Rate Snapshot: Bank of Japan treats markets with unexpected monetary stimulus increase

by MPA31 Oct 2014

By David Shirmeyer, CEO at Sigma Research

TRICK or TREAT! The trick; how to drive global stock markets higher. The treat; the Bank of Japan treated markets with an unexpected increase in monetary stimulus overnight. The reaction; sent stock bourses substantially higher in early trading this morning. At 9:00 the US markets trading in the futures markets were pointing to an all-time intraday high for the DJIA and the other indexes on fire.   The bond and mortgage markets taking a hit so far with stock markets roaring. Not a large increase in rates however. At 9:30 DJIA opened +90, NASDAQ +75, a 14 yr high, S&P +15. Interest rates holding well so far; the 10 2.34% +3 bp and 30 yr MBS price down just 2 bps.


The BOJ surprised global markets overnight increasing the monetary base by 80 trillion yen a year from 60 trillion a yr. The bank said it will purchase exchange-traded funds so their amounts outstanding increase by about 3 trillion yen a year. Japanese real-estate investment trusts will be purchased with a view to raising their amounts outstanding by about 90 billion yen annually, according to the central bank. Japan’s government also said the $1.2 trillion Government Pension Investment Fund would announce a boost in its holdings of foreign assets. In a press conference held later, the GPIF said it would increase its target holdings for both local and overseas shares to 25 percent each from 12 percent, confirming the Nikkei report. When a central bank is out buying ETFs and foreign stocks it logically sends investors into a frenzy of buying.


It is interesting to listen to the CNBC commentators this morning; one would think Helicopter Ben was dropping $1,000.00 bills across the country. The Bank of Japan set the world on its heels with the stimulus announcement. It wasn’t expected, and the massive amount is shocking; between what the bank is saying it will do and the GPIF saying it would buy anything around the world equity markets are on fire, The bond market still OK given the circumstances. Maybe the bond market isn’t quite as excited yet about the news frm Japan as equity traders are now.


Turning to domestic news; this morning’s Sept personal income and spending data was weak at 8:30. Ignored initially as Japan news is dominating. If it were not for the Japanese news it is likely the US stock market would be trading lower now. Personal income was expected up 0.3% as reported +0.2%, the slowest pace this year. Spending expected +0.1% declined 0.2%. The PCE core up 0.1% as expected. Q3 employment cost index expected +0.5% increased 0.7%; yr/yr +2.2% frm +2.0% in Q2.


More data at 9:45 and 9:55; the Chicago purchasing mgrs. index was thought to be unchanged at 60.5, as reported it jumped to 66.2. The U. of Michigan final consumer sentiment index for October was better than thought at 86.9 against forecasts of 86.4; the index is the highest now since July 2007.


The bond and mortgage markets a little weaker but given the news from Japan and the reaction to it in the equity markets, treasuries are not suffering too much so far. Technically the 10 yesterday tested and held its 40 day average, so far today it tested it again and has held. Stocks rallying because Japan’s pension funds are going to buy global investments, and where better than in the US. Volatility remains high for equity markets but at the moment the bond market is rather stable given the backdrops. All that said, we are not as bullish as we had been; if the 10 closes above 2.35% we will have to accept the bullish bias turning more bearish.



PRICES @ 10:15 AM

10 yr note:                   -5/32 (15 bp) 2.33% +2 bp

5 yr note:                     -7/32 (22 bp) 1.62% +4 bp

2 Yr note:                    -2/32 (6 bp) 0.51% +3 bp

30 yr bond:                  -17/32 (53 bp) 3.08% +4 bp

Libor Rates:                1 mo 0.154%; 3 mo 0.232%; 6 mo 0.324%; 1 yr 0.541%

30 yr FNMA 3.5 Nov:  @9:30 103.42 -4 bp (+2 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Nov:  @9:30 103.70 -2 bp (+4 bp frm 9:30 yesterday)

30 yr GNMA 3.5 Nov:  @9:30 104.43 -4 bp (-3 bp frm 9:30 yesterday)

Dollar/Yen:                  111.99 +2.78 (huge move)

Dollar/Euro:                $1.2511 -$0.0102 (big move)

Gold:                          $1164.40 -34.20 (big decline on strong dollar)

Crude Oil:                  $79.86 -$1.26 (psychological level under $80.00)

DJIA:                         17,338.07 +142.65

NASDAQ:                  4625.03 +58.89

S&P 500:                   2012.52 +17.87