In the central bank quest for higher inflation (aka, a higher cost of living matching 2%), Japan reported that core CPI (ex food for them) rose .7% y/o/y in September as expected and unchanged from August. It does though match the highest level since March 2015 when the CPI prints were rolling thru the impact of the VAT increase. Also taking out energy prices has it up .2% y/o/y, also in line with expectations but is far from the higher inflation the BoJ so desperately wants. The October Tokyo CPI (so a more timely read for this city) saw the core rate up by .6% y/o/y, one tenth more than expected and also up one tenth from September. That is also the highest level since March 2015. But ex food and energy, prices were up just .1% y/o/y. As all the data was basically in line, JGB yields held steady. The irony of Japanese inflation over the past 25 years is that they’ve actually achieved true price stability as inflation ex food and energy has averaged up by .2% per year. The 2% target has been literally picked out of thin year. The BoJ meets next week and maybe at some point they will acknowledge a needed change in that target. With the yen lower again, the Nikkei closed up another 1.2% and is up 15% year to date, thus finally catching up with many global indices.
A day after Mario Draghi pulled every verbal lever out of his mouth to sound as dovish as possible to offset the 50% monthly reduction in QE and likely end next year, German import prices in September spiked by .9% m/o/m and was higher by 3% y/o/y. That was above the estimate of up .5% and 2.6% respectively. Part of the jump was certainly petro prices but even ex this saw import prices up by .4% m/o/m and 2.1% y/o/y. Draghi’s success in focusing on the stock of its bond holdings vs the flow, an unofficial September end to QE and relying on NIRP until 2019 helped to keep European bond yields at bay and most likely due to positioning had a good day. The German 10 yr yield today is down 1 bp after yesterday’s 6.5 bp drop. At .41% it remains in the range over the last month of .37% and .48%. The European bank stocks though after rallying 1.6% yesterday are giving back half of that gain today. NIRP continues to damage their profitability.
While extreme monetary policy has been the global rage over the past 10 years, there hasn’t been much discussion on how central bankers will deal with the next downturn. We know the Fed is trying to reload its interest rate gun but there still won’t be much there. Peter Praet, the ECB chief economist said this today, “It’s difficult to imagine that if there is a new shock, that the policy space that you have will be available as it was 10 years ago.”
Quietly, interest rates continue to move higher in China. Their 10 yr yield was up by 5 bps to 3.84% and is now at a 3 year high. This yield is up 10 bps on the week which is the biggest one week move since January. This coincides with the 7 month high that is the US 10 yr yield. With the rise in Chinese interest rates, I continue to have an eye on Chinese property stocks which fell .4% overnight but still saw a weekly gain. Copper prices are falling by 1.7%, down for a 3rd straight day. Iron ore is down by 2.3%, also down for a 3rd straight day.