Bank of Japan catches out the markets (+video)

Markets in Europe woke up to the surprising news that, overnight, the Bank of Japan has adopted negative interest rates in an attempt to drive up inflation.

The benchmark rate has been slashed by 20bps to -0.1% and there was no change in the current level of Bank of Japan asset purchases of ¥80 trillion a year. The move, known by the catchy phrase “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate,” caught economists by surprise and shows how concerned policy makers are in the face of a Chinese slowdown and a rise in the yen: The last cut in the benchmark rate was back in 2010.

As the news hit the wire the yen was aggressively sold off and Asian bourses were on a rollercoaster ride. The Nikkei in Tokyo closed at 2.85%, the ASX/S&P 200 in Australia was up 0.6%, the CSI300 index and Shanghai Composite index in China were up 3%, and the Hang Seng in Hong Kong rose 2.23%.

Service industry does its bit for Sterling

In the UK, Sterling managed to stop its decline yesterday when its gross domestic product figures revealed a rise of 0.5% growth quarter-on-quarter bringing the annual rate of growth to 1.9%, in line with market expectations. The data is evidence of just how dependent the UK is on its services industry, as growth was almost entirely driven by the service sector. 

US jobless claims fall
 
In the US, durable goods data published yesterday showed a sharp downturn, and figures for pending home sales also disappointed the markets. Jobless claims data was the only bright spot in the US: Claims have fallen more than expected, to 278,000. Durable goods data was the really worrying reading, as it shows private domestic demand is significantly slowing.

The calendar will be dominated by the fourth quarter gross domestic product figure, the Chicago Purchasing Managers’ Index and the University of Michigan sentiment report. San Francisco Federal Reserve President Williams is also speaking, and his words will be picked over for clues as to the next US rate rise.

Europa-o-rama
 
Today will be busy day on the data front. We start in Europe with France’s fourth quarter gross domestic product reading, Germany’s retail sales for December, and the European Economic and Monetary Union (EMU) consumer prices index for January. 

That’s it for another busy week – enjoy the weekend.

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