From Japan To Europe To US, It’s Still All About Inflation

By Ven Ram, Bloomberg Markets Live reporter and strategist

The yen is copping it after the Bank of Japan left its policy settings unchanged as expected, though there was a clear inkling from the statement that change may be in the air.

For starters, the BOJ did away with this boilerplate that had been a feature in the pandemic years:

For the time being, while closely monitoring the impact of COVID-19, the Bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels.

The bank also added this bit for good measure, which weighed on the yen given the rather longish time frame:

…the Bank has decided to conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one and a half years.

Ironically, heading into the decision, we got news that Japan’s headline inflation accelerated more than forecast in April, retail sales surged, and there were more jobs available than there were applicants. All of this should revive the yen once the short-term positions that were opened in the run-up to the BOJ meeting are wound down. Not surprisingly, JGBs rallied, as colleague Mark Cranfield writes.

Meanwhile in Europe, we will get a slew of data that will play into the European Central Bank’s quantum of hike that we are likely to get in May.

Overnight in the US, we got a reminder yet again from the GDP data that inflation can’t simply be wished away. The markets have been unduly optimistic that inflation will slow just because policymakers have neat projections and presentations showing milder numbers. Earlier this week, a case was made for linker bonds to outperform nominal bonds, and that should continue to be the case.

We will get more of that today from the University of Michigan’s inflation survey. Last month, expectations surged a full percentage point to 4.6%, but the markets glossed over the print. If we get a sticky reading this time around, the reaction — coming as those numbers do after Thursday’s inflation scare — may cause a further selloff in front-end Treasuries.

Even so, I fully expect the two-year Treasury yields to yo-yo between 4.15% and 4.30% for reasons outlined here. And with First Republic’s woes still unresolved, rich Treasuries getting richer may be the theme.