Market Update
February 13, 2023

Debate Continues As Yields Rise

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Week Ending 10th February, 2022

In this week’s update – We experienced quite a quiet week last week. The rate action debate continues which has resulted in a rise in global yields. Japan is set to welcome new Bank of Japan (BoJ) Governor on the 8th April with much speculation on the future of Yield Curve Control. In the Markets, global equity funds saw withdrawals while the US$ index gained. Money Market funds recorded outflows while Bond funds saw inflows. Continue reading for the full market update.

Rates And Inflation:

Markets followed in the steps of the bumper US payrolls number released last week which has renewed rate action debate resulting in a rise in global yields. The job market remains quite robust. What has us slightly worried – and little reference has been made to it – is the upwards revision in US inflation data for last month. It did not fall -0.1% m/m but, instead actually rose +0.1% m/m (see Friday commentary). Furthermore, core inflation rose 0.4% m/m (not 0.3% as originally reported). Even November was revised up to 0.3% m/m (from the 0.2% initially reported). These upward revisions might not seem much but clearly demonstrate the issues bugging the Fed and why they think their battle, against inflation, is far from over! In the process, some rate sensitive sectors have slowed significantly. Given these revisions as well as the labour market and strength in the services activity, it doesn’t look like the Fed is going to pivot. We might be in for some upside pressures to inflation elsewhere. The Australian CB has revised its forecasts higher.

In Japan:

Kazuo Ueda is set to be the next BoJ Governor on 8th April (when Kuroda retires). While his initial comments stated current easy monetary policy is appropriate. Much speculation remains about the future of Yield Curve Control (YCC). The BoJ has a really challenging task on its hands as it potentially faces a debt time-bomb. The country is spent 22% of its annual budget just on debt redemption and interest payments in 2022. This is expected to rise to 25% by FY 2025. It wants to spend on a vast range of packages and social welfare programmes for its ageing population and this has left it with a debt pile of 263% of its GDP! A 1% parallel shift in its yield curve would raise debt servicing costs by Y3.6TN by FY 2026. For perspective, its defence budget is Y5.4TN. Removal of YCC could see yields range between 1.6% to 2.2%. On the other hand, continued bond purchases (YCC) to keep a lid on 10y yields drives down the Yen which imports even more inflation.


For w/e 8th Feb, the US$ index gained 1.1% w/w helped by the strong payroll number and renewed fears of rate hikes. Global equity funds saw withdrawals of $209mn (Asia and Europe saw inflows of $100mn each). MM funds recorded outflows of $4.47bn while bond funds gained $4.52bn

Source: Bloomberg, CNBC, Reuters, Trading Economics and Goldman Sachs.

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