Things are different on planet Japan
Macro & Overnight
US GDP turned positive in Q3 showing a headline +2.6% QoQ growth. However, this primarily reflected the significant LNG exports to Europe. The domestic composites to GDP point to an economy with slowing growth. However, this GDP headline provides plenty of ammo for the Fed to say the US economy remains strong and, therefore, can withstand higher rates. The pivot question remains unanswered.
Eurozone risks remain skewed to lower growth and faster inflation. The ECB moved its policy rates up by a further .75% yesterday and made an effort to sound tough on inflation. However, with the mechanism in place to suppress divergence, markets didn’t buy it, and the Euro traded back below $ parity.
Meanwhile, on planet Japan, in another universe, The Bank of Japan maintained its key short-term policy rate at zero. However, it did acknowledge that the risks to inflation have shifted to the upside. Japan’s rising inflation rate has just breached 3%, while the ten-year bond yield at just 0.25%.
With its policy of yield curve control the BoJ now owns the entire issue of certain Japanese bonds. In effect, the government is tail-swallowing its own debt.
With a frozen bond market the currency is taking all the pain of this policy. The BoJ has spent c$40bn in support of the Yen’s value in the last six weeks alone. Despite this, the Yen continued to slide. In addition, the Tokyo government announced a new $200bn energy plan yesterday designed to alleviate the impact of rising energy costs on consumers and businesses.
Japan’s role as a global financial outlier has become more extreme. The big question is whether the BoJ can remain solvent longer than the US $ and energy costs remain rampant.
In US equities, the tech rout continued with Amazon joining Meta in the down 20% club by announcing a poor Q3 performance and pointing to an absence of profit in Q4. Apple also reported Q3 results but defied recent NASDAQ gravity and its price traded up modestly after hours.
The decline of US big tech has destroyed about $1tn of equity over the past week. This capitulation signals the end of the “Buy The Dip, The Fed Will Bail Us Out” investor mentality, probably precisely the medicine the Fed has been trying to get investors to take these last few months. Perhaps a necessary condition to pause on rates, but still not sufficient.
In energy, oil prices remain firm. The UK’s Centrica has announced the re-opening of its Rough gas storage facility, which, while only running at 20% of its previous limit, still adds 50% to the UK’s woefully inadequate capacity.
With UK gilt yields still falling, Sunak and Hunt have delayed the Autumn Statement. This gives them time to widen their windfall tax net. They are targeting banks and energy companies.
UK Company News
Airline operator IAG announced 3Q results which beat on yields. IAG has a very low rating but high leverage , which remains a concern given the volatile economic outlook.
Grafton announced Eric Born as new CEO. Eric was formerly CEO of Wincanton and Swissport.
NatWest suffered from rising impairments and the threat of windfall taxes.
Enterprise IT supplier Computacenter delivered a solid if slightly mixed Q3 update.
Oil and gas developer IGas, owner of a significant interest in UK fracking acreage, unsurprisingly issued a statement of their disappointment that the UK has decided to ban fracking for the second time in this Parliament. The shares, which were over £1 on hopes for the Truss fracking revolution, now trade at 27p.
Floor covering distributor Likewise said that its profitability will be lower than originally anticipated due to unfavourable market conditions.
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