Marketmind: If The Yield Cap Fits..

Marketmind: If The Yield Cap Fits..

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Fourth-quarter GDP growth tops a list of key Chinese indicators, while interest rate decisions from Indonesia and Malaysia will be pored over by investors. But the biggest event this week will be the Bank of Japan’s monetary policy decision on Wednesday.

Trading volume across the region may be lighter than usual on Monday because U.S. markets are closed for Martin Luther King Day. The real market action will come later in the week.

While the BOJ is expected to leave its central ‘yield curve control’ targets at -0.10% for short-term rates and 0% for the 10-year bond yield, all eyes will be on whether policymakers make further adjustments to yield-curve control (YCC) bands following December’s surprise tweak.

Graphic: Japan 10-year yield https://fingfx.thomsonreuters.com/gfx/mkt/gdpzqwkykvw/Japan10y.jpg

The BOJ stunned markets last month by effectively raising the cap on the 10-year yield to 0.50% from 0.25% and investors have gunned for it since – it hit 0.55% last week, forcing the BOJ to ramp up its already massive quantities of bond purchases.

The BOJ may also raise its inflation forecasts on Wednesday, ahead of December inflation data on Friday.

The yen has been on a tear recently. The BOJ stunned markets again in October by intervening in FX market buying yen for the first time since 1998 – three bouts of intervention in total have helped push the yen to a seven-month high of 127.50 per dollar, a far cry from October’s low of 151.00.

China’s yuan also has been surging against the beleaguered dollar on soaring optimism surrounding the country’s reopening now that Beijing has ditched its zero-COVID policy. The yuan hit 6.70 per dollar on Friday, its strongest since early July.

Chinese house price data will be released on Monday, before a barrage of releases the following day – Q4 GDP, and December retail sales, industrial production and fixed investment. All are expected to be weaker than the previous prints but investors are hoping this marks the economic nadir.

Later in the week, Bank Indonesia is expected to raise interest rates by another 25 basis points to 5.75%. Economists at Goldman Sachs reckon inflation probably peaked in September but remains too high for policymakers’ liking, so they will hike twice more for a terminal rate of 6.25% by March.

Bank Negara Malaysia is expected to raise rates by a quarter point on Thursday, to 3.00%. Goldman predicts another two 25 bps increases for a peak rate of 3.50% by May, while Morgan Stanley’s team reckons this will be the last hike of the cycle.

Elsewhere, there are no fewer than 11 speeches from Fed officials lined up this week, and a record number of world leaders, policy makers and top corporate chiefs will attend the World Economic Forum in Davos.

Three key developments that could provide more direction to markets on Monday:

– China house prices (December)

– Indonesia trade (December)

– India wholesale price inflation (December)

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Diane Craft)