BoJ Hikes Rates But Serves up Limited Guidance

Devin

Economic

Forex

Central Bank

Summary:

Following a raft of mixed messages from the Bank of Japan (BoJ) and stronger-than-expected wage negotiations for corporate Japan, the central bank stepped up overnight and ended eight years of negative interest rate policy (NIRP) as well as putting a cap on yield curve control (YCC). The BoJ raised its Policy Rate by 10bps for the first time in nearly two decades, increasing the rate to a range between 0.0% to 0.1% from -0.1%. This is quite the contrast to other major G10 central banks, with the Fed, the Swiss National Bank (SNB) and the Bank of England (BoE) poised to remain on hold this week.

Ahead of the event, markets were pricing in about a 50/50-coin toss on whether a rate hike would unfold, but interestingly, the markets are also still pricing in at least another two rate hikes on top of today’s push.

Given the lack of indication in forward guidance in terms of any additional policy firming—despite the BoJ clearly leaving the door ajar for additional rate hikes down the road, which is inevitable according to some desks—this was a tricky market to trade. On one hand, the rate hike was clearly hawkish (albeit expected), yet the lack of any form of a clear signal was dovish. This helps explain why we saw a decline in the Japanese yen (JPY), which led the USD/JPY currency pair higher, up +0.8% ahead of the US cash open.

USD/JPY on the Verge of Refreshing Multi-Year Highs

The recent upside in the US dollar (USD) versus the JPY has landed price action at the door of notable resistance on the monthly chart at ¥150.80. As seen from the chart, the level, along with monthly channel resistance, taken from the high of ¥125.85, welcomed selling in late 2022, followed by another reaction visible in late 2023. However, the aforementioned reaction lacked vigour, leaving neighbouring support on the monthly chart unchallenged at ¥138.42. This, coupled with the underlying trend facing north and the recent BoJ announcement, positions the currency pair to perhaps take on current resistance and retest the mettle of monthly channel resistance.

Nearer to home, however, the daily chart has buyers and sellers battling for position ahead of resistance at ¥150.78. This follows a one-sided push through resistance at ¥149.58 (now marked support). In view of the above information, follow-through buying could have price puncture current monthly and daily resistances (¥150.80/78) to target at least daily resistance at ¥151.72, a level nestled just south of the ¥151.94 October 2022 peak. Consuming this high would have the market reach highs not seen since the late 1990s!

Source: FP Markets

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Cohen

Commodity

After reaching an all-time high in December last year, the price of gold has continued to surge in 2024, hitting new highs and trading at more than US$2,100 (S$2,820) an ounce since early March.

At the same time, global markets are also at or near all-time highs.

Japan's Nikkei reached levels not seen since 1989 in February before crossing the 40,000 mark on Mar 4. The United States' Dow Jones Industrial Average, meanwhile, has also been setting new records, closing above 39,000 for the first time on Feb 22 and hovering around that level since then.

Given that gold and stocks are assets with different associated risks that typically thrive under different circumstances, why have they sailed to all-time highs simultaneously?

And what does this say about the current investment climate, where even the cryptocurrency Bitcoin hit new highs after more than two years in the wilderness?

CNA spoke to analysts at three banks and a bullion dealer to find out.

What is driving gold prices and global markets upwards?

Expectations of interest rate cuts from the United States Federal Reserve are the key driver of the simultaneous surges in gold prices and global markets, analysts said.

The Fed began hiking interest rates amid rising inflation in March 2022 but has held steady since its 11th hike of this cycle in July 2023. The hikes raised its key lending rate to a 23-year high of between 5.25 per cent and 5.5 per cent as it looked to return inflation firmly to its long-term target of 2 per cent.

"This latest rally in gold price over the past month is unique in that gold is trading higher alongside other risky assets like equities," said UOB's head of markets strategy Heng Koon How.

"In this case, it is likely that gold and other risky assets are being repriced higher as investors come to a consensus that the US Federal Reserve is likely to start cutting rates from June."

Mr. Vasu Menon, managing director of investment strategy at OCBC, said: "What's kept markets going is hope that the US Federal Reserve will cut rates this year, which historically has been good news for global equities.

"However, whether markets can continue their strong showing in coming months depends on how the economy and inflation in the United States perform and what the Fed does in terms of interest rate cuts."

Mr. Menon said it is "interesting" that global equities have continued to post strong gains although rate cut expectations have been pared back sharply from a projection of seven to eight rate cuts at the start of the year to about three currently.

