Recent moves in the Japanese markets has shown the kind of confusion surrounding the economic policies effects on the The BOJ governors came out last week stating that the economy can cope with rising interest rates in the near term. This had negative consequence on the equity markets and strengthened the Yen as the statements made it clear that the BOJ is willing to sacrifice near term growth to reach the inflation targets. This idea is flawed and would eventually have to be adjusted if growth does not pick up soon. I believe this will be the case because of the severity of the interest rate moves the BOJ will have to actively keep pushing rates lower or there will be a slowdown in lending as banks wait for interest rates to level off in order to preserve margins.
This week could see a lot of volatility off the back of last week news. The data that is coming out of note could have adverse effects on the US and Japanese markets as well as global markets in general. Japanese retail sales come out early in the week which will shed some light on the effects of 'Abenomics' on the consumer in the past month. Bad news coming out of retail sales could put doubts into the minds of investors that a recovery is n the making and the rising interest rates could be seen as a hindrance to that, putting into question the aggressiveness of the stimulus (a bit exaggerated from one number but the idea will only be confirmed should more negative data come out).
US GDP is expected to come out around 2.5% which could continue the rally in the US should this meet (or exceed) expectations, however it could bring about concerns about the Fed slowing down purchases as well; good for the dollar, potentially bad for stocks.
The biggest factor to watch out for is Chinese PMI at the end of the week. Slowing growth in China was a major factor in the volatility in the markets last week and could be a deciding factor in the following week as well. Perhaps this is the last calm week (relatively) we will see in awhile.
With the markets making new records and yields on government debt spiking as well, it doesn’t seem off that this trend will continue (money coming out of bonds and into equities) into this week. This week’s economic calendar has announcement about inflation in the US, and Euro zone as well as GDP number for many major developed nations. This could have different effects in different countries, such as in Japan inflation could be a boost to the economy and markets as inflation would be a sign that the early stages of “Abenomics” is working. In the Euro zone and the US lower inflation would continue to reinforce the central banks decisions to continue simulative measures, which could see further rises in both the stock markets and Core sovereign debt.
The ECB press conference took steps in the right direction, in posturing more aggressively against slowing growth and declining inflation. There is still a long way to go; in the longer term growth will need to be higher than real interest rates in order to break out of the high leveraging cycle that is currently in place. More austerity is becoming structurally and politically harder to achieve.
The biggest measure that was taken from the meeting was Draghi’s consideration of taking the interest rate on deposits negative. This will create another scenario as seen in Japan with large capital flows moving into other assets, not seeing that would only justify the severity of the situation and the strong desire for safety. There could be some potential shifts in asset perception out of this such as Swiss bonds look less bad in shaky times and periphery bonds in good times. It will have to be a situation that is monitored for potential bubble creation in commodities, gold, etc.