fed. WIRP suggests a 25 bp hike February 1 is fully priced in, with only 10% odds of a larger 50 bp move. Another 25 bp hike March 22 is almost priced in, while one last 25 bp hike in Q2 is only 30% priced in. We think these odds are too low. Furthermore, the swaps market continues to price in an easing cycle by year-end and we just don’t see that happening. Yesterday, Barkin said he was in favor of keeping rates high, adding “You just can’t declare victory too soon.” He stressed that “As long as inflation stays elevated, we need to continue to move the needle, to tighten if you will, ever more.” Bostic, Harker, and Logan speak today. We expect Fed speakers to remain hawkish as financial conditions continue to loosen.

The U.S. manufacturing sector continues to weaken. Yesterday, the Empire survey came in expected at a whopping -32.9 vs. -8.7 expected and -11.2 in December. This was the lowest since May 2020. The Philly Fed reports tomorrow and is expected at -11.0 vs. -13.8 in December but there are clear downside risks. December IP will be reported today and is expected at -0.1% m/m vs. -0.2% in November, with manufacturing production expected at -0.2% m/m vs. -0.6% in November. There can be no doubt that the manufacturing sector is also slowing along with the housing sector. However, this is exactly what the Fed wants to see.


Reports suggest the ECB may downshift sooner than expected. Policymakers are reportedly considering a slower pace of tightening than what was set forth at the December 15 decision. Reports suggest a 25 bp hike March 16 is now being considered after a likely 50 bp hike February 2. Recall that at her press conference, Madame Lagarde said it was obvious to expect more 50 bp hikes “for a period of time.” She stressed that market rate bets wouldn’t lead to inflation converging with the 2% target and that the ECB needs to do more than what the market expects. Villeroy pushed back on these reports by stressing that Lagarde’s hawkish guidance remains valid and that it’s too soon to talk about the March meeting. Of note, the ECB publishes the account of its December 15 meeting tomorrow.

ECB tightening expectations have fallen. WIRP suggests a 50 bp hike February 2 is almost fully priced in, followed by around 50% odds of another 50 bp hike March 16. Then, 25 bp hikes are priced in for May 4 and June 15 that would see the deposit rate peak near 3.25% vs. 3.5% last week and 3.75% at the start of the year. Odds of one last 25 bp hike in Q3 are around 30%. If inflation continues to slow, we think the expected peak rate is likely to move down perhaps even to 3.0%, which is where it stood back in mid-December.

The U.K. reported December CPI. Headline came in as expected at 10.5% y/y vs. 10.7%, core came in a tick higher than expected and steady from November at 6.3% y/y, and CPIH came in as expected at 9.2% y/y vs. 9.3% in November. Headline decelerated for the second straight month from the 11.1% peak in October but remains far above the 2% target. Like other countries, core remains elevated near the 6.5% cycle high, and therein lies the problem for the Bank of England. What will the bank do if headline continues to ease and core remains elevated? Stay tuned.

BOE tightening expectations remain steady. WIRP suggest nearly 85% odds of a 50 bp hike February 2, while a 25 bp hike March 23 is now priced in rather than 50 bp previously. After that, a 25 bp hike in either May or June is priced in that would see the bank rate peak near 4.5% vs. 4.75% last week. Elsewhere, November U.K. house prices slowed to 10.3% y/y vs. a revised 12.4% (was 12.6%) in October as past BOE tightening continues to pressure the housing sector.


The two-day Bank of Japan meeting ended with no change in policy. Most importantly, the current settings for Yield Curve Control were maintained and the bank pledged to continue large scale JGB purchases and to remain nimble. The bank noted that the economy was under pressure from slowdown overseas and that risk to the economy are skewed to the downside for both FY22 and FY23 and balanced for FY24. Governor Kuroda said he does not believe the trading band for the 10-year JGB yield needs to be widened further, adding that the bank needs more time to assess the impact of its December adjustment.

BOJ tightening expectations have fallen. WIRP suggests 20% odds of liftoff for the next meeting March 9-10, rising to nearly 60% for the April 27-28 meeting and fully priced in for the June 15-16 meeting. If markets continue to test the BOJ’s commitment to YCC, we still think it’s quite possible that it abandons YCC at the March meeting in order to set up liftoff at the April or June meetings. This is the basic roadmap for tightening that’s been well-established by the Fed. Of note, the BOJ’s balance sheet has continued to grow as a result of YCC but we do not foresee Quantitative Tightening until 2024 at the earliest.

New forecasts were released in the Outlook Report. It turns out that reports suggesting the bank will raise its core inflation forecasts close to its 2% target were not quite true. Specifically, the bank was expected to raise its FY23 forecast to between 1.6-2.0% but kept it steady at 1.6% while raising its FY24 forecast to 1.8% vs. 1.6% previously. These minor revisions suggest the bank is in no hurry to hike rates. However, we continue to believe that liftoff is likely to come earlier than we previously anticipated, with risks of a move in Q2 or perhaps even Q1 vs. H2 seen previously. Of note, Japan reports December national CPI Friday. Headline is expected at 4.0% y/y vs. 3.8% in November, core is expected at 4.0% y/y vs. 3.7% in November, and core ex-energy is expected at 3.1% y/y vs. 2.8% in November.

November core machine orders were very weak. Orders came in at -8.3% m/m vs. -1.0% expected and 5.4% in October, which dragged the y/y down to -3.7% vs. 1.6% expected and 0.4% in October. This was the first y/y contraction since March 2021. While December may see a bounce based on machine tool orders already reported, the recent weakness in orders does not bode well for IP and exports in the coming months. Perhaps that is why the BOJ sees downside risks to the economy and maintained its ultra-dovish stance.

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