"The recalibration in expectations caused some market volatility but it did not derail markets because investors remain hopeful that the Fed will cut rates this year," he said.

"The better-than-expected fourth-quarter earnings season, a rally in artificial intelligence (AI) and tech stocks, and optimism about US economic growth also contributed to the market's strong showing in the past two months."

With regard to gold, Mr. Menon said that the precious metal "has benefited from expectation for the Fed to lower interest rates, not just this year but over the next three years".

"The precious metal's outlook becomes more positive when interest rates fall because gold offers zero yield – it does not pay dividends or regular income to investors – and will look more appealing when rates fall," he said.

DBS' Chief Investment Office also brought up AI in its analysis of why markets have been doing well.

"Positive corporate earnings and optimism surrounding rate cuts and artificial intelligence as the next sustainable investment theme have driven stock markets to record highs," it said.

"Fundamentally, there are also good reasons backing a more optimistic outlook. These include clear signs that the Fed is on pause, inflation is generally falling and economic activity ... appears resilient."

Analysts said that gold's status as a safe-haven asset has also continued to keep it desirable.

Mr. Menon said that "global geopolitical uncertainty" tied to the war in Ukraine, the conflict in the Middle East and the US elections later this year has "boosted the safe-haven appeal of gold and resulted in a surge in demand".

Mr. Gregor Gregersen, the founder of bullion dealer Silver Bullion, highlighted continued concerns over inflation as a driver of gold prices.

"As central banks continue to print more money, it leads to the devaluation of currencies and increased inflation, causing investors to seek a safe haven like gold as its value tends to hold steady during times of economic instability," he said.

Additionally, the "dovish stance" that some central banks are moving towards with the intention of lowering interest rates "could potentially devalue their currencies and drive investors to buy precious metals like gold as a hedge against currency risk", Mr. Gregersen said.

Another thing working in gold's favour is broad demand.

"Global central banks have made substantial purchases of gold over the past two years. Demand from central banks stood at 1,037 tonnes last year, just 45 tonnes shy of the record set in 2022," said Mr. Menon.

"Emerging markets central banks have been especially aggressive with gold buying after the US weaponised the US dollar in its sanctions against Russia for its invasion of Ukraine," he added.

It is not just central banks who have been buying gold aggressively, however.

"Consumers, through jewellery purchases, and other investors have also piled into gold resulting in total gold demand surging to a record high of 4,899 tonnes last year," Mr. Menon said.

Finally, gold is also getting more attractive "with US treasury yields seeming like they may have peaked", said DBS' Chief Investment Office.

"Treasury yields represent the – risk-free – opportunity cost of holding non-interest-bearing gold," it said. "However, tides have started to shift."

What do the surges say about investor sentiment?

According to the World Gold Council, gold "is often correlated with the stock market during risk-on periods ... (and) decouples and becomes inversely correlated during periods of stress".

"This is unique amongst most hedges in the marketplace," it said on its website.

While they might be open to more risk, investors are still keeping a cautious eye on the horizon, analysts said.

"Gold and stocks are not supposed to be correlated, but they often are due to the shared economic factors and speculative shifts. It is usually in protracted crises when investors will shift into gold from equities," said Mr. Gregersen.

The fact that both equities and gold are rising "indicates that investors are hedging their bets", he added.

Despite remaining optimistic about potential rate cuts, investors are "also concerned over higher market volatility as valuations go higher, and tail risks arising from geopolitical tensions, US politics and fiscal debt are escalating", said DBS' Chief Investment Office.

"Gold is seen as a risk diversifier which can hedge against stock market volatility and benefits during tumultuous times," it added.

Striking a similar note, Mr. Menon said: "Given the slew of headwinds on the horizon, gold is seen as a good portfolio diversifier and a hedge against global uncertainties.

"Hence, even though stock prices have surged, investors and central banks have also been buying gold to diversify their portfolios and protect them against global risks."

How often do gold prices and global markets rise in tandem?

Mr. Menon highlighted two periods of time in the last 15 years where gold and stocks both did well at the same time.

"Historically it has been observed that when the stock market is most pessimistic, gold performs very well. However, there have been periods when both gold and stocks have both appreciated at the same time," said Mr. Menon.

"For example, after (the) US sub-prime crisis in 2007 (to) 2008, both gold and stocks posted gains between 2009 and 2012.

