JGB’s are selling off sharply and the yen is ripping higher after a story that Reuters said “The BoJ will likely raise its inflation forecasts next week and debate whether further steps are needed to address market distortions it sought to fix with December’s surprise tweak to its yield control policy, sources say.” Also, we can’t expect yet an end to YCC, “Keen to wait for more clarity on whether wage hikes will broaden, the central bank is also seen holding off on making big tweaks to yield curve control, such as abandoning negative interest rates, the sources said.”
To highlight how screwed up their yield curve still is, the 9 yr yield jumped 7.3 bps overnight to .63% while the 10 yr is at .51% (with the .50% the upper end of the YCC band which is only focused on the 10 yr). The 20 yr yield was higher by 7.5 bps to 1.42% and the 40 yr yield (the longest maturity on their curve) was up by 6.3 bps to 1.99%. To quantify, these rising rates is on about $9 trillion of debt (or almost 1.3 quadrillion yen) which is about 265% of Japan’s GDP. While there are no ripple effects today to European and US bond markets ahead of CPI, Japan’s bond market will be a big story this year.
9 yr JGB Yield
I want to talk again about the importance of China’s reopening and on energy, particularly jet fuel. According to the South China Morning Post, pre Covid China saw 9,125 weekly international flights. Liang Nan, the director of the Department of Transport under the Civil Aviation Administration of China said on Tuesday that “It is estimated that, by the end of February, we will see international flights recover to around 1,000 each week, or 11% of pre-pandemic levels.” He thinks that gets between 1,300-2,300 by the end of March and thinks by yr end it will “reach 7,300 flights per week” which is 805 of pre Covid.
Separately, I read last week that pre Covid China had 400 flights per week to Thailand. As of a few weeks ago there were just 14. In other words, the demand for jet fuel out of China is going to surge this year. We still own and like the Macau casino stocks, the biggest online Asian travel agency and other Asian names.
I wanted to print here the strategy, that they mentioned in last night’s earnings call, for how KB Homes is dealing with reduced demand and to improve their chances of selling homes. “We are utilizing two different sales strategies, depending on how many homes we have in the backlog in a community. For communities that have large backlogs, particularly those with far more in backlog than remaining to sell, you’re placing more emphasis on our temporary interest rate buy down and lock programs to help produce sales and de-emphasizing price reductions until more of our backlog is delivered. While we recognize that price is the most effective sales lever to generate new orders, we also know that if we lower the base price in a community on new sales, many buyers in backlog would expect to receive a similar reduction regardless of the rate in which they may have locked their loan.”
The other, “we have adjusted pricing in communities with smaller backlogs, where only a small percentage of that backlog will be impacted.”
Taiwan Semi, one of the most important companies in the world, said this on their earnings call, “Demand is softer than we thought three months ago.” Positively, they also said things are continuing to normalize in shipping chips for the auto sector.
The good market start to the year has lifted sentiment. Yesterday Investors Intelligence said Bulls rose to 41.4 from 36.6 while Bears slipped slightly to 32.9 from 33.8. Those expecting a correction are down to 25.7. In today’s AAII, the Bears fell for a 3rd week by 2.1 pts to 39.9, the least since November 3rd, the 2nd lowest since August 18th, but still remains above the level of Bulls. Bulls rose 3.5 pts to 24 but after falling by 6 last week. The CNN Fear/Greed index closed yesterday at 55 vs 42 in the week before and that is just about smack on Neutral. Bottom line, while sentiment has clearly improved, I’d still classify it as in ‘no man’s land’ giving us no tradeable extreme in either direction.
AAII Bears