Weekly View - BoJ: Last man standing
Beating inflation, irrespective of the near consequences for growth, is clearly the top priority for central banks in the US and Europe. The US Federal Reserve raised rates by 75 bps on Wednesday, with another big hike set to come in July. It also started to shrink its USD9 trn balance sheet. Faced with consumer inflation set to reach an annual 11%, the Bank of England also raised rates last week—even though it cut its growth forecast. But the biggest surprise last week came from the Swiss National Bank (SNB), which raised its policy rate by 50 bps and made it clear it would intervene to keep the Swiss franc strong, seeing a stronger franc as a way of tackling imported inflation. The European Central Bank (ECB) would also like to see a weak euro regain strength for the same reason—with the hope that the start of its rate-hiking campaign next month heralds the start of a fight-back. We are increasingly positive on the Swiss franc, and while we are becoming more constructive on the euro, we still need to see more details of the ECB’s plans to tackle ‘financial fragmentation’ in the euro area.
Unsurprisingly, the mood in risk markets has turned sombre. The Fed and other central banks want to believe they can achieve a “soft landing”—but we think the path to such an outcome is becoming narrower. News that a high-profile Swedish fintech group was forced to cut its initial valuation by half as it seeks private investor cash is an indication of how valuations are coming under strain for unprofitable start-ups, on which we remain negative as a rule. But there is a chance that lower stock valuations could lead to a revival in M&A among more established groups, with talk of a tie-up between BNP and ABN-AMRO a case in point.
The Bank of Japan (BoJ) stands out as the last man standing when it comes to policy dovishness. Last week, it kept its overnight rate at -0.1% and committed to buying unlimited quantities of government bonds. This money printing has resulted in historic lows for the yen against the USD. With markets increasingly testing the BoJ’s resolve, we remain negative on Japanese bonds. With July elections to Japan’s upper house of parliament taking place against a backdrop of public anxiety about rising import prices, the ministry of finance could intervene in currency markets at some stage. The political temperature is also rising elsewhere. French president Emanuel Macron has fallen short of a parliamentary majority, leaving question marks over his reform agenda. Voter discontent also meant the Socialist party (in power in Madrid) was punished in regional elections in Andalusia in Spain. By contrast, the leftist candidate, Gustavo Petro, won the presidential election in Colombia, continuing a turn to the left seen elsewhere in Latin America. All in all, as questions about “who pays the bill” for debt and inflation (one of our investment themes) gains prominence, politics will increasingly impinge on the market outlook.