JAPAN: BoJ Balance Sheet Declining, Potential Implications For Global Markets
Jan-30 03:47
BoJ efforts to curb the size of its balance sheet have stepped up. This could have implications for local asset markets and the yen, but also, global asset markets, as we outline below.
- At the end of last week, the central bank announced it was ending a fund-provisioning program from July of this year. This program had been designed to boost bank lending (see this BBG link). As it stands at the moment the BoJ balance sheet is down a little over 2% in y/y terms for Jan. This is back to late 2022's contraction pace. Efforts by the central bank to curb the balance sheet are arguably not that surprising, given its sits at well over 100% of GDP, well above equivalent balance sheet sizes of the Fed and ECB.
- A contracting balance sheet of the central bank will generally be viewed as tightening financial conditions, all else equal. As such this is likely to be yen positive, but bearish for local bonds and equities. The correlations between y/y changes of the BoJ balance sheet and local equities is around 55% in recent years (for the Topix). Correlations with USD/JPY have been generally negative though in recent years (the broader USD trend potentially dominating).
- Arguably though, BoJ balance sheet shifts may have a bigger influence on global trends, potentially through the capital flow channel. The first chart below plots the BoJ balance sheet y/y change against a global money supply proxy in y/y terms. There has been a reasonable correlation with the two series in recent series.
Fig 1: BoJ Balance Sheet & Global Money Supply Proxy Y/Y
Source: MNI - Market News/Bloomberg
- The global money supply proxy presented above has a stronger correlation with global commodity and equity returns on a contemporaneous basis. However, if we push forward the BoJ balance y/y change by 6 months, the correlations are stronger, particularly in recent years.
- The second chart below plots the balance sheet 6 months forward (in y/y terms) against global commodity and equity returns (y/y). All else equal, the declining BoJ balance sheet will act as a headwind for global asset markets if recent correlations hold.
Fig 2: BoJ Balance Sheet (6 months Forward) & Global Commodities & Equities - Y/Y
Source: MNI - Market News/Bloomberg
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US TSYS: Futures Stronger, National Day of Mourning on Jan 9
Dec-31 03:36
TYH5 is +0-05 firmer at 109-04 after Monday’s solid gains.
- There has been no cash dealing in US tsys today with Japan out for a bank holiday. Today’s US data (prior, est) includes FHFA House Price Index MoM (0.7%, 0.4%) and S&P CoreLogic CS 20-City MoM SA (0.18%, 0.20%) at 0900ET, Dallas Fed Services Activity (9.8, --) at 1030ET.
- Reminder for Tuesday's session: Rate futures have a full session (1600ET close) while cash Tsys close at 1400ET.
- While the NYSE Group markets will close on January 9 in observance of the National Day of Mourning for President Carter (New York Stock Exchange, NYSE American Equities, NYSE American Options, NYSE Arca Equities, NYSE Arca Options, NYSE Chicago and NYSE National), the CME Group has opted for early close, link HERE
- FI open outcry will close at 1300ET, and GLOBEX after at 1315ET.
- More to follow, but economic data expected that day is likely to proceed as normal (weekly jobless claims at 0930ET, Wholesale trade & inventories at 1000ET).
- Treasury auctions scheduled for January 9 remain uncertain (4- & 8W bills at 1130ET, 30Y bond re-open at 1300ET).
AUSSIE BONDS: Strong Close To the Year
Dec-31 03:31
ACGBs (YM +8.0 & XM +9.5) closed sharply richer on a shortened data-light session ahead of tomorrow’s New Year’s Day holiday.
- There has been no cash dealing in US tsys today with Japan out for a bank holiday. TYH5 is +0-05 firmer at 109-04 after Monday’s solid gains. Today’s US data (prior, est) includes FHFA House Price Index MoM (0.7%, 0.4%) and S&P CoreLogic CS 20-City MoM SA (0.18%, 0.20%) at 0900ET, Dallas Fed Services Activity (9.8, --) at 1030ET.
- Today, the local calendar was empty. The next data releases are CoreLogic Home Value and S&P Global PMI Mfg on January 2.
- Cash ACGBs are 8-9bps richer, and the AU-US 10-year yield differential is at -17bps, around the lowest level since June.
- Swap rates are 7-10bps lower, with the 3s10s curve flatter.
- The bills strip is stronger, with contracts +1 to +5.
- RBA-dated OIS pricing is 1-5bps softer across meetings, with late 2025 leading. A 25bps rate cut is more than fully priced by April (128%), with a 63% probability of a February cut.
FOREX: US Dollar Trending Lower After US Yields Drop
Dec-31 02:06
G10 currency moves have generally been limited with holiday-impacted trading thin. The greenback has trended lower through most of the session after yields fell on Monday, the BBDXY USD index is down 0.1%. The yen has moved the most against the US dollar with USDJPY down 0.3% to 156.42, close to the intraday low. JPY strengthened on Monday as US equities sold off and that trend has continued today with US equity futures slightly lower.
- AUDUSD is up 0.1% to 0.6229, close to the intraday high, after a low of 0.6211 earlier. It may face downward pressure with A$620mn of options due to expire on January 2 at 0.6175. There is also little support for Aussie from risk appetite. AUDJPY is down 0.2% to 97.42.
- NZDUSD is moderately higher at 0.5642 following a drop to 0.5633. AUDNZD is up 0.1% to 1.1040.
- EURUSD and GBPUSD are slightly higher at 1.0411 and 1.2559 respectively.
- Japan, South Korea and Thailand are closed and the equity markets that are open are currently mixed. The Hang Seng is up 0.2% but the CSI 300 is down 0.2% and the ASX -0.6%. Copper is up 0.1% and iron ore is around $101/t.
- Germany, Italy, Switzerland, Sweden and Norway have holidays, the UK closes at 12:30 and France at 14:05.
- US October house price data and December Dallas Fed print later.
