The Japanese government bonds rallied on Monday as investors pour into safe-haven assets amid deepening global growth fears after reading weak economic data last week. Also, weak oil prices pushed investors towards safe-haven assets. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved fell 40.79 pct to -0.107 pct and the yield on the 2-year bonds dipped 2.58 pct to -0.239 pct by 0615 GMT.
Last week, the Euro zone preliminary April inflation declined 0.2 pct y/y, against market consensus of -0.1 pct, from prior zero. Similarly, the Germany March retail sales tumbled 1.1 pct m/m, against market expectation of 0.3 pct m/m rise, from down 0.4 pct in February. On annual basis, it rose tad 0.7 pct y/y, consensus was for 2.2 pct y/y, from prior 5.5 pct. The French consumer prices were weaker than expected in April, which rose 0.1 pct m/m, as compared to 0.8 pct m/m in March. On annual basis, it declined 0.2 pct, against market expectation of 0.1 pct fall, from prior down 0.1 pct. The milder than-anticipated consumer prices in April underscore the challenge confronting the European Central Bank to push inflation back up toward its 2% target. To accomplish that objective, the European Central Bank cut interest rates in March and extended its quantitative easing program.
The United States Q1 GDP rose 0.5 pct q/q (annualized), lower than the market expectation of 0.7 pct q/q, from 1.4 pct in the previous quarter. Similarly, personal consumption increased 1.9 pct, against market anticipation of 1.7 pct, from 2.4% in the last quarter of 2015. Moreover, exports tumbled 2.8 pct, from prior down 2 pct, alongside a 0.2 pct increase from imports. Business investments also declined 5.9 pct, alongside the deceleration seen in the headline measure, this report clearly reflects the weaker tone of data seen to open the year. Although a number of releases continue to reflect current economic dampness, the potential for a rebound in inventories in the months ahead should provide a boost to growth as we move further into 2016.
On last Thursday, the Japanese March National CPI (excluding fresh food) tumbled -0.3 pct y/y (lowest since April 2013), against market expectation of -0.2 pct y/y, from flat 0.0% in February. On the other However, national CPI-excluding food, energy rose 0.7 pct y/y, lower than the market expectation of 0.8 pct y/y, from prior 0.8 pct. Similarly, March overall household spending declined 5.3% y/y, investors were anticipating a fall of 4.1 pct, from up 1.2 pct in February.
In addition, the Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, crude oil prices tumbled by snapping 6-month high as rising production in the Middle East outweighed a decline in U.S. output and a recent slide in the dollar, which has been supporting crude. OPEC supplies rose to 32.64 million barrels per day in April, from 32.47 million barrels per day in March, according to a Reuters survey. That almost matches January's 32.65 million barrel per day, when Indonesia's return to OPEC boosted production to the highest since at least 1997. The International benchmark Brent futures fell 1.20 pct to $46.80 and West Texas Intermediate (WTI) tumbled 0.85 pct to $45.53 by 0615 GMT.
Last week, the Bank of Japan in its policy meeting left the monetary policy rate unchanged at -0.1 pct, against the market expectation of ease. I also kept its asset purchase program at ¥80 trillion per annum and ¥300 billion into ETFs. The Bank of Japan in its policy statement said that they will take additional easing steps in three dimensions of quantity, quality and interest rate, if needed to hit price target and Japan consumer inflation to hit 2 pct in fiscal 2017. Said the Japanese economy is expected to rise moderately as a trend and negative impact on prices from energy price falls likely to remain until early next year. Moreover, the BoJ in its quarterly report lowed the forecast for real Gross Domestic Product (GDP) and Consumer Price Index (CPI) to 1.2 pct and 0.1 pct, from 1.5 pct and 0.3 pct in 2016 and 2017, respectively. Real GDP is expected to be +1.0 pct in fiscal year 2018/19. Similarly, core CPI is to expected to be +0.5 pct and 1.7 pct, from 0.8 pct and 1.9 pct in FY2016 and FY2017, respectively. In fiscal year 2018-19 core CPI is expected to grow 1.9 pct.
According to recent Reuters report, the BoJ has decided to increase the initial purchase amount of 10-25 years JGBs from JPY 220-240 billion, while reducing the amount of 25-40 years JGBs from JPY 180-160 billion on last Thursday. It was a powerful message that the BoJ wants to push 10-25 years JGB yields down further into negative territory in the interest rate environment where pension funds and regional institutional investors were unable to buy JGBs maturing within 10 years due to the negative yields. The BoJ is using the most popular 10-25 year zone as leverage.
Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility. Further, we expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 pct at year-end.
The Japanese markets will remain closed from Tuesday to Thursday on account of national day holiday. Meanwhile, Nikkei 225 closed -3.11% at 16,147.38.
The material has been provided by InstaForex Company – www.instaforex.com