July 31 REX Wire Market Outlook

PMI weakens across the G4, but Japan has some surprises up its sleeve as BoJ plays with YCC.

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Here's the next in our series of regular market overviews as we head into the new week, and a new month.

The picture across the global economy is mixed (which, given the negative predictions of the past few months, might be seen as positive). Last week's FOMC meeting delivered a 25 bps increase in the base rate, which is largely expected to be the Fed's last hike—though Jay Powell hedged his bets in his statement, saying: "I would say it's certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it's possible that we would choose to hold steady."

The Fed has hiked rates at record speed, without destroying the economy, as many critics feared and predicted. The S&P has been trending higher for 10 months, and is close to its all-time high. The DXY, which dipped below 100 earlier this month, has also taken a leg up to almost 102. The dollar is strong, despite interest rate rises nearing their end. America is, against all the doomsayers' warnings, open for business.

The Global Picture

It's worth reiterating that rate rises do not take effect immediately; the dampening effect they have on the economy generally has a 9-12 month lag.

Looking ahead, the global picture is not so healthy. PMI (Purchasing Managers' Index) results for July show that the world's four largest economies are, in aggregate, slowing down. PMI takes the form of a survey of businesses and summarizes market conditions. Importantly, unlike many other metrics, PMI is a leading indicator.

The latest PMI data showed dampening growth, with a likely downturn on the way, as expectations fell to their lowest in 2023.

"Data split by sector highlighted a third consecutive monthly contraction in output at goods producers, meanwhile service sector activity cooled to a five-month low. The eurozone weighed on the overall performance of the G4, by registering the steepest deterioration in performance. The remaining economies, bar Japan, pointed to softer expansions in output in July."

Japan Raises Eyebrows

Japan is the only one of the G4 whose economy is not heading downwards, according to the PMI (buoyed by its services sector). What's more, the Bank of Japan has just dropped a bombshell...

On Friday the BoJ announced it was changing the target yield for 10-year Japanese government bonds, promising to purchase them at a yield of up to 1%, following years of maintaining its target of 0.5%. This move, which took place in response to rising wages and inflation, essentially weakens its yield curve control.

Then, on Monday morning, the Bank promptly announced an "unscheduled bond buying operation" for over $2 billion, as the yield on its bonds (surely predictably) soared.

This abrupt change to Japan's monetary policy could have big implications, as investors sell US government bonds to buy more attractive Japanese bonds, and the Yen strengthens against the dollar. Expect yields outside of Japan to rise in response.

Crypto Stable But A Big Move Looms

Bitcoin closed the week around $29,300, registering very little movement over the past few days. Last week we mentioned that the weekly Bollinger Bands were at their tightest ever. Well, they haven't got any wider. We can only assume that the move, when it comes, will be impressive.

BTC-USD chart, TradingView
Bitcoin remains stable going into the new week.

So far, BTC has not reacted to BoJ's news—possibly because it's unclear what the appropriate move would be. Sell off as bonds yields look more attractive, or buy as an inflation hedge as BoJ fills the gas tank of its money-printer and fits a super charger, as further "unscheduled" purchases to tame a more volatile Yen become the norm?

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