"The Fed cut rates sharply in response to the crisis, and even though this and other measures by the US government helped to stem the crisis, the period that followed (the) crisis was still filled with other economic and political uncertainties. Europe, for example, ran into a debt crisis in 2011 and 2012 that resulted in rate cuts by the (European Central Bank) and continued loose monetary policy in the US, which helped stock prices."

Another period where stocks and gold both did well was in 2020 and 2021, after the onset of the COVID-19 pandemic.

"Once again, it was a period filled with lots of uncertainties and central banks undertook unprecedented monetary easing to support economies and financial markets which benefited stocks, bonds and gold as well," Mr. Menon said.

Should retail investors wade in or look elsewhere?

When asked if it is "too late" for retail investors who have no or limited holdings in precious metals and stocks to add top-tier assets to their portfolios, DBS' Chief Investment Office said: "Time in the market beats timing the markets. Instead of trying to catch the peak or the bottom, investors would do well to maintain a disciplined approach to investing.

"We emphasise the importance of putting cash to work through a well-diversified portfolio that employs our 'barbell' strategy, comprising exposures to income-generating bonds on one end and quality-growth equities on the other.

"In a world characterised by economic and geopolitical uncertainties, it will provide a solid foundation to generate appropriate returns through economic cycles."

Mr. Menon said that, overall, OCBC remains "constructive about the investment outlook for 2024, assuming US core inflation falls and the US economy avoids a hard landing as the US central bank cuts rates".

"If this scenario plays out, it could offer fodder for cash-rich investors to get back into markets in a bigger way, which could fuel a multi-year rally as we saw in the 1980s, when the Fed eventually won the battle over inflation and reduced rates," he said.

"With close to US$6 trillion sitting idle in US money market funds, there is clearly an abundance of liquidity that can offer stock markets with firepower in 2024 and perhaps beyond."

However, Mr. Menon said that "it would still be prudent for investors not to get over-exuberant about the outlook and jump headlong into stock markets now".

"It makes sense to stay invested, but it is also important to be cognizant of risks," he said.

"Perhaps time diversification may be a good strategy to adopt for 2024, whereby fresh investments are made gradually over several months instead of investors trying to time the markets.

"As an added measure of risk management, be sure to keep a diversified portfolio of equities and bonds to avoid concentration risk."

Analysts also agreed that gold prices have not peaked yet.

Mr. Gregerson said that even though gold has been hitting new highs of late, it "has a lot further to go as a hedge against inflation and currency crises, and if held for the long term is a prudent form of savings".

"Since 1970, gold's average annual appreciation in USD terms has been around 7.8 per cent per year. We believe that over the next decade, gold (will) exceed this yearly return," he added.

Mr. Heng of UOB said that the bank maintains its "positive outlook for gold" and has forecast that it will reach a price of US$2,300 an ounce by the first quarter of 2025. This is up from the US$2,200 per ounce by the fourth quarter of 2024 he forecast in December last year.

"Once the US dollar and interest rates both start to drop more meaningfully in the second half of the year as the US Federal Reserve starts its rate cuts, gold will be propelled even higher," he said.

"We reiterate our long-term view that gold is a good portfolio diversifier of risk and has embarked on a sustained rally above US$2,000 (an ounce)."

That figure of US$2,300 is also OCBC's 12-month target for gold, according to Mr. Menon.

For investors looking for an alternative to gold in the precious metal space, silver is an option, said Mr. Gregersen.

"Based on the gold-silver ratio, which measures the relative price of these two metals, silver is currently highly undervalued, being 89 times cheaper than gold, and should be considered as a good alternative to gold," he said.

"Silver is also a critical metal for solar panel production, representing around 10 per cent of solar panel production costs. We believe that silver's increasing scarcity – 2022 saw a global 23 per cent supply deficit – and green energy roles are not yet fully appreciated by the markets."

Source: CNA

Risk Warnings and Disclaimers

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Samantha Luan

Economic

Bond

Central Bank

While the US central bank is all but certain to hold rates steady Wednesday, trading data points to growing concern that its new forecasts will show increased reticence to ease monetary policy.

The December forecasts showed policymakers were penciling in three quarter-point cuts in 2024, but since then the economy has continued to exhibit surprising strength and inflation has held above the Fed’s target.

“The bond market is bracing for a hawkish Fed message Wednesday,” Bryce Doty, senior portfolio manager at Sit Investment Associates, said in a note to clients.

Bond yields have risen this year, saddling investors with fresh losses, as expectations faded that the Fed would ease policy sharply. In late December, futures traders were pricing in virtual certainty the central bank would start cutting rates by Wednesday’s meeting and make a total of about six such moves by the year’s end.

