MNI US OPEN - BoJ Delivers Festive Surprise

NEWS

JAPAN (MNI): BOJ Lifts 10-Year Yield Target To 50bp

The Bank of Japan board Tuesday maintained its yield curve control policy but expanded its target band for the 10-year bond yield to between plus and minus 50bp, up from 25bp. As a result of the decision, the BOJ raised the rate on its fixed-rate bond buying operation to 0.50% from 0.25%. “The BOJ decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, with maintaining accommodative financial conditions,” a statement released by the BOJ said.

JAPAN (MNI): BOJ Shift Not Rate Hike, Doesn't Mean Exit - Kuroda

Bank of Japan Governor Haruhiko Kuroda said the decision to lift the cap on the 10-year bond yield to 50bp is neither a rate hike nor an exit from easy policy but rather a way to enhance the transmission of monetary policy. “Today’s decisions will increase the sustainability of easy policy, which will contribute to achieving a 2% price target,” Kuroda told reporters.

JAPAN (MNI): BOJ Keeps Recovery View; Cuts Overseas Outlook

The Bank of Japan board on Tuesday left its overall economic assessment, highlighting the ongoing recovery in the domestic economy but wary about a slowdown in overseas economies. “Japan’s economy, despite being affected by factors such as high commodity prices, has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19,” the BOJ said.

CHINA (MNI): LPR Cut Seen in Q1 To Boost Property Market

(MNI) Perth - China’s reference lending rates are expected to be lowered in the first quarter of 2023 to support the ailing property market after they were left unchanged this month as higher wholesale funding costs weighed on lenders, economists said.

CHINA (MNI): China's December Loan Prime Rate Unchanged

(MNI) Beijing - China's reference lending rate remained unchanged on Tuesday, according to a statement on the People's Bank of China website, which was in line with market expectations after the central bank kept a key policy rate steady last Thursday.

AUSTRALIA (MNI): Foreign Min Travels to China as Diplomatic Thaw Gets Underway

Australian Foreign Minister Senator Penny Wong travels to China today for meetings with her counterpart Wang Yi. This will mark the first trip to China for an Australian foreign minister since 2018 and is seen as a continuation of the thaw in diplomatic relations that have been frozen for some years as China and Australia engaged in a war of words and escalating economic barriers.

DATA

GERMAN DATA (MNI): Ongoing Downtrend for Factory-Gate Inflation

• GERMANY NOV PPI -3.9% M/M (FCST -1.7%); OCT -4.2% M/M
• GERMANY NOV PPI +28.2% Y/Y (FCST +31.1%); OCT +34.5% Y/Y

Factory-gate inflation recorded a more pronounced decline than anticipated in November. Prices fell by -3.9% m/m and 6.3pp on the annualised print to +28.2% y/y. This is the lowest year-on-year reading since February and a substantial slowdown from the Aug-Sep record peak of +45.8% y/y. Lower energy prices and weak demand conditions are evidently feeding through into easing price pressures.

FX SUMMARY: BoJ Gives Gift of FX Volatility Pre-Christmas

• With markets expecting another copy-paste statement from the Bank of Japan, markets were caught offguard by the bank's decision to widen their tolerance band as part of the yield curve control programme.
• The market read was hawkish, with yields shooting higher across the Japanese curve and the JPY rallying sharply against all others. USD/JPY cleared all nearby support to drop to the Y132.00 handle, making for a 5 point decline in prices.
• EUR/JPY moved similarly, dropping to touch the 200-dma at 140.11. A firm break of this support would be the first since February, adding further pressure to a cross already at multi-month lows.
• Firm JPY strength is pressuring global equity markets, with US futures pointing to a lower open on Wall Street today. This has fed into poor AUD, NZD trade, who remain the weakest currencies in G10.
• Focus turns to US housing starts and building permits releases as well as the prelim December Eurozone consumer confidence.

BOND SUMMARY: Curves Bear Steepen On BoJ Surprise

A sharp drop in JGBs following the Bank of Japan's shock move to raise the upper limit of its Yield Curve Control band has reverberated across global core FI Tuesday.

