BOJ's QE10 Is Latest Japanese Dud Ahead Of The US Cliffhanger

Very much in keeping with the tradition of Japan's now monthly QE8 (September) and QE9 (October), last night's announcement of what is effectively QE10, left a bitter taste in the mouth of salivating habitual gamblers (f/k/a traders), after Shirakawa showed he would not bend over to Abe's political demands just yet, and left out any mention of inflation targeting, whether 2% or 3%, out of the QE10 announcement. What he did include was yet another JPY 10 billion increase in the total asset purchase fund to a total of JPY 76 trillion, increasing the size of eligible JGB and Bill purchases by JPY 5 billion each. However, since this approach has proven to be a total failure in recent months, the market immediately faded the move and the USDJPY tumbled to under 84.00 overnight.

From Reuters: ""The reaction in the market is one of modest disappointment. Expectations of aggressive BOJ easing have been running ahead of reality," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi. "But there's probably enough in the (BOJ) statement to keep market expectations for more aggressive easing alive so that will probably keep any rebound in the yen relatively modest." Hardman forecast the dollar to trade at 86 yen in 12 months time and the yen's recent weakening trend was sustainable. The yen also regained ground against the euro, with the single currency falling 0.5 percent to 111.09 yen and retreating from a 16-month high of 112.59 yen hit on Wednesday."

Some other overnight notable news included a report that the Spanish central government is mulling removing Catalonia president Artur Mas from office should Catalonian leaders carry on with the threat of a referendum on independence (unclear just how they plan on "removing" him) according to the Spanish press; a miss in Italian retail sales (a preview of what is coming to the US) which declined -1.0% on expectations of an unchanged print down from -0.1%; UK retail sales also missing, with the ex-auto and fuel unchanged in November, on expectations of a +0.4% rise and up from -0.8%; a modest beat in German November PPI, which printed down from 0.0% to -0.2% on expectations of -0.1%; the Dutch unemployment rate rising to 7.0% from 6.8% as the "everyone is equal" doctrine in Europe continues bearing fruit; a Greek current account deficit of -€0.684 billion in October; and so on.

All of the above highlighted news items are, of course, completely irrelevant, as the market now observes the Cliffhanger drama in what may be its last day. As we expected several days ago, if the GOP indeed proceeds to vote Plan B in the House today (and is subsequently voted down by the Senate), you can drop any hope of a compromise deal in 2012.

More from DB's Jim Reid:

Welcome to the last full day of civilisation as we know it. Tomorrow is the day that ancient Mayans predicted as ushering in the apocalypse and in case this event occurs before tomorrow's EMR I just wanted to say thanks for reading the research all these years. It’s been a blast. So have an extra few roast potatoes today at lunch as it really won't matter if their prophesy turns out to be correct. As someone who makes quite long-term predictions in our annual asset return study one has to admire the tenure of the apocalypse forecast from the Mayans as it was made over 5000 years ago. I'm very happy to make a forecast for the year 7013 if anyone out there cares!

The way things are going it won't be a surprise to see the fiscal cliff to and fro still being the main event as 7012 turns into 7013. Yesterday continued the 'will they won't they' maneuverings of the last few weeks and although many commentators and the market seem to think we're edging nearing to a deal behind the scenes, the public posturing taken at face value would suggest otherwise.

In a press conference that lasted all of 54-seconds yesterday, Boehner said that the GOP would today proceed with Plan B where the House votes on a bill to extend tax cuts on incomes up to $1m. This defies a threat from Senate Majority Leader Harry Reid who said the Democrats would block the plan in the senate and a vow from President Obama to veto the bill if it manages to pass congress. In Boehner’s closing statement, he said “the President will have a decision to make. He can call upon Senate Democrats to pass that bill or he can be responsible for the largest tax increase in American history”. The House is due to meet today beginning at around 10am USEST.