Traders have since reassessed the outlook and are expecting roughly three rate reductions in 2024, putting them in line with the Fed’s so-called dot-plot forecasts from December. But there’s a possibility the latest release will show policymakers expect even fewer cuts, potentially triggering another round of selling.

Tom Simons, a senior economist with Jefferies, said he expects the median policymakers’ forecast will peg the benchmark rate at about 4.88% by the end of the year, implying just two quarter-point cuts. He said that would address some of the easing of financial conditions this year, evidenced by the rally in the stock market.

“If the Fed were to keep rate forecasts unchanged, they would risk another renewed push to even easier financial conditions that would work against their effort to get inflation back down to 2%,” he said in a note to clients.

Speculation that rates will come down later this year continues to be widespread, however, and there remain some signs of bullishness in the Treasury market. JPMorgan Chase & Co.’s latest client survey, for example, showed that while short bets have increased, outright long positions have risen as well and now stand at the biggest since Jan. 29.

But on Monday, two-year Treasury yields hit the highest levels of the year, rising to as much as 4.75%, though they dropped slightly on Tuesday. Bank of America Corp.’s head of interest-rate strategy, Mark Cabana, Tuesday estimated that the two-year yield would rise another 10 basis points if the Fed’s new dot-plot shows just two cuts this year.

The options market has shown investors positioning for such risks. On Monday, there was a big increase in open interest in two-year note futures, consistent with new short positions being set, as well as a large purchase of five-year note options anticipating the cash yield will rise to 4.45% by Friday. It was around 4.3% Tuesday.

Traders have also been targeting protection against a hawkish shift with options linked to the Secured Overnight Financing Rate, which closely tracks the central bank’s policy path. Further out on the curve in Treasury options, there’s also been activity hedging for higher yields.

New Shorts, Longs Unwound

Open interest data over the past week has shown a heavy amount of new short positions added in 10-year note futures, particularly on March 13, when around $3 million per basis point in risk was added. The day before a large amount of long positions appeared to be liquidated into the selloff in the futures. Overall net change in open interest on 10-year note futures last week was roughly +43,000 contracts.

Out of Cash Neutrals

JPMorgan’s latest survey of Treasury clients released Tuesday is more mixed. It shows neutral positions dropping as both long and short positions rose in the week up to March 18. Moreover, the outright long positions are now the biggest since Jan. 29.

Bearish Skew Extends

Into last week’s back-up in Treasury yields, the cost of protection against a bigger selloff rose to the most expensive since the end of February in long-bond futures. In Treasury options, flows have reflected increased demand for protection on higher yields, with a recent stand-out trade including a weekly option targeting a rise in 5-year yields to 4.45% by Friday. Tuesday’s release of open interest data showed this position as new risk.

Asset Manager De-Leveraging

CFTC data in the week up to March 12 showed roughly 183,000 10-year note futures-equivalents of asset manager net-long liquidation, continuing the recent de-leveraging trend out of Treasury futures and potentially into credit. Asset manager net long positioning in Treasury futures is now at its lowest since July, shown by 10-year note futures equivalents.

Basis Trade Is Seen Dwindling as Asset Managers Pivot to Credit.

SOFR Options Most Active

The largest three strikes which saw open interest gains benefitted from a large SOFR Jun24 94.9375/94.875/94.8125/94.75 put condor buyer over the past week, a position which stands to benefit from rate-cut pricing coming out of the June policy meeting. There was also demand over the past week for SOFR Jun24 94.875/94.9375/95.00/95.0625 call condor’s. Largest liquidation was seen in the 95.50 strike, supported by last week’s strike adjustment within a SOFR Dec24 structure.

SOFR Options Heat-Map

The most populated SOFR options strike out to the Dec24 tenor is the 95.50 strike, despite a heavy amount of liquidation seen over the past week. Within the 4.5% strike, a large amount of Jun24 puts remain. Other populated strikes include the 95.00, 95.25 and 94.875 where a decent amount of Jun24 puts open interest also remains.

Source: Bloomberg

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Kevin Du

Economic

Central Bank

That new projection on Wednesday will come in the form of a so-called "dot plot," a chart updated quarterly that shows the prediction of each Fed official about the direction of the federal funds rate.

In December, the dot plot revealed a consensus among Fed officials for three cuts for 2024, the first sign that the central bank was prepared to start loosening monetary policy.

