Weekly outlook: Japanese bonds a litmus test for global inflation

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16 December 2022

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Monday 19 December

– German Ifo business climate survey
– US NAHB house building industry survey
– In the US, quarterly results from FedEx, General Mills and BlackBerry

Tuesday 20 December

– Trading statement from Petrofac
– US new housing permits
– Bank of Japan monetary policy decision

The headline interest rate in Japan has not shifted from -0.1% since February 2016, and AJ Bell investment director Russ Mould and analyst Danni Hewson do not see governor Haruhiko Kuroda budging in the near future.

Mould and Hewson identified that the BoJ has not officially adjusted its quantitative and qualitative easing (QQE) programme, whereby the central bank is committed to capping the yield on the 10-year Japanese Government Bond (JGB) at 0.25%.

They said that under QQE, the BoJ’s plans to inject around ¥80trn (£480bn) into the economy each year, and the assets held on its balance sheet are still near record highs.

However, inflation has hit 3.7% in Japan this year, its highest level since 1991, and this has put pressure on that 0.25% yield target.

Mould and Hewson said: “If the 0.25% threshold ever gives way, that could be the signal that bond vigilantes really do think inflation is here to stay not just in Japan but worldwide, so the battle between the BoJ and the bond market is well worth watching.”

– In the US, quarterly results from Nike and Carnival

Wednesday 21 December

– Japanese inflation figures
– UK government borrowing figures
– US Conference Board consumer confidence reading
– US existing homes sales
– US oil inventories
– Micron Technology first-quarter results

Silicon chips are a good guide to global economic health, according to Mould and Hewson, and global sales are expected to top $600bn (£490bn) in 2023, a second successive yearly-sales record.

However, disappointing earnings, cuts to capital investment budgets, ballooning inventories, and fears of a recession have seen the Philadelphia Semiconductor Index (Sox) trading one-third below last December’s all-time high.

Mould and Hewson noted that the Sox has an uncanny record of measuring investors’ risk appetite: “It topped out six to nine months before the S&P 500 and FTSE All-World did in 2000 and 2007, to herald two thumping bear markets, and then bottomed out before those headline indices did in 2002 and 2009, to signal the start of a new bull market.”

However, the prospects for memory chip specialist Micron Technology, one of SOX’s constituents, do not look promising. The pair from AJ Bell highlighted that Micron’s chief executive Sanjay Mehotra unveiled a 23% quarter-on-quarter drop in sales, and a halving of operating profit in its Q4 (June-August), and the $60bn (£49bn) cap company hinted at further slowdowns in November.