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BOJ is stuck between a rock and a hard place

The Bank of Japan (BOJ) is again intervening in its currency market to prevent further depreciation. FT reports that the BOJ spent at least $30 billion to support the yen last Friday. This is in addition to the $20 billion estimated in September. The simultaneous support by the BOJ of the yen and the bond market, which is QE, is counter-intuitive. The BOJ caps ten-year bond rates at 0.25%. It attempts to save banks and insurance companies from major losses by preventing returns from reaching market levels. The BOJ’s accommodative monetary policy, while other central bankers are incredibly hawkish, is a crucial factor behind the yen’s rapid depreciation. The BOJ is between a rock and a hard place. Let the yen depreciate further or let yields rise. Trying to pursue a policy in two completely opposite directions will prove impossible.

Why should we care? The BOJ is likely to sell UST bonds, especially 30-year bonds, to support the yen. Although the sale is intense, it is temporary. Furthermore, it creates strange dislocations in the US bond market and other markets. Such outliers should normalize quickly once the BOJ stops selling.

boj, BOJ is stuck between a rock and a hard place

boj, BOJ is stuck between a rock and a hard place

What to watch today

Economy

  • 9:00 a.m. ET: FHFA Housing Price IndexAugust (-0.6% expected, -0.6% before)
  • 9:00 a.m. ET: Composite S&P CoreLogic Case-Shiller 20 citiesMoM, Aug (-0.80% expected, -0.44% before)
  • 9:00 a.m. ET: Composite S&P CoreLogic Case-Shiller 20 citiesYoY, Aug (14.10% expected, 16.06% before)
  • 9:00 a.m. ET: US National S&P CoreLogic Case-Shiller House Price Index (15.77% before)
  • 10:00 a.m. ET: Conference Board Consumer Confidence, October (106 expected, 108.0 before)
  • 10:00 a.m. ET: Current status of the Conference Board, October (149.6 before)
  • 10:00 a.m. ET: Conference Board Expectations, October (80.3 before)
  • 10:00 a.m. ET: Richmond Fed Manufacturing Index, October (-5 planned, 0 before)

Earnings

boj, BOJ is stuck between a rock and a hard place

Market Trading Update

The market rallied yesterday, providing needed follow-up after retesting support at the 20dma. The market broke the next resistance level at 3800 yesterday but was rejected at the close. Today, the revenue crush is on as GOOG and MSFT report their earnings. If this market wants to continue this reflexive rally, we need a breakout and close above 3800 which will open a rally towards the 50dma as shown. With buybacks returning next week, there’s still fuel for a further lead through the end of the year. Don’t try to hold the top because you might miss it. Make sales along the way as the market recovery continues.

boj, BOJ is stuck between a rock and a hard place

Returns expected

In Choosing stocks in a bond-friendly environmentwe have developed Goodbye TINA – Hello BAAA. The gist of both articles is that bonds are likely to outperform stocks over the next ten years. Our article Choosing Stocks in a Bond-Friendly Environment reviewed previous 10-year periods when stocks underperformed bonds to help gauge which stock market factors and sectors should outperform. The chart below from Topdown Charts provides a few more options. As noted, they expect the stock to return around 3% per year over the next five to ten years. This has nothing to do with options on foreign stocks, which exceed 10%. The chart adds even more credence to our view that investors who rely on passive strategies may underperform investors who employ more active strategies.

boj, BOJ is stuck between a rock and a hard place

Chinese stocks are crushed

The chart below shows that Chinese stocks fell sharply on Monday. The widely followed Hang Seng index fell more than 6%, while the Tech index fell nearly 10%. Chinese GDP beat expectations with growth of 3.9% against estimates of 3.3%. Despite the good economic news, investors fear that the recent government reshuffle could lead to an increase in global tensions, which are not favorable for growth. The Chinese yuan is also depreciating on the news. It is now at its lowest level against the dollar since 2008.

boj, BOJ is stuck between a rock and a hard place

Housing affordability

The chart below illustrates the dramatic rise in mortgage rates and their effects on housing affordability. As of January 1, 2022, only ten months ago, the 30-year mortgage rate was 3.22%. A potential buyer looking for monthly mortgage payments of $3,000 could afford to buy a home worth $692,000. Today, mortgage rates are north of 7%. Today, the same home buyer can only afford a home worth $444,000. Either mortgage rates fall rapidly or house prices will have to adjust significantly. As Lance Roberts often says, home buyers buy payments.

boj, BOJ is stuck between a rock and a hard place

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boj, BOJ is stuck between a rock and a hard place

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