Marketmind: Bank of Japan sets the stage for higher yields

A look at the day ahead in European and global markets from Vidya Ranganathan

The Bank of Japan decided to bend its long-running yield control policy on Friday, just days after the Fed opted to be non-committal on the future path of rates and the ECB hinted at pauses.

The BOJ maintained its guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would be “references” rather than “rigid limits”.

More significantly, it followed up with an offer to buy 10-year Japanese government bonds (JGBs) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5% – leaving the bond market stupefied and confused while the yen swung wildly as the market digested the stealth move.

For investors, there is much riding on whether they see any BOJ move as a technical adjustment to a highly constrictive yield-curve-control (YCC) policy or the start of a tightening cycle in the world’s biggest creditor nation with billions invested in U.S. stocks and financial markets.

That’s against the backdrop of a “goldilocks” scenario in the United States, after Chair Jerome Powell suggested a soft landing for the economy because the central bank’s staff no longer forecast a recession – not entirely good news for those anticipating rate cuts by next year.

Overnight, the U.S. Commerce Department put out its robust initial take on second-quarter GDP.

There’s weakness all around in stock markets, with MSCI’s broadest index of Asia-Pacific shares outside Japan down, along with . The fell 0.67% to snap its longest winning streak since 1987.

The ECB raised rates by 25 basis points to a 23-year high on Thursday, but President Christine Lagarde sent the euro tumbling with talk of a pause in September. The euro slid nearly 1% overnight and was nursing its losses at $1.0980 on Friday.

While markets are mostly focused on the diverging monetary trajectories of the G3 central banks and what they mean for stocks and currencies, there’s also a bunch of European economic indicators due.

Second-quarter GDP estimates for Spain, France and Germany should show modestly expanding and yet struggling economies, if latest purchasing manager indexes are any indication. Inflation numbers are also due in France and Germany.

The U.S. Commerce Department is due to release its broad-ranging and hotly anticipated Personal Consumption Expenditures (PCE) report on Friday, which will cover income, spending, and crucially, inflation.

Key developments that could influence markets on Friday:

Germany, France July CPI

France, Spain, Germany Q2 GDP

Eurozone July economic confidence

U.S. personal spending, core PCE

Earnings: AstraZeneca (NASDAQ:), BASF, Exxon Mobil (NYSE:), P&G

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