Marketmind: RIP YCC?

By Wayne Cole

SYDNEY (Reuters) – A look at the day ahead in European and global markets from Wayne Cole.

The main surprise in Asia was provided by a Yomiuri newspaper report that the Bank of Japan will review the side effects of its yield curve control (YCC) at a policy meeting next week and may take additional steps to correct distortions in the market.

This, presumably, refers to the fact that 10-year yields have been stuck at the new YCC ceiling of 0.5% for four sessions, even while the BOJ has been busy buying bonds in bulk to get them down.

The timing of the review was a surprise given the market had thought it would wait until BOJ Governor Haruhiko Kuroda retires in April before taking any big steps. Then again, the market had thought the same last month when the central bank wrongfooted everyone by widening its YCC band.

Clearly it’s hard to have a credible target for 10-year yields of zero when they are trading every day at 0.5%, and just buying yet more debt is unlikely to solve that.

The BOJ could raise the target to, say, 0.5% and lift the trading range to 0-1.0%, but markets would likely see it as capitulation and immediately take yields to the new ceiling.

This FACTBOX has some more options.

Whatever the decision, time is ticking for YCC and maybe even negative rates in Japan. That would be a seismic event for bonds given Japan has acted as an anchor for yields globally, while encouraging Japanese investors to funnel funds offshore.

Any reversal of those flows could see the yen rally further, one reason the dollar is down 0.6% so far today at 131.63.

The other major event in Asia was China’s CPI for December which came in bang on expectations at 1.8% y/y, marking China as one of the very few countries in the world without an inflation dragon breathing down its neck.

Indeed, producer prices surprised on the downside with a drop of 0.7% y/y, the third month of declines and a world away from the 10.3% annual increase seen in December 2021. With reopening proceeding apace, supply bottlenecks fading and shipping costs plunging, China may yet return to being an exporter of disinflation, at least for goods prices.

As for U.S. CPI, the market is clearly priced for a dovish outcome, so there’s some risk of disappointment. Median forecasts are 6.5% for headline and 5.7% for core, and this is one of those cases where a result just 0.1ppt either side could make or break the recent rally in bonds.

Other key developments that could influence markets on Thursday:

– Fed’s Harker, Barkin and Bullard speak

– U.S. weekly jobless claims seen rising to 215,000, with continued claims at 1.705 million

(Reporting by Wayne Cole; Editing by Jacqueline Wong)