• While short-end yields rose on December's latest hawkish central bank surprise, the nature of the BoJ move (raising the ceiling on 10Y JGB yields to 0.50% from 0.25%) has had more of an impact further down the curve with bear steepening.
• Though the move has softened since the initial shock, curves remain steeper: UK and German 2s10s +2bp, US +5bp.
• Periphery spreads initially moved wider on the risk-off move, but have since narrowed as equities have recovered.
• Featuring on the schedule today is more US housing data (starts and building permits), following from yesterday's weak NAHB reading. We also get Dec Eurozone consumer confidence.

Latest levels:

• Mar 10-Yr US futures (TY) down 17.5/32 at 113-19 (L: 113-11.5 / H: 114-05.5)
• Mar Bund futures (RX) down 101 ticks at 136.14 (L: 135.83 / H: 137.22)
• Mar Gilt futures (G) down 100 ticks at 101.45 (L: 100.88 / H: 101.73)
• Italy / German 10-Yr spread 0.5bps tighter at 217.4bps

EQUITIES: Bearish Eurostoxx Futures Breach 50-Day EMA

EUROSTOXX 50 futures are in a clear bear mode position and today’s move lower has reinforced this theme. The break lower has confirmed a breach of the 50-day EMA - at 3799.60. The break of this average signals scope for an extension lower near-term and this has opened 3720.00 next, the Nov 10 low. On the upside, initial firm resistance is seen at the 20-day EMA - it intersects at 3896.10. S&P E-Minis continue to trade lower and a clear risk-off mood is driving prices lower. The bearish activity has reinforced recent reversal signals - a shooting star candle on Dec 13 followed by a break on Dec 15, of support at 3945.75, the Dec 7 low. The focus is on 3778.45, a Fibonacci projection. On the upside, initial firm resistance is seen at 3952.05, the 50-day EMA. A break of this EMA is required to ease bearish pressure.

• Japan's NIKKEI closed lower by 669.61 pts or -2.46% at 26568.03 and the TOPIX ended 29.82 pts lower or -1.54% at 1905.59.
• Elsewhere, in China the SHANGHAI closed lower by 33.349 pts or -1.07% at 3073.766 and the HANG SENG ended 258.01 pts lower or -1.33% at 19094.8.
• Across Europe, Germany's DAX trades lower by 50.64 pts or -0.36% at 13895.52, FTSE 100 lower by 13.19 pts or -0.18% at 7348.26, CAC 40 down 38.82 pts or -0.6% at 6436.06 and Euro Stoxx 50 down 13.29 pts or -0.35% at 3798.83.
• Dow Jones mini down 32 pts or -0.1% at 32941, S&P 500 mini down 8.5 pts or -0.22% at 3837.25, NASDAQ mini down 42.5 pts or -0.38% at 11152.75.

COMMODITIES: Gold Trades Above $1800 Handle

Trend conditions in WTI futures remain bearish. Recent gains however, have highlighted a bullish corrective cycle and last week this resulted in a test of the 20-day EMA, at $76.89 today. A clear break of this hurdle would signal scope for an extension and open $80.35, the 50-day EMA. On the downside, a stronger reversal lower would refocus attention on the bear trigger which lies at $70.08, the Dec 9 low. Trend conditions in Gold remain bullish despite last Thursday’s sell-off. Pullbacks are considered corrective and key S/T support to watch is $1765.9, Dec 5 low. The yellow metal breached $1810.0 last week, Dec 5 high, to resume the uptrend. This maintains the positive price sequence of higher highs and higher lows and opens $1842.7, a Fibonacci retracement. On the downside, a break of $1765.9 would signal scope for a deeper pullback.

• WTI Crude down $0.35 or -0.47% at $74.84
• Natural Gas down $0.17 or -2.91% at $5.681
• Gold spot up $14.65 or +0.82% at $1802.34
• Copper up $0.85 or +0.22% at $379.05
• Silver up $0.63 or +2.72% at $23.6171
• Platinum up $12.38 or +1.26% at $996.27