A Lump of Japanese Coal For Christmas?
The S&P 500 closed higher on Friday, in a light trading day ahead of a long weekend, as investors assessed inflation data against rate hike and recession fears while energy shares jumped on higher oil prices.
A Commerce Department report showed U.S. consumer spending barely rose in November, while inflation cooled further, but not enough to discourage the U.S. Federal Reserve from driving interest rates to higher levels next year.
The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 0.1% last month after climbing 0.4% in October.
A benchmark survey showed U.S. consumers expect price pressures to moderate notably in the next year, with the one-year inflation outlook dropping to the lowest in 18 months in December.
Wall Street indexes had sold off sharply on Thursday after revised data had indicated a resilient American economy, fueling worries that the Federal Reserve could keep hiking rates for longer and end up pushing the economy into a recession.
But Friday's data and the fact that it came in roughly in line with expectations, eased some of those concerns for now, according to Shawn Cruz, head trading strategist at TD Ameritrade in Chicago, Illinois.
"This is a clear indication that this is a bad news is good news kind of market. The market wants the Fed to feel what they're doing has been enough," said Cruz.
"It is on edge over what the path for Fed policy is going to be for next year as that's going to drive the economy and corporate earnings."
Investors have been jittery since last week as the Fed indicated that it remains stubbornly committed to achieving the 2% inflation goal and projected rate hikes to above 5% in 2023, a level not seen since 2007.
Joe Quinlan Head of CIO Market Strategy at Merrill and Bank of America Private Bank also called Fed hawkishness "the big cloud on the horizon."
"Today is more of a muted response to good data but still it's not all clear, mission accomplished," he said, adding that analyst earnings estimates for 2023 are likely too high.
The Dow Jones Industrial Average) rose 176.44 points, or 0.53%, to 33,203.93, the S&P 500 gained 22.43 points, or 0.59%, to 3,844.82 and the Nasdaq Composite added 21.74 points, or 0.21%, to 10,497.86.
The S&P and Nasdaq lost ground for the third week in a row, with the benchmark index falling 0.2% compared with a weekly decline of 1.9% for Nasdaq. The Dow however gained 0.9% for its first weekly increase out of three.
TD Ameritrade's Cruz also noted that thin trading volume may have created more exaggerated moves Thursday and Friday with volume dropped sharply on Friday as participants likely took time off ahead of the long weekend as U.S. markets will be closed on Monday, the day after the Christmas holiday.
On U.S. exchanges 7.75 billion shares changed hands on Friday compared with the 11.41 billion average for the last 20 sessions.
Energy shares stood out as the biggest advancers throughout the session as oil prices gained following news of Moscow's plans to cut crude output.
After spending most of the day down, even the technology and healthcare sectors, the S&P's weakest performers for the session, managed to eke out small gains with tech adding 0.08% and healthcare adding 0.12%.
Tesla Inc's (TSLA) shares had touched a more than two-year low in volatile trading as boss Elon Musk's promise to not sell his shares for at least two years did not reassure investors.
Dow Jones parent News Corp (NWSA) gained 2.8%, making it the second-biggest percentage gainer in the S&P Communications services index after a report that billionaire businessman Michael Bloomberg was interested in acquiring either Dow Jones or the Washington Post.
Advancing issues outnumbered declining ones on the NYSE by a 2.06-to-1 ratio; on Nasdaq, a 1.09-to-1 ratio favored advancers.
The S&P 500 posted 2 new 52-week highs and 1 new low; the Nasdaq Composite recorded 49 new highs and 228 new lows.
Tanaya Macheel and Samantha Subin of CNBC also report the S&P 500 and Nasdaq close higher Friday, but fall for a third straight week:
The S&P 500 and Nasdaq Composite rose Friday, but still posted a weekly loss as recession fears continue to batter investor sentiment.
The S&P 500 rose 0.6% to 3,844.82, while the and Nasdaq Composite added 0.2% to close at 10,497.86. The Dow Jones Industrial Average closed 176.44 points higher, or 0.5%, to 33,203.93.
The major indexes oscillated earlier in the session after the core personal consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, came in slightly hotter than economists expected on a year-over-year basis, indicating that inflation is sticking despite the Fed’s efforts to fight it.
