European and global markets are heading into Friday with investors focused on central bank signals and important economic data. This is after the Bank of Japan made a historic move that ends nearly three decades of interest rates being close to zero.
The Bank of Japan raised its benchmark rate by a quarter of a percentage point to 0.75 percent after years of very loose monetary policy. Many people expected the move after policymakers made it clear what they wanted, but it still has a lot of symbolic meaning. For the first time in about 30 years, Japanese savers can get a good return on their deposits. This is a big change in the country’s monetary situation.
The markets reacted quickly. At first, the yen fell as traders sold on the news, pushing the dollar up to 156.19 yen before settling near 156.00. The Nikkei index of Japanese stocks held on to early gains of about 1.2 percent, showing strength. There was a lot of momentum behind the rally from Wall Street, where Micron Technology’s strong earnings reignited interest in tech stocks.
Even though the rate hike was expected, the Bank of Japan was very firm. Policymakers stressed that real interest rates are still very low even after the rise, and they said they would keep tightening if inflation and economic growth stay on track with what they expect. Officials also said they were more sure that Japanese companies would keep raising wages, which would keep inflation around the two percent target going for a long time.
Eye Central Bank of Japan as Japan Ends Era of Ultra-Low Rates
It looked like the bond markets believed what the central bank said. The yield on ten-year Japanese government bonds went up five basis points to 2.015 percent, the highest level since August 1999. The move showed that people are starting to think that Japan’s policy normalization is far from over.
Now, people are paying attention to Kazuo Ueda, the Governor of the Bank of Japan, who is about to hold a press conference after the meeting. His comments have caused big changes in the market before, and investors will be watching closely for any signs of where rates are going in the future. Ueda has said for a long time that a neutral interest rate could be anywhere from 1% to 2.5%. But so far, the markets have only priced in one more hike at the lower end of that range. If there is any sign that rates might go up even more, it could help the yen and hurt bond prices even more.
Investors are also looking at how reliable the most recent inflation data from the US is, in addition to Japan. The consumer price index report from Thursday said that inflation fell from 3.0 percent in September to 2.7 percent in November. However, there was no data for October because the government was shut down. A lot of economists are still not sure about the slowdown, pointing out that the data has problems with how it was collected.
The Bureau of Labor Statistics could only get price data from the middle of November, which was when Black Friday sales were at their peak. This timing probably made the inflation numbers look lower than they really were. Also, changes made to make up for the missing data from October had an effect on important parts like rent and owners’ equivalent rent. Analysts say these effects could last until at least April, which makes it hard to believe the headline inflation numbers in the coming months.
The Federal Reserve is in a tough spot right now because it has to weigh signs of cooling inflation against strong economic activity. Data that isn’t reliable makes it harder to make policy decisions and makes global markets less stable.
There are a lot of things on the economic calendar for Friday that could change people’s minds. European Central Bank officials, such as Martins Kazaks Kocher, Philip Lane, and Piero Cipollone, are expected to make comments in Europe. The EU flash consumer confidence numbers, the German GfK consumer sentiment numbers, the producer prices from Germany and France, and the UK retail sales numbers are all examples of data that will be released.
The University of Michigan consumer sentiment survey and existing home sales numbers will be the main things that markets in the U.S. pay attention to. These indicators will help shape expectations about growth, inflation, and interest rate policy as markets deal with a changing global monetary environment.
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