Now that projection is in question following a string of hotter-than-expected inflation readings and cautious commentary from Fed officials.

"This does leave a degree of uncertainty as to when they cut first and what they’ll do on the dot plot," said Wil Stith, bond portfolio manager for Wilmington Trust. "Will they leave it at three cuts or will they change that?"

Fed Chair Jay Powell and his colleagues have been emphasizing for months that they want to be sure inflation is moving "sustainably" down to their 2% target before starting cuts. They are widely expected to hold the Fed’s benchmark rate steady at this week’s Federal Open Market Committee meeting, leaving it at a 23-year high.

Investors have been adjusting their bets on when those cuts could start. After beginning the year predicting six cuts starting in March, they now expect three starting in June. Even the odds of a June cut have been falling in recent weeks. After June, the Fed only has four more meetings in 2024.

Investors Are About to Find Out Whether Fed Still Expects 3 Rate Cuts in 2024_1

"If anything, the [Fed's] message hasn't really changed," Charles Schwab's Kevin Gordon told Yahoo Finance Live last week. "It's really been the market that's been jumping around in terms of when it expects rate cuts to start and how many you're going to get this year."

Two former Fed officials who used to take part in such deliberations — Esther George and Jim Bullard — told Yahoo Finance they are not expecting predictions to change significantly this week.

"Maybe you'll see some more people say fewer cuts than they had before," said George, the former president of the Kansas City Fed. But it’s unclear whether that’s enough to change the median of three cuts for the year, she added.

Bullard, the former St Louis Fed president, said that "unless you think you've seen really dramatically different data, you usually don't change your forecast all that much."

In fact, Bullard said there is enough data to support cuts right now, and he doesn’t think the hotter inflation readings from the Consumer Price Index recently are enough to change the outlook for 2024.

He instead pointed to the Fed’s favored inflation gauge, the core Personal Consumption Expenditures index, which was 2.8% as of January and could drop to 2% by the third quarter.

The Fed could make its first cut, he said, once that reading gets to a range of 2.5%-2.7%.

"I always felt like there was an implicit zone for the committee [for core PCE] of 1.5% to 2.5%," said Bullard, who is now dean of the Mitchell Daniels School of Business at Purdue University, while also admitting "it's tough to move if the inflation data is kind of zigging or zagging in the wrong direction."

A few market observers say the recent readings suggest that zero cuts are now a possibility for 2024, while some are urging the Fed to wait past June before making any moves.

Wilmington Trust's Stith predicted Fed officials will keep their consensus for three cuts in 2024, but he doesn’t expect those cuts to begin until late summer.

"And if they do get rates down to 4.75%, given financial conditions, is that really going to result in a 2% sustainable inflation level or not?" he said. "I think that's sort of in the back of the market's mind given all the strength we’re seeing."

Powell said two weeks ago in semi-annual testimony before the Senate that the Fed is "not far" from the confidence it needs to cut rates, while some of his colleagues have suggested over the last month that it could happen "later this year" or during the summer.

For the Fed to cut rates, officials will need to see certain components of inflation — like housing and services — come down to gain confirmation that inflation is returning to 2%, according to George.

"This committee has been pretty clear given what happened where inflation got out from under them and they thought it would be transitory that now they are quite determined to restore their credibility and get back to 2%," she said.

Source: Yahoo Finance

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Thomas

Economic

Central Bank

The Bank of Japan's strategy for an orderly exit from years of massive stimulus unraveled on an overcast day in December when Governor Kazuo Ueda and two deputies gathered at the bank's Tokyo headquarters.

Inflation was slowing more than expected, complicating the central bank's plan to end negative interest rates by March or April and then follow quickly with further increases. The officials considered two alternatives.

The first option was to wait for signs of economic improvement and then go ahead as planned. The second was to end negative rates but hold off on subsequent increases.

Ultimately, the MIT-trained Ueda went with the second option, allowing Japan to shed its title as the last country with negative interest rates but leaving it short of its hoped-for normalisation and still facing years of near-zero rates that pressure the hard-hit yen.

"With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2% that long," said one person familiar with the deliberations, referring to the bank's key target.

"The BOJ leadership probably realised that time was running short, if they wanted to end negative rates."

The decision was also complicated by differences between Ueda's two deputies, as well as the governor's wavering on the exit timing. The existence of the two plans, and other details about the deliberations, are reported for the first time by Reuters.

