Japan booming but BOJ needs to decide on stimulus
Five big themes likely to dominate thinking of investors and traders in the coming week and the stories related to them
1. BOJ hints on policy
The Bank of Japan holds the last of this year’s major central bank meetings next week.
Japan’s economy is now into its best period of expansion this century, the labor market continues to improve, and bank lending is booming. Yet the BOJ’s stimulus remains pretty much at full throttle, having already ballooned its balance sheet to the same size as Japan’s GDP.
Keeping the yen from appreciating and thus disturbing the cyclical tailwinds of growth seems to have become a major reason why the BOJ is a laggard on policy ‘normalization.’
Some BOJ policymakers have been dropping subtle hints to prepare markets for an eventual exit from its policy – one that keeps short-term rates negative and pegs the 10-year yield to zero percent – but investors expect little guidance around that exit plan at next week’s meeting.
The first changes may come via a small rise in the 10-year yield target, they suspect, but even the odds of that are low so long as wage growth is subdued and inflation remains well below the BOJ’s 2% target.
2. Home sweet home?
Fresh US figures on existing home sales and housing starts could point to a continued deceleration going into 2018. On a 12-month percentage change, dating back to 2000, both data series reveal how the housing market is softening.
The Federal Reserve’s interest-rate cycle has been a major factor – in particular, short-term mortgages, where interest rates on floating-rate home loans have risen the most, making life harder for some would-be buyers.
One of the conundrums though is that the White House wants to juice up the economy with tax cuts while the Federal Reserve wants to keeping raising interest rates so they get back to more normal levels.
3. Viva Espana
A snap election takes places in Catalonia on Thursday with the Spanish government hoping the vote will put an end to the wealthy region’s independence bid. One recent poll suggested pro-independence parties may fail to retain an absolute majority of seats in the Catalan parliament, with pro-unity parties poised to increase their vote share.
Failure to win a majority in the regional parliament would be a blow for Catalan separatists who have billed the Dec. 21 election as a de facto plebiscite on Madrid’s decision to impose direct rule in October following an independence referendum. Spanish bonds and stocks markets, both unnerved by the political crisis, have recovered ground.
Any signs that the election will bring calm to the euro zone’s fourth biggest economy should cheer investors – and give them plenty of time focus on elections likely to be held in Italy early next year.
4. ANC you later
South Africa’s ruling African National Congress (ANC) party is expected to anoint its next leader on Sunday – but whoever wins, the chances of the party splitting in two have grown.
The bruising battle to choose the successor to President Jacob Zuma between business-friendly Deputy President Cyril Ramaphosa and Nkosazana Dlamini-Zuma, a former cabinet minister and ex-wife of President Jacob Zuma, is too close to call.
The rand has performed well in recent weeks on expectations that Ramaphosa will clinch the victory, but the complexity of the leadership contest means the outcome is far from certain.
So investors who had been hoping for political stability and a chance for the country to enact some much-needed structural reforms could be disappointed.
5. Vintage year
With just one full trading week left to the end of the year, perhaps one of the few remaining issues to decide markets-wise is whether this was the best in year in global stocks since 2013 or 2009.
Right now 2017 is vying with 2013, with gains just above 20% year-to-date seen in both. The crash recovery year of 2009 clocked up more than 30% and stocks are well shy of that.
Next week we may well finally see the inking of a US tax cut deal but trading flows are also likely to slow to a trickle as investors shut up shop. It could make markets more sensitive to volatility but it shouldn’t ruin the end-of-year parties.