BOJ shock prompts breather for shares, U.S. inflation data up next

Global shares paused for breath on Friday as investors digested monetary policy steps from Japan and inflation data on both sides of the Atlantic in the hope of more evidence to persuade central banks to end their rate hiking cycle.

The Bank of Japan made its yield curve control policy more flexible and loosened its defence of a long-term interest rate cap, seen by investors as prelude to a shift away from years of ultra-loose monetary policy.

The moves cap a big week for central banks, with interest rate rises in the U.S. and Europe in recent days seen as the final moves in the most aggressive hiking cycle in a generation, with the Bank of England meeting next week.

The yen and benchmark Japanese bond yields jumped after the BOJ moves, while hopes for stimulus had Chinese stocks heading for their best week since last November.

Oil was on track for a fifth straight week of gains after news that the U.S. economy grew faster than expected in the second quarter, but gold was braced for its biggest weekly decline in five weeks.

The MSCI All Country stock index was little changed at 699 points, still up more than 15% for 2023 as it returns to levels last seen in the second quarter of 2022 on steady earnings and hopes of an end to interest rate hikes.

“The general consensus is that inflation is slowing, but the big question is whether it’s slowing fast enough,” said Mike Hewson, chief markets strategist at CMC Markets.

“Equity markets are looking fairly positive on the basis that we are closer to the end of their rate hiking cycle than we have ever been,” Hewson said.

In Europe, the STOXX index of 600 companies was down 0.4% after hitting a 17-month high on Thursday when the European Central Bank raised interest rates to their highest level in over two decades and left open the possibility of a pause at its next meeting.

Data showed that price growth in France cooled slightly more than expected in July, though Spanish inflation was higher than expected in the same month.

An ECB survey pointed to sticky inflation. German economic growth was treading water in the second quarter, stuck in a twilight zone between stagnation and recession, ING bank said. Euro zone businesses were also gloomy.

The Dow Jones Industrial Average on Wall Street snapped its longest winning streak since 1987 on Thursday after news of Japan’s policy shift was reported in advance by the Nikkei newspaper.

But a bull market remains in place, even if a little overbought, though a modest correction would be no surprise, said Patrick Spencer, vice chair of equities at Baird.

“People are waiting for weakness in the market to re-enter as earnings have been good. The reality is that the underlying economy, especially in the States, not so much in Europe, still remains quite strong,” Spencer said.

U.S. stock futures were firmer, helped by after-market gains driven by profits at Intel (NASDAQ:INTC).

The U.S. Commerce Dept. is due to release its hotly anticipated Personal Consumption Expenditures (PCE) report before the opening bell on Wall Street.

BANK OF JAPAN SHIFT

The Bank of Japan’s policy shift could have seismic implications for global money flows, since a cheap yen that’s been inexpensive to borrow has been a mainstay of capital market funding for years, and it now faces upward pressure from rising Japanese yields just as global rates seem to peak.

Yields on euro zone government bonds surged on news of the Japanese move which could make Japanese assets more attractive to domestic investors.

Ten-year Japanese government bond yields hit a nine-year high of 0.575%, later trading at 0.540%, and the Nikkei dropped 0.4%, with financial stocks surging in anticipation of higher rates.

The yen which had gained for days on speculation of a BOJ move, was choppy after the announcement, before gaining to hit a week-high of 138.05 to the dollar.

It was trading at 139.71 during the European morning.

“We’re really at the beginning of the end of really extreme monetary accommodation but they still sound very cognisant of … downside risk to the economy and inflation outlook,” said Sally Auld, chief investment officer at JB Were in Sydney.

Ten-year U.S. Treasury yields, which had climbed overnight on stronger-than-expected U.S. data and talk of Japan’s tweak, stayed above 4%.

The U.S. dollar was broadly stronger, especially against the Australian dollar – down 1% to $0.66420 – which was weighed after retail sales suffered their biggest fall of the year in June, suggesting less need for another rate hike.

The euro eased 0.1% to $1.09650 on Friday.

Brent crude oil futures slipped slightly from three-month highs to $83.93 a barrel.