This account is based on interviews with 25 incumbent and former central bank officials with direct knowledge of the interactions, or familiar with the personalities and dynamics of the bank's leaders, as well as five government officials in regular contact with BOJ officials.

They all spoke on the condition of anonymity as they were not authorised to discuss the matters publicly.

A BOJ spokesperson said the bank would not comment on the deliberations outlined by Reuters.

Reuters also spoke to five small-business owners to gauge how the policy shift could unfold across an economy battered by decline and deflation.

On Tuesday, the BOJ drew the curtain on eight years of negative rates and other remnants of unorthodox policy, delivering its first increase in borrowing costs since 2007.

"It's a watershed moment for Japan and for central banks across the world, as it finally puts an end to abnormal monetary stimulus," said former BOJ official Nobuyasu Atago.

Still, he said, it could take several years for short-term rates to move up to even 1%.

Local Tremors

Even a slight rise in interest rates could send tremors through struggling local economies in Japan, reflecting how deflation and a diminishing population have squeezed demand.

"The prospect of higher interest rates has become a significant concern for traditional inns," said Koji Ishida, who runs a hotel company and heads the local tourism association in Yugawara, a hot-spring resort southwest of Tokyo known for its ryokan, or traditional inns.

In autumn, Ishida received a frantic call from the family that owns one of the town's most storied ryokan, saying it was nearing collapse and asking for help.

"As neighbours, we needed to help them," Ishida said. He worried the failure of a prominent ryokan could tarnish the image of tourism-dependent Yugawara and trigger "a chain reaction of bankruptcies".

Seiranso, a 94-year-old ryokan known for its mountainside outdoor bath at the foot of a waterfall, last month filed for bankruptcy protection with around 850 million yen ($5.7 million) in debt, including pandemic loans.

Under those proceedings, it aims to turn itself around with backing from Ishida's company, according to its website. A lawyer for Seiranso declined to comment.

Almost one-third of ryokan lost money in the last financial year, according to data from the Japan Ryokan and Hotel Association, an industry group.

"The industry needs zero-interest rates," said Masanori Numao, whose family runs a ryokan in Kinugawa Onsen, a hot-spring resort in Nikko National Park, where their roots go back more than 300 years.

Forty years ago, Kinugawa was thriving; after sunset there were "beautiful geisha", the clatter of wooden geta clogs and laughter from karaoke bars that lined the narrow streets, Numao said.

Today, tourists sometimes photograph derelict hotels abandoned after the bubble economy burst in the early 1990s.

Ryokan owners struggle to renovate ageing buildings because banks are unwilling to lend them more, making it difficult to attract tourists, Numao said.

Higher interest rates would increase pressure on hot-spring towns like Kinugawa, he said. "The government is just watching resort towns drown."

Policy Differences

In taking over the BOJ last April, Ueda was mandated to dismantle the radical stimulus of his predecessor, Haruhiko Kuroda.

Kuroda's "bazooka" approach initially helped boost stock prices. But it crushed bank margins and caused unwelcome yen declines that lawmakers feared could hurt voters through rising living costs.

Ueda and his deputies were unanimous on the need for an exit, but not on the timing.

Choosing the second option mended, at least momentarily, the quiet tension between the two deputy governors, career central banker Shinichi Uchida and former bank regulator Ryozo Himino.

Ueda, Uchida and Himino did not respond to Reuters questions.

Uchida was cautious about ending negative rates too hastily, believing that the BOJ should allow the economy to run hot by keeping ultra-low rates for a prolonged period.

By contrast, Himino favoured an early exit from what he saw as excessive monetary support that could sow the seeds of a future bubble.

As an outsider, Himino wasn't afraid to challenge some of the bank's traditions.

At one informal meeting late last year, he complained about the BOJ's management style and suggested changes, ruffling feathers among some officials within the institution, according to two people with knowledge of the matter.

Throughout the discussions, Ueda would listen silently and rarely spoke up. People who know him say the governor was neither a hawk nor a dove.

Having studied under former Federal Reserve vice chairman Stanley Fischer, who also taught former central bankers Ben Bernanke and Mario Draghi, Ueda combined faith in economic models and a sense of pragmatism.

However, he was not quick to make decisions, opting to analyse various options thoroughly until the last minute.

"He's a pure academic who's great at comparing data and strategies," said a person who has known Ueda for decades. "But making quick, decisive decisions isn't his strength."

While the two deputies rarely exhibited differences in public, it was usually Uchida who prevailed. Ueda relied heavily on Uchida's expertise on the technical aspects of the bank's monetary tools.

