BOJ's Intervention: A Temporary Fix?

Jeffrey Roach:

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's happening in the global markets and the call to action for investors. First, was the alleged intervention worth it? Investors speculated that the Bank of Japan spent over 5 trillion yen as $35 billion recently to support the weak weekend after roughly two years of weakness. Well, was it worth it? Well, after a brief appreciation, the yen weakened back to 158 yen per dollar within hours of more trading, reversing much of the government's efforts to stop the weakness. So what gives? Well, the variance between Fed policy and the BOJ, Bank of Japan, is the main culprit for yen hitting a 34-year low. The Fed has tilted hawkish and the BOJ is accommodative. So as a consequence, the yen remains weak. The strong dollar weak yen will ease inflation pressures in the U.S., but will also create headwinds for emerging market economies.

Jeffrey Roach:

Second, the timing of rate cuts is pushed out. Annual core inflation held steady in March, rising 2.8% from a year ago, the same pace as February. Here are a few highlights to think about. Inflation first services and goods are on two very different glide paths. Annual services inflation, 4% up in March. Goods inflation, roughly flat. The savings rate in March fell to 3.2% the lowest since late 2022. As consumers are likely feeling a little bit of that pinch of sticky inflation and this chart, I'm showing core services ex-housing, a favorite metric for policymakers. Core services excluding housing, ran even hotter in March, although one can still argue that the longer-term trajectory hasn't changed. So the bottom line is the timing of rate cuts will likely be pushed out even further as services inflation reaccelerated last month. If the economy slows and inflation lingers, the stagflation debate will likely resurface, potentially instigating some volatility in markets.

Jeffrey Roach:

Third, we are a lot less interest rate sensitive. One of the important things investors learned last week is that the economy is less sensitive to rates in this cycle despite high interest rates. Residential investment, a traditionally rate-sensitive sector contributed a historic amount to growth this year. So when you think about broader macro landscapes so far this year, just two categories, financial service charges and residential investment contributed the majority of the growth outside of the pandemic period. Well, that was the biggest contribution since 2003. The dearth of housing supply drove construction activity last quarter more than offset the headwinds from higher interest rates. The Fed has backed a little bit into a corner as some sectors of the economy appear immune to interest rates. At this rate, we do expect the Fed to stay on hold longer than they would happen in a normal cycle, which increases the odds of some stagflation or maybe that bumpy landing. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.