Pro Perspectives 10/3/23






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October 03, 2023

A month ago, the decline in “job openings” data (JOLTS) kicked off a week-long series of softer employment data.

It’s no secret that the Fed has been targeting/threatening jobs along the way, over the past eighteen months, in its inflation fight. 

And Jerome Powell has specifically isolated this JOLTS data.  He thinks a high supply of jobs leads to people quitting jobs at a higher rate, which leads to job seekers leveraging their position of strength to get a higher wage.

And higher wages, the Fed has feared, will lead to more inflation, and self-reinforcing inflation pressure.

So, a softer job market is considered good news in this world, as it suggests the Fed may finally relent and bring an end to the tightening cycle madness. 

Indeed, it was good enough (combined with favorable data of the past few months) to put the Fed on hold last month.

That brings us to today’s data:  This morning we kicked off the same series of jobs data with the most recent JOLTS report.  It was highera negative surprise.

This pushed yields to new sixteen-year highs, again.  Stocks went lower.  The dollar went higher.

And it triggered what looks like intervention (yet to be officially confirmed).

As we’ve discussed, this level in the benchmark U.S. market interest rate puts high stress on the domestic and global economy.

And the step higher, by the day, in U.S government bond yields, continues to stress markets that are already at vulnerable levels.

We’ve talked about the 150 level in USD/JPY, as the level of yen weakness that proved to be intolerant to the Bank of Japan last October.

The wider the spread between U.S. rates and Japanese rates, the more upward pressure on the value of the dollar vs. the yen.

They intervened last October above 150, and that event relieved pressure in global markets, turning interest rate markets (lower) and stock markets (higher).

Today, after strong JOLTS data in the U.S., the resulting dollar strength immediately spiked USDJPY above the 150 level, and then this happened …

The above is a chart of the dollar versus the yen (the line moving higher represents a stronger dollar/weaker yen and vice versa).  As we saw in October, the value of the yen was once again defended above 150 per dollar

What does the yen have to do with U.S. yields and U.S. stocks?

Remember, the central banks are working in coordination.

The Western world has been able to exit emergency level monetary policy, while simultaneously running record debt and deficits (without triggering a sovereign debt crisis), ONLY because Japan has been the shock absorber for the global economy.

The dangerous effects of Western world tightening have been subdued by keeping the liquidity pumping from a part of the world that has the most severe structural deflation problem, and the biggest government debt load in the world (Japan).  And it’s well coordinated.

Rates are still negative in Japan.

And the Bank of Japan is still in full quantitative easing (QE) mode.  In fact, they are in unlimited QE mode.

By the design of their “yield curve control” program, in order to defend the upper limit of the 10-year Japanese government bond yield they have the license to buy Japanese bonds in unlimited amounts.  Those bonds are bought with freshly printed yen, which finds its way into foreign asset markets (like U.S. Treasuries and U.S. stocks).

Now, with all of this in mind, there has been speculation that the Bank of Japan will start exiting these emergency policies by the second half of next year.  Is the world going to lose its valuable shock absorber?

With that, let’s take a look at Japan’s long, multi-decade bout with deflation.

Like their central bank counterparts, Japan has a 2% inflation target.  They’ve been above 2% now for seventeen consecutive months.

But since the early 90s, they’ve spent 90% of the time below 2%.  And for 40% of the past three decades, Japan has experienced deflation.

With that in mind, if Japan follows the lead of the Fed, which “symmetrically” targeted an “average” 2% inflation “over time,” then Japan will keep the pedal-to-the-metal on monetary policy — and continue its important role, offsetting (to a degree) the extraction of liquidity in Western world economies.

Japan can let the economy run hot for a long, long time — inflating away the world’s largest sovereign debt load. 

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