How the Bank of Japan's Plan for A Smooth Stimulus Exit Stumbled_1

Uchida was also the main interlocutor with officials from Prime Minister Fumio Kishida's government, sounding out their views on monetary policy and laying the groundwork for an exit.

Kishida's administration had been nudging the BOJ to phase out stimulus in hope it would slow declines in the yen that were hurting households through higher food and fuel costs.

"The government hopes the BOJ conducts monetary policy appropriately towards sustainably and stably achieving its price target accompanied by wage increases, with an eye on economic, price and financial developments," a spokesperson for the prime minister's office told Reuters.

Once there was consensus the BOJ would go with the second option, Uchida proceeded with the next step of preparing markets.

In a speech in Nara in February, Uchida hinted at what a post-negative rate monetary policy would look like.

Tuesday's policy shift roughly aligned with those clues.

Ueda's choice of the second option means the BOJ will keep rates at zero for a prolonged period, delaying Japan's return to normal borrowing costs, said five of the sources familiar with the bank's thinking. It will likely take years to reduce the bank's balance sheet, which had ballooned after heavy asset-buying, three analysts told Reuters.

There is near-consensus among BOJ watchers that the bank will move very gradually, and allow short-term rates to rise to around 0.5% over several years.

"Given Mr. Ueda's very cautious character and his focus on building consensus within the board, he will likely take plenty of time and proceed carefully in normalising policy," said former BOJ economist Hideo Hayakawa.

($1 = 148.3800 yen)

Source: Reuters

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Devin

Economic

Housing market activity has been muted over the last several years due to high mortgage rates and home prices, as well as limited inventory.

Yet the latest batch of economic data suggests the landscape may be starting to shift and more housing options are becoming available for buyers.

In February, housing starts climbed 10.7% month-over-month versus January's revised estimate, above the median forecast of 8.2%, according to a report released Tuesday by the US Census Bureau and the Department of Housing and Urban Development. It's the highest gain in nine months and marks a strong reversal of the 12.3% month-over-month decline seen in January.

Housing starts came in 5.9% higher than a year ago. In total, privately owned housing starts grew to 1.521 million units, seasonally adjusted. Single-family housing starts last month rose 11.6% to hover near two-year highs.

Building permits also climbed 1.9% month-over-month to hit 1.518 million. That was above the median forecast for a 0.5% gain, and marked the biggest leap since August.

"The composition was strong, as four-fifths of the February increase came from the single-family starts component (+11.6%), while the more volatile multi-family starts component also increased (+8.3%)," Goldman Sachs strategists wrote in a note Tuesday.

A Housing Market Rebound May Finally Be Underway_1

Building starts and housing permits climbed in February(Source: Goldman Sachs Investment Research)

Housing completions, too, came in at 1.729 million, 19.7% higher than the revised January estimate and 9.6% higher versus one year ago.

Meanwhile, the NAHB homebuilder confidence index for March moved into positive territory for the first time since July, climbing above 50, the level associated with neutral sentiment.

The "current sales conditions" gauge increased the most, from 52 to 56, as builders reported an uptick in home demand.

A loosening housing market and improved inventory could bring relief to Americans who have endured the "lock-in" effect since the pandemic as current owners stay put to hold on to low mortgage rates they secured years ago.

"Over the next two years we're forecasting very different paths for single and multi-family construction," Capital Economics strategists wrote in a Tuesday note. "We think single-family starts will benefit from the lack of second-hand homes on the market, which shifts demand to newbuilds. But we expect that strength will be offset by weakness in the multi-family starts, leaving total housing starts little higher than they currently are by end-2025."

Source: Business Insider

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Risk Warnings and Disclaimers

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Oil prices have climbed to four-month highs on lower crude exports from the Middle East, signs of stronger demand in China and potential supply disruptions following Ukrainian attacks on Russian refineries.

WTI crude is on a five-day winning streak, up 5.9% to US$87.20 per barrel since Tuesday, 12 March. This marks the highest close since 30 October 2023.

But local energy stocks including Woodside (ASX: WDS), Beach Energy (ASX: BPT) and Karoon Energy (ASX: KAR) have struggled to keep pace with oil's gains. We'll explore some of the challenges facing local energy stocks below.

Oil Prices Are Soaring: The State of Play for ASX 200 Energy Stocks_1

WTI crude (Blue) vs. Beach Energy (Green), Woodside (Red) and Karoon Energy (Orange) year-to-date performance, adjusted for dividends (Source: TradingView)

Oil Headlines At a Glance

Before we dive in – Here's a headline dump for all things oil.

