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On October 23, as the sell-off in tech stocks intensified, investors flocked to traditional safe-haven assets, including the yen, Japanese government bonds, and US Treasuries, pushing the yen to its highest level in over a month. After trading within a narrow range for several weeks, the yen broke out of this range in the past 24 hours, currently reaching its highest level since September 18 (the day the Bank of Japan raised interest rates). During Fridays Tokyo trading session, the yen rose as much as 0.4% against the dollar, hitting 156.08; previously, it had already recorded a 0.9% gain on Thursday. Asian stocks followed Wall Street lower, influenced by continued investor withdrawals from tech stocks. The price of Japans benchmark 10-year government bond surged, with yields falling 10 basis points; US Treasuries largely maintained Thursdays gains. "The yen is more favored than the dollar as a safe-haven asset," said Carol Kong, a strategist at Commonwealth Bank of Australia. "This weeks earnings reports from major U.S. tech companies have raised questions about the AI-driven U.S. growth narrative." She added that the yen could strengthen further against the dollar if the unwinding of tech stock positions intensifies.October 23 – Japans core consumer inflation exceeded the central banks 2% target for the first time in nine months in September, indicating expanding price pressures and reinforcing the case for a recent interest rate hike. These figures highlight that the protracted Middle East conflict pushing up fuel costs, a weaker yen leading to higher import prices, and strong AI demand are eroding the effectiveness of government fuel subsidies. Masato Koike, senior economist at Sompo Institute Plus, stated that core inflation is expected to accelerate due to rising energy costs caused by the Middle East conflict and its subsequent second-round effects. However, since prices are not accelerating sharply, a second rate hike in October is almost unnecessary, and the next rate hike by the Bank of Japan is expected in December. Marcel Tiliant, head of Asia Pacific at Capital Economics, expects the Bank of Japan to maintain its policy unchanged next week but will hint at continued concerns about upside risks to inflation. There is little evidence that the tightening so far has slowed the economy, and risks are tilting towards a peak policy rate higher than Capital Economics 2% forecast.Gold prices weakened on Friday, on track for their biggest weekly drop in over four months. Soaring oil prices and strong U.S. economic data fueled expectations that the Federal Reserve will maintain high interest rates for an extended period. High energy prices reinforce these expectations, increasing the opportunity cost of holding non-yielding gold. Last week, U.S. initial jobless claims fell to their lowest level in nearly 57 years, indicating a modest recovery in job growth in October. Market focus has now shifted to the Federal Reserves policy meeting on October 27-28 and next weeks PCE data release. The PCE data is a key indicator closely watched by the Federal Reserve.The yield on Japans two-year government bonds fell 6 basis points to 1.840%.On October 23, Turki al-Maliki, a spokesman for the Saudi-led coalition, stated on social media that they had intercepted and destroyed a ballistic missile launched by Yemens Houthi rebels towards the Saudi capital, Riyadh. Earlier, air raid sirens were sounded in Riyadh, and multiple explosions were heard.

Embrace the uncertainty’ from less central bank guidance – former Fed officials

Jimmy Khan

Jul 29, 2022 14:54

Even as markets try to predict the U.S. central bank's upcoming policy decisions, investors and policymakers should embrace the Federal Reserve's shift to providing fewer firm signals on forward guidance, according to two former Fed officials.

Former Atlanta Federal Reserve president Dennis Lockhart said on Thursday at the Reuters Global Markets Forum (GMF) that the guidance we've previously seen "creates an expectation that's unjustified."

The Fed is navigating and figuring things out as they go along, so I think it's better to accept the uncertainty, he said.

Former Fed Board of Governors member Jeremy Stein told GMF that the central bank's flexibility is limited by too detailed guidance at a time when the course of inflation and economic growth is still unknown.

"The key question is how much higher we can raise interest rates in a year. Actually, we don't know. Giving the market a false sense of security is ineffective, according to Stein, a professor at Harvard University at the moment.

Jerome Powell, the chair of the Fed, avoided indicating the magnitude of upcoming rate hikes after the central bank boosted interest rates by 75 basis points on Wednesday. Similar emphasis has been placed on a meeting-by-meeting "data-driven" approach by other central banks.

According to Stein, markets frequently run the risk of ignoring the more crucial issue of how high rates will ultimately rise and how they will affect financial conditions.

A 100-basis-point rate hike is possible, according to Lockhart, even though the chance is slim at the Fed's September meeting. He and Stein had doubts about how rapidly inflation would decline.

Stein said that during the Great Financial Crisis of 2008, both unemployment and price increases spiked, and a repeat of this situation may put the Fed's resolve to get inflation back to its target of 2 percent to the test.