Peter Boockvar

We heard from the incoming BoJ Governor overnight where Kazuo Ueda has been called upon to dig out of the massive monetary hole his soon to be predecessor Haruhiko Kuroda dug for him. The delicate dance Ueda has to conduct is removing negative rate policy, allow the market to set the rest of the yield curve but at the same time not allow interest rates to jump too much that the finances of the Japanese government are threatened because of the huge interest expense bill they are potentially subject to on that rate rise. Ueda said this on the job he has ahead, “If I’m appointed BoJ Governor, my mission isn’t to come up with some kind of magical, special monetary policy.” But, higher inflation is going to force him to act sooner rather than later. 

Kuroda’s last meeting is on March 10th and I wouldn’t be surprised if he raised the short term rate from -.10% to back to zero. A nominal move but symbolic and something he can exit stage left with. Any further changes to YCC will be left to Ueda and I wouldn’t be surprised if his first move takes place in April by maybe widening the band by another 25 bps. 

Ueda acknowledged some reality but also expressed some delusion. He said “It’s true there are various side-effects emerging from the stimulus. But the BoJ’s current policy is a necessary, appropriate means to achieve 2% inflation.” Specifically on YCC and rates, “There are various possibilities on what YCC could look like in the future…If trend inflation heightens significantly and sustained achievement of the BoJ’s 2% target comes into sight, the central bank must consider normalizing monetary policy.”

This re-introduction to Ueda came as Japan’s January CPI came out and rose 4.3% headline and 3.2% ex food and energy, about as expected and both are at multi decade highs if we don’t include value added tax increases. So Ueda talks about whether and when the 2% inflation target comes into sight, well it’s here. Also, the BoJ is beginning to get the wage gains they so hoped for but now which is just trying to offset the higher inflation they wanted. If you didn’t see on Wednesday Toyota raised pay for its 68,000 unionized workers at the fastest pace in 20 years. I couldn’t find the percentage increase but Honda followed and gave its workers a 5% raise. 

I spent the morning writing about this all because I cannot emphasize enough that how this all plays out with BoJ policy, JGB yields and the yen has huge liquidity flow repercussions for the rest of the world. JGB yields didn’t move much in response but the yen is weaker and the Nikkei rallied by 1.3%. However, the Japanese bank stock index fell 1.2%. Irrespective of how this goes, we remain long Japanese stocks and especially like Japanese banks. If monetary policy tightens, the yen will rally but we’ll also see repatriation of money from overseas and back into Japan. As the largest foreign holder of US Treasuries, that will also be a big deal for that market. Corporate Japan will also benefit from the China reopening. On the other hand, higher JGB yields will likely have an upward lift to bond yields around the world. 

Shifting gears, Square in its earnings call said of note, “Looking at recent volume trends, we saw a moderation in the GPV (gross payment volume) growth rates for discretionary verticals in the US beginning in November, primarily for food and drink and retail. And we have seen these trends continue into the first quarter.” They did though say loss rates on consumer receivables remained below 1%. 

Also notable in the Square earnings call was non macro related but maybe a sign of things to come from others. And that is recognizing that stock based employee compensation while technically non-cash is in reality a real expense that so many tech related companies exclude from their P&L and which they call ‘adjusted’. Jack Dorsey acknowledging this said “So we’re going to include it on how we assess our investments and performance…As a result, we’re shifting our focus to an adjusted operating income margin. With this metric, profit margins will include certain non-cash expenses like stock based compensation and depreciation and amortization.” 

If all companies properly expensed stock based comp, the earnings on the S&P 500 would be lower. 

Consumer confidence in Germany rose 3.3 pts m/o/m but still remains deeply negative at -30.5. It was at +9 in February 2020. GFK said “Recent drops in energy prices and reports that experts believe a recession in Germany this year can now be avoided mean that optimism is slowly returning.” 

French February consumer confidence fell 1 pt m/o/m but January was revised up by 3 pts so the net result was better than expected. At the current 82, it compares with the February 2020 print of 105. A much higher cost of living is not just hurting the confidence of Americans, but Europeans too. 

Germany Consumer Confidence