No more carry on here

The Bank of Japan ended the era of negative interest rates with its first hike since 2007. This ended a period in which speculators could get paid for borrowing Japanese yen and depositing those funds in another currency offering a higher rate of interest, known as a carry trade. The New Zealand Dollar was a favourite for many years, and the relationship between the yen and the movement between the NZD and the yen was often used as a proxy for economic sentiment. If the NZD rose, this indicated those who would risk borrowing yen and depositing it in New Zealand would be on the rise, and vice versa. The last of the central banks to end using negative interest rates to boost its economy, hopefully never to return.

Later today, the Fed will announce its latest rate decision. There will be no change to borrowing costs; what might change is how the Fed sees interest rates moving for the rest of the year. Ahead of the meeting, interest rates have been moving higher across the curve for most of the year, as stubborn inflation prints have resulted in the markets reducing their expectations for the number of times the Fed will cut interest rates this year. The US ten-year treasury yield now stands at 4.3%, having stated the year below 4%. Rising stock markets and falling bond yields have resulted in a further narrowing of the equity risk premium. Equities have basically become more expensive relative to bonds.

The latest Merrill Lynch Fund Manager survey reports that the fear of stubborn inflation has increased amongst professional fund managers, since the start of the year. Stubborn inflation prints have resulted in the Fed retaining its more hawkish stance and raised the chances of higher rates for longer, which should, in theory, increase the risk of an economic downturn. However, as the year has worn on, the average fund manager has become less concerned about a hard landing that somehow does not add up. At the start of the year, this was the month that the first rate cut was expected; now, the money is in June. All eyes and ears will be on Mr Powell later today. Ahead of it yesterday, the US stock market had a fairly good day.

This morning, there was more good news on the UK inflation front as the monthly CPI and PPI reports came out. The year-over-year CPI fell to 3.4%, below the forecast of 3.5%. Producer prices were a slightly more mixed bag; however, input prices fell by more than expected year over year. Output prices rose year over year modestly, which could indicate better corporate margins. Tomorrow, the Bank of England meets. Last week, the Bank of England inflation expectations survey reported that UK households had further lowered their inflation expectations from 3.3% to 3% in the next year. Households expect 3.1% inflation in five years, below the pre-pandemic average of 3.3% but above the Bank of Englands 2% target. We shall see what Mr Bailey and his team makes of all this tomorrow.