The Cambridge Weekly – 23rd January 2023

The Cambridge Weekly – 23rd January 2023

Slowing growth throws markets into a bind

Last Monday we wrote that markets were rising because bad economic news was good news in terms of lessening concerns over interest rate rises, beyond what is already expected and therefore priced in. Last week, various economic data releases in the US painted a very clear picture of a slowing US economy, from declining Christmas retail sales to industrial production. Even though this pushed long-term bond yields down further and had inflation expectations decline to a very benign 2%, markets this time took the bad news negatively, giving back some of the gains of the previous week.

PPI pullback and the ‘new normal’ for inflation

Judging by capital market expectations, we are over the hump. The global inflation crisis of the last year and a half has peaked, and price increases are now expected to trend downward in the US, UK and Europe. US Treasury yields have fallen consistently since the beginning of November and are now back to where they were in September – just before the world had a UK-inspired bond rodeo. This implies lower growth and price expectations in the years ahead and comes on the back of a 6.5% December annual inflation reading in the US – its lowest in more than a year.

Bank of Japan monetary easing: endgame or dawn of a new era?

Japan’s bond market is faltering. Bank of Japan (BoJ) governor Haruhiko Kuroda, nearly at the end of his ten-year tenure, is committed to controlling the yield curve in his aim to stimulate the economy. Bond traders doubt he or his successor will be able to. The result is selling pressure on Japanese government bonds (JGBs), and the BoJ having to hoover up those sales to maintain its target. The fallout has affected currency and equity markets, creating a notable tightening of Japan’s financial conditions.