Ultra-Easy Policy

Macro Perspectives

• US stocks were mostly higher on Thursday, as markets digested a batch of corporate results and macroeconomic data for further insights on how the economy fares to the prolonged period of high interest rates.

• The S&P 500 was up 0.6% and the Dow rose 300 points, while the Nasdaq edged higher by 0.2%.

• Energy producers and banks were among the sharpest gainers, with ExxonMobil and Wells Fargo adding over 2% and 7%, respectively.

• Alphabet dropped 2.5% after Third Point dissolved its stake in the company, while reports that ChatGPT creator OpenAI is considering launching a search engine also pressured shares.

• On the earnings front, Cisco dropped about 2% after the company's full-year guidance fell short of market expectations, and Deere & Company was down about 5.8% after providing a downbeat full-year outlook.

The sharp moves in stocks, bonds and the dollar, following Tuesday's inflation report, have fully retraced. Remember, we looked at this trendline support in the Nasdaq on Tuesday afternoon (similar line in the S&P 500).

This technical support held beautifully - it was a level to buy the overreaction, not sell. Clearly the demand was strong to buy even a shallow dip in the stocks leading the technology revolution. Speaking of leading the way, here's a look at how Nvidia traded on the open after the Tuesday inflation report.

After the opening gap down, Nvidia shares were bought aggressively - the dip didn't last long. Nvidia reports next Wednesday.

Rebounding most aggressively, since Tuesday, has been the equal-weighted S&P 500 and the Russell 2000 which represents broader stock market strength. As proxies of broader stock market confidence and demand, this is good news. The equal weighted S&P remains 3% under the 2021 highs, the Russell 2000 (small caps) remain 16% under the 2021 highs.

With the P/E on the S&P 500 running north of 20, which is historically high, there remains plenty of deeply undervalued stocks for investors to suss out. That bodes well for this chart above to continue narrowing the losses against its 2021 record highs - and to narrow the divergence in this chart …

Adding fuel to this, the market's appraisal on the risk of a bounce back in inflation was ratcheted down overnight. Remember all of the stories about the Bank of Japan ending negative interest rates and QE, escaping the deflation vortex of the past three decades?

Well, they just reported a second consecutive quarter of negative GDP.

As we've discussed in my daily notes, maintaining ultra-easy policy in Japan (negative rates and QE) as the rest of the world was tightening, was the only way major central banks were able to raise rates to combat inflation, without losing control of government bond markets (i.e. runaway yields).

So, the Bank of Japan held the line all the way through the global tightening cycle. Now inflation in major economies is declining sharply, with the potential that inflation could turn into deflation, and no central bank is more sensitive to the plight of deflation than the Bank of Japan.

Japan is now officially in recession. That should send the signal that they will continue ultra-easy policy as far as the eye can see, which means they will continue to buy a lot of sovereign debt of the Western world, which (helpfully) puts downward pressure on global interest rates.

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