“The economic numbers announced today highlight the difficulty for investors today, where weak numbers bring recession fears and strong numbers bring Fed fear,” said Louis Navellier, founder and chief investment officer of growth investing firm Navellier & Associates.
“You just can’t win right now on macro numbers,” he added. “That is why it’s now much more of a stock-picking market, but with all the index and ETF traders even stocks that are executing their business plan well can get pushed around meaningfully by associated losers.”
The S&P 500 ended the week down about 0.2% for the week, posting its third straight weekly decline. The Nasdaq Composite, meanwhile, lost 2% for the week, also for the third down week in a row. The Dow was the outperformer, posting a 0.9% gain.
Recession fears have resurged recently dashing some investors’ hope for a year-end rally and leading to big losses in December. Investors worry that overtightening from central banks worldwide could force the economy into a downturn.
For December, the S&P 500 has lost 5.8%, while the Dow and Nasdaq have lost more than 4% and 8.5%, respectively. Those are the biggest monthly declines for the major averages since September. Stocks are also on pace for their worst annual performance since 2008.
Indeed, stocks and bonds are on pace for their worst annual performance.
Not surprisingly, traders are losing hope in the stock market after a year of rolling losses and fakeouts:
For all the ink spilled over its horrors, the 2022 stock market will go into the books as an undistinguished one in the history of bad years. For traders who lived through it, though, certain things have made it feel worse than top-line alone numbers justify, a potential impediment to a quick recovery.
While the 25% peak-to-trough drop in the S&P 500 ranks in the lower range of bear-market wipeouts, it took a particularly jagged route to get there. At 2.3 days, the average duration of declines is the worst since 1977. Throw in three separate bounces of 10% or more and it was a market where hopefulness was squeezed as in few years before it.
This may explain why despite a smaller drawdown, pessimism by some measures rivals that seen in the financial crisis and the dot-com crash. Safety crumbled in government bonds, which failed to provide a buffer for beat-up equities. Buying put options as a way to hedge losses didn’t work either, adding to trader angst.
“There’s less and less people willing to go out there and stick their necks out to try and buy on those pullbacks,” said Shawn Cruz, head trading strategist at TD Ameritrade. “When they start seeing the pullbacks and the drawdowns be longer and be more pronounced and the rallies being maybe more muted, that’s just going to serve to further drive more risk-averse behavior in the market.”
While stocks headed to the Christmas break with a modest weekly decline, anyone hoping for the rebound from October lows to continue in December bounce has been burned. The S&P 500 slipped 0.2% in the five days, bringing its loss for the month to almost 6%.
That would be just the fourth-worst month of the year in a market that at times has seemed almost consciously bent on wringing optimism out of investors. Downtrends have been drawn out and big up days unreliable buy indicators. Consider a strategy that buys stocks one day after the S&P 500 posts a single-session decline of 1%. That trade has delivered a loss of 0.3% in 2022, the worst performance in more than three decades.
Big rallies have also been traps. Purchasing stocks after 1% up days has led to losses, with the S&P 500 falling an average 0.2%.
“There’s an old saying on Wall Street to ‘buy the dip, and sell the rip,’ but for 2022, the saying should be ‘sell the dip, and sell the rip,’” Justin Walters, co-founder at Bespoke Investment Group, wrote in a note Monday.
It’s a stark reversal from the prior two years, when dip buying generated the best returns in decades. For people still conditioned to the success of the strategy — and until recently, many were — 2022 has been a wakeup call.
Retail investors, who repeatedly dived in earlier in the year when stocks pulled back, got burned, with all their profits made in the meme-stock rally wiped out. Now, they’re exiting in droves.
Day traders have net sold $20 billion of single stocks in December, pushing their total disposals in recent months to almost $100 billion — an amount that has unwound 15% of what they accumulated in the prior three years, according to an estimate by Morgan Stanley’s sales and trading team that’s based on public exchange data.
The retail army is likely not done selling even with January historically marking a strong month for that crowd, according to the Morgan Stanley team including Christopher Metli. Using the 2018 episode as a guide, they see the potential for small-fry investors to dump another $75 billion to $100 billion of stocks as next year cranks up.
