Written Commentary
STOCK INDEX FUTURES
Stock index futures are lower after the Bank of Japan made a surprise decision to let a benchmark interest rate increase.
In addition, traders remain concerned that a more hawkish Fed could tip the economy into recession.
Housing permits in November were 1.342 million when 1.495 million were expected and housing starts were 1.427 million when 1.400 million were anticipated.
This Bank of Japan’s policy change is probably the last of the bearish news for a while.
Despite recent pressure on futures, the fundamentals and technicals for stock index futures remain supportive.
CURRENCY FUTURES
The Japanese yen is sharply higher after the Bank of Japan made a surprise decision to let a benchmark interest rate increase.
The BOJ said the yield on the 10-year Japanese government bond could increase to as high as 0.50% from a previous cap of 0.25%. The central bank had set a target range of near zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low.
The 10-year yield, which had remained near 0.25% for months because of the central bank’s cap, quickly moved up to 0.40%.
The U.S. dollar index continues to underperform the news.
Interest rate differential expectations are long-term bearish for the greenback, and lower prices are likely.
Germany’s producer price index eased in November for the second month in a row, adding to signs that inflation may have peaked. Producer prices of industrial products increased 28.2% on the same month last year compared with a 34.5% year-on-year increase in October. Analysts had forecast a November reading of a 30.6% increase.
The trade surplus in Switzerland declined to CHF 0.5 billion in November of 2022, which is the smallest trade surplus since January 2018.
INTEREST RATE MARKET FUTURES
The 30-year Treasury bond futures are lower in response to the tightening move by the Bank of Japan, which pushed up global yields.
This Bank of Japan policy change is probably the last of the bearish news for a while.
According to financial futures markets currently, there is a 63.0% probability that the Federal Open Market Committee will increase its fed funds rate by 25 basis points at the February 1 policy meeting and a 37.0% probability that the rate will be hiked by 50 basis points.
The fundamental and technical aspects are supportive for futures.
I will be out of the office on Wednesday, December 21.
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