JAPAN: Outbound Bond Investment Steady In Recent Years, Stock Still Large
Earlier headlines crossed from Japan's FinMin Kato that the country is seeking more JGB holdings by domestic investors. This comes after recent increased scrutiny of Japan's fiscal position, with poor auction results for longer dated securities driving higher back end yields. Speculation is the BOJ may shift its taper plans, while Japan's MOF may change the mix of its bond issuance, i.e. focus more on short dated rather than longer dated issuance.
- The broader implications of greater domestic participation in JGBs may mean less outbound investment to overseas bonds (and potential equities). This could have implications for offshore debt markets.
- The chart below plots cumulative outbound investment flows into overseas bonds and equities since 2000. Investments into offshore bonds dominates, although outflow trends to both bonds and equities have flatlined in recent years.
- In this sense, Japan has become a less important marginal buyer of overseas bonds/equities in recent years, at least compared to the period prior to 2020. Still, its stock of holdings remains very large.
Fig 1: Japan Cumulative Outbound Portfolio Flows (JPY Billions)
Source: Bloomberg Finance L.P./MNI
- If we see disinvestment of offshore portfolio holdings, particularly in the bond space, what country's/regions might be impacted? The second chart below looks at cumulative flows back to the start of 2005, with North America very dominate (i.e. the US) in recent years.
- This is followed by the EU, although cumulate inflows peaked back in early 2021. Cumulative flows to Germany have been trending lower over the past decade, and are now comfortably negative. France and Italy have been relatively steady, while France has been losing ground in recent years (but still represents the largest stock. Still, this is still modest compared to the cumulative flows that have been seen to the US.
- There are obviously lots of factors in play in terms local investors asset allocation decisions, but these flows/stocks are worth being mindful of if local investors are called upon to support the home bond market.
Fig 2: Japan Cumulative Outbound Flows To Long-Term Debt Securities (JPY, Billions)
Source: Bloomberg Finance L.P./MNI
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MACRO OUTLOOK: US PPI/Retail Sales And Powell Follow On Thursday [2/2]
- Core PCE implications will then be watched closely in Thursday’s PPI report, and we expect with additional focus on portfolio management after last month’s huge upward revision to February.
- Retail sales, whilst only reported in nominal terms, will offer a keenly awaited look at consumer behavior.
- Real spending moderated to 1.8% annualized in Q1 after 4.0% in Q4 despite likely tariff front-running, with April a good test of how much discretionary spending was pulled forward.
- Finally, Powell provides “Opening Remarks” at the Second Thomas Laubach Research Conference, although he’s allotted twenty minutes so there is scope for more substantive remarks than you’d usually expect. His message at Wednesday’s FOMC press conference was one firmly of being in no hurry to cut rates amidst huge uncertainty. He also appeared to put more weight on hard data over soft indicators that appear more stagflationary in nature.
MACRO OUTLOOK: US CPI Offers Look At April Tariff Distortions on Tuesday [1/2]
- The week’s US data calendar is highlighted by CPI inflation on Tuesday although PPI inflation and retail sales reports on Thursday are in close second. All three releases are going to be important, offering further hard data for April in the first month under reciprocal tariffs. What’s more, PPI and retail sales are followed by Fed Chair Powell just ten minutes after their release (more on that below).
- Core CPI inflation is seen accelerating to 0.3% M/M in April, with six unrounded estimates we’ve seen to date averaging 0.27% M/M.
- A potential for a ‘low’ 0.3% aside, it’s still likely a swift acceleration from a particularly soft 0.06% M/M in March which was in large part down to surprisingly abrupt declines in lodging away from home (-3.5%) and airfare (-5.3%) prices.
- This lodging weakness carried over to core PCE inflation back in March, at just 0.03% M/M after a particularly strong 0.50% M/M in February in a large wedge with core CPI at 0.23% M/M.
- Markets currently price a next Fed cut with the September FOMC meeting.
USDCAD TECHS: Pressuring Resistance
- RES 4: 1.4296 High Apr 7
- RES 3: 1.4111 High Apr 4
- RES 2: 1.4041 50-day EMA
- RES 1: 1.3943 High May 9
- PRICE: 1.3930 @ 16:06 BST May 9
- SUP 1: 1.3751 Low May 6
- SUP 2: 1.3744 76.4% retracement of Sep 25 ‘24 - Feb 3 bull run
- SUP 3: 1.3696 Low Oct 10 2024
- SUP 4: 1.3643 Low Oct 9 ‘24
USDCAD has recovered from its recent lows. Despite the recovery, the trend condition remains bearish and short-term gains are considered corrective. A fresh cycle low on Tuesday reinforces the bearish theme. Potential is seen for a move towards 1.3744, a Fibonacci retracement. Note that moving average studies are in a bear mode position, highlighting a dominant downtrend. Key resistance is seen at 1.4041, the 50-day EMA.