Democrats said that the focus on Plan B has “poisoned the well a bit”, and the stalemate of the last 24 hours helped the S&P 500 close at the day’s lows of - 0.76% and the IG19 credit index to finish at the wides of 90.5bp (+1.375bp) yesterday. Despite this, President Obama said that he remains confident of reaching a deal in the next few days, saying that he and Boehner are “pretty close” on the terms of a deal. The WSJ said that Obama will cancel a holiday to Hawaii beginning on Friday if a deal is not yet resolved.

DB’s Peter Hooper notes that recent developments have closed the gap between the two sides on revenue and spending to $200bn and $100bn respectively. As a result, Hooper sees a 75% probability of a deal being reached before year-end, up from his estimate of 60% a fortnight ago.

Turning to Asia, most equity indices are trading lower overnight as investors took cues from the softer US close. All eyes are on the first post-election BoJ meeting statement today as the central bank has just announced a further expansion to its asset purchase program. The BoJ expanded its asset purchase program by another JPY10 Trillion to JPY 76 Trillion and added that it will examine its inflation target at the next meeting in January. The absence of an inflation target announcement overnight is perhaps a tad disappointing for markets given earlier chatter of such discussions taking place today. Both the Nikkei (-0.78%) and USDJPY (-0.53%) are down for the first time this week but in reality the market is perhaps ripe for some consolidation after the strong rally in Japanese equities and the recent JPY weakness since snap elections were called in mid-November.

Since then the Nikkei has rallied by about 14% and the JPY has fallen about 3.5% against the Dollar. In equities, the auto, electronics and steel sectors have gained about 18%, 14% and 21% respectively over the same period. Indeed names such as Tokyo Electric Power and Sharp have risen by an incredible 77% and 79% since then with the former benefitting from the new leadership’s pro-nuclear policies and the latter from the currency  weakness. Incidentally the middle of last month also seems to have marked the recent lows for many global equity markets. The S&P 500, Stoxx 600, FTSEMIB, the DAX, and the Hang Seng all hit their Q4 lows around 15-16th November and have gained about +6%, +6%, +8%, +9%, +7% since then with the DAX even making a new post-crisis high last night. Also in Europe the IBEX and FTSEMIB both added around +1.1% yesterday to post their longest winning streak (7-days) since 29th April 2011. Promises of ever increasing central bank intervention from various parts of the world, some recovery momentum in China, and a general optimism around a fiscal cliff compromise have perhaps played a role in the latest risk rally as markets give authorities the benefit of the doubt and increasingly price out worst case scenarios. Interestingly Gold has fallen nearly 3% over the same period despite ever expanding central banks balance sheets and a moderate rise in inflation expectations (as measured by a 12bp rise in the 10-year breakevens).

Back to the news flow, European developments have seemingly taken a backseat in recent days given the primary focus on the fiscal cliff negotiations. Following delays to the passing of Italy’s budget laws through parliament, Mario Monti has cancelled his Friday end-of-year address and will now likely address the Italian public over the weekend (Dec 22nd or 23rd). According to the FT, Monti was reported to have indicated in a meeting with the head of the UDC party that he intends to lead an alliance of centrist pro-European parties at the next election. In France, markets were somewhat relieved that draft banking reform laws proposed by Hollande’s government were more mild than expected which helped French banking stocks outperform yesterday. French banks will ringfence proprietary trading activities in separate self-funded entities but will be able to keep the majority of other investment banking activities within the deposit-taking part of the bank. French banks will have to contribute EUR2bn, rising to EUR10bn by 2020, to a resolution fund that would pay out to cover a bank failure and is aimed at preventing a bail-in of senior creditors.

Turning to the day ahead, the main focus will be on fiscal cliff developments including the House vote on the GOP bill during the US session. Ahead of that, euroarea consumer confidence numbers, and Italian and UK retail sales will be the main data releases. In the US, the third and final revision to Q3 GDP, the Philly Fed manufacturing index, existing home sales and weekly jobless claims are the data releases of note.