· 20 Mar – Oil to trade at US$85-90 next quarter even without OPEC+ cuts (Bloomberg)

· 19 Mar – China set for record Russian oil imports in March (Bloomberg)

· 19 Mar – Oil prices inch higher amid attacks on Russian energy facilities (Reuters)

· 14 Mar – Oil prices climb as revised IEA outlook signals tighter market (Reuters)

· 13 Mar – Oil prices up 3% to 4-month high on US crude stock drop (Reuters)

Woodside: Plenty of Uncertainties

Woodside has experienced a ~25% drawdown from August 2023 highs amid softening LNG prices, oil production risks and uncertainties with the company's Climate Transition Action Plan (CTAP).

Goldman Sachs retained a NEUTRAL rating on the stock with a $31.30 target price as of 28 February 2024, citing a number of risks including:

· Relatively full valuation: "Trading at ~0.9x NAV, with 55% of growth projects comprising our NAV we see higher risk of schedule delays and capex increases eroding upside to our valuation."

· Limited near term production growth to offset gas price weakness: "We expect production to remain relatively flat over 2024-2026 as Mad Dog 2 and Sangomar oil ramp up offsets existing decline at the North West Shelf and Bass Strait, leaving earnings largely exposed to softening LNG prices."

· Oil production ramp-up uncertainty: "As Mad Dog 2 continues to ramp-up and Sangomar is brought online mid-year, ramp-up phasing, peak production rates, and initial decline rates will remain a focus over 2024 which could present downside risk to our estimates."

Oil Prices Are Soaring: The State of Play for ASX 200 Energy Stocks_2

Woodside 12-month price chart (Source: Market Index)

Beach Energy: Mixed Catalysts

Beach Energy's half-year FY24 result (announced 12 Feb) missed analyst expectations across most key metrics, attributed to higher costs, tariffs and depreciation/amortisation.

· Production down 11% to 8.8MMboe (millions of barrels of oil equivalent), in-line with consensus

· Underlying EBITDA down 1% to $488 million or 8% below $532 million consensus

· Underlying NPAT down 10% to $173 million or 23% below $225 million consensus

While the earnings underwhelmed, the company's new Managing Director Brett Woods told the market what it wanted to hear. In just two weeks on the job, he has:

· Launched a strategic review into costs and capital discipline

· Deep dive review into Waitsia Stage 2 and confirmed its develop as on time and on budget

· Paused Western Flank exploration drilling to assess recent drilling results

· In the earnings Q&A, he said he was keen to pursue value-accretive production growth in the Perth Basin but wanted to instil a higher degree of cost discipline across the business

Oil Prices Are Soaring: The State of Play for ASX 200 Energy Stocks_3

Beach Energy 12-month price chart (Source: Market Index)

Karoon Energy: Working Through Who Dat

Karoon Energy raised $480 million at $2.05 per new share (14.6% discount to pre-raise close) in November 2023 to acquire a 30% interest in the Who Dat and Dome Patrol oil and gas fields in the US.

The raise increased outstanding shares on issue by approximately 41%, offset by factors such as:

· Builds scale with 57-63% increase in 2024 production

· Raises EBITDA by approximately 44%

· A 75% lift in 2P reserves

· Diversifies Karoon both geographically and by asset

"Since the US acquisition, Karoon has suffered lower oil prices and temporary Brazil production issues. Who Dat performing strongly, and should boost in 1H24 with new wells online. The wild-card is the unpriced exploration & development upside around Who Dat (US) and Neon (Brazil)," Macquarie analysts said in a note earlier this year.

Market Index's broker consensus data currently has a $2.57 target price. Citi stands out as the most bullish broker, with a $3.00 target price.

"Operating cash flow was a good beat versus consensus and highlights the cash generation of the business which we think has been misunderstood. At a $60 oil price for CY25, we estimate that over the next 24 months KAR could earn ~40% of its market cap in FCF," the analysts said in a note dated 28 February.

Oil Prices Are Soaring: The State of Play for ASX 200 Energy Stocks_4

Karoon 12-month price chart (Source: Market Index)

Putting It All Together

The three oil majors above are carrying plenty of baggage from hefty CAPEX cycles to fulfilling climate transition commitments and integrating new assets, among other challenges. These factors collectively weigh on their current share price performance. However, should oil prices continue to push higher, energy stocks are likely to follow suit.