Markets were buoyed on Friday by a Bank of Japan (BOJ) decision to move interest rates into negative territory.
While a surprise and a signal of central banks growing aggressiveness in the face of a weakening global economy, this move should not be something that moves US markets north. The effort made by BOJ’s Kuroda was an effort to fight falling wages and the rising Yen. If successful, this move would weaken the yen and cause the dollar to continue to strengthen.
While the idea of a strong dollar might seem good, it is not good for business. Much of the slowed growth in the 4th quarter, 0.7% annualized[1], is attributable to decreased business investment. This comes from decreased profits as a result of less competitive pricing as the dollar has strengthened internationally. It was also represented by a drag in trade balance as exports soften and imports have increased.
US Data
The US Data pointed towards improving conditions[2]:
- S&P/CS HPI Comp 20 City, YoY (Nov): 5.8%
- CB Consumer Confidence (Jan): 98.1
- New Home Sales, MoM (Dec): 10.8%
- Core Dur. Goods Orders, MoM (Dec): -1.2%
- Trade Balance (Dec): -61.50B
- Michigan Cons. Sent. (Jan): 92.0
The major detractor was the affirmation of a slowing economic environment during the 4th quarter with the fall in GDP.
Conclusion
While Kuroda’s actions were warranted given recent weakness in Japans economy, it is just the most recent action of developed nations loosening monetary policy.
The markets reactions, though opposite of the long term effects, is a validation of how investors are viewing the current economy. Global slowing that is proving true for the US as well. It shows a hopefulness that the Federal Reserve Board (FRB) will reverse course and follow Central Banks around the world. The one problem with that would be a vote of no confidence by the FRB in our current economy.
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