“Retail demand may not follow seasonal patterns as strongly in 2023 given a deteriorating macro backdrop, with low savings rates and a higher cost of living,” Metli and his colleagues wrote in a note last Friday.
The mood among pros is as bleak if not gloomier. In Bank of America Corp.’s survey of money managers, cash holdings rose to 6.1% during the fall, the highest level since the immediate aftermath of the 2001 terrorist attack, while allocation to stocks fell to an all-time low.
In other words, even though this retrenchment is nowhere near as bad as the 2008 crash that eventually erased more than half of the S&P 500’s value, it’s stoked similar paranoia, particularly when nothing but cash was safe during this year’s drubbing.
In part because of the market’s slow grind, once-popular crash hedges have misfired. The Cboe S&P 500 5% Put Protection Index (PPUT), which tracks a strategy that holds a long position on the equity gauge while buying monthly 5% out-of-the-money puts as a hedge, is nursing a loss that is almost identical to the market’s, down roughly 20%.
Government bonds, which delivered positive returns during every bear market since the 1970s, failed to provide buffer. With a Bloomberg index tracking Treasuries down 12% in 2022, it’s the first year in at least five decades where both bonds and stocks suffered synchronized losses of at least 10%.
“There was nowhere to hide for a whole year — that’s a big issue,” Mohamed El-Erian, chief economic adviser at Allianz SE and Bloomberg Opinion columnist, said on Bloomberg TV. “It’s not just returns, it’s returns correlation and volatility that have hit you in a big way. Is it done? No, it’s not.”
Unfortunately, as painful as 2022 was for investors, it can get a lot worse:
In his latest weekly market wrap-up, "Chop, Chop, Chop...", Martin Roberge of Canaccord Genuity notes:
So far this year, the S&P 500 is down 18.5% in total return terms. Unfortunately for investors, 10-year Treasuries did not provide any offset, losing 16% over the same period. This is highly unusual since bonds typically provide a hedge against falling equity prices. In fact, we looked at history going back to the Great Depression era and found only 6 calendar years when both stocks and bonds delivered negative returns, namely 1931, 1946, 1969, 1973, 1977 and 2018. The bars in our Chart of the Week show the performance of stocks and bonds for these reference years along with the performance over the following year. As we can see in the first panel, the average rebound in equity prices is quite modest at +2.2%. What is more, if we exclude the 31% jump in 2019 when the Fed pivoted and cut rates by 75bps, the average return comes negative at -3.7%. Conversely, following a negative year, bonds have delivered positive and superior returns with an average of +7.3% (second panel). Thus, unless the Fed changes its mind and initiates an easing cycle in 2023, we believe bonds are likely the place to be while stocks face more choppiness as earnings decline and Fed funds stay high for longer than expected.
Go read my October comment on how CDPQ's Vincent Deslisle, Executive Vice-President and Head of Liquid Markets, saw opportunities in global fixed income assets after that recent sell-off.
He wasn't alone. OTPP and HOOPP's respective CIOs, Ziad Hindo and Michael Wissell, also saw opportunities in fixed income as those assets sold off.
It proved to be a great time to load up on US long bonds:
However, the rally in Treasurys has stalled recently as inflation pressures persist and investors are listening to the Fed which is clearly stating to prepare for higher for longer.
There is no question headline inflation pressures will abate but core inflation remains sticky and if wage inflation picks up, that will cause a problem for the Fed next year.
Remember, the Fed is targeting 2% inflation and the US is currently at 7.1%.
The first 2 percentage points decline is the easy part, going from 5% YoY back down to 2% YoY is going to be tough.
In fact, Molly Smith of Bloomberg reports US inflation continues to ease, but wages will keep the Fed on alert:
US inflation continued to ease into the end of 2022 and expectations of future increases dropped, reinforcing hopes that the worst bout of price pressures in a generation has finally passed.
The Federal Reserve’s preferred inflation gauges cooled in November, including a headline annual measure that registered the smallest increase in over a year, according to Commerce Department data released Friday. Consumers’ year-ahead inflation expectations dropped this month to the lowest since June 2021, a survey by the University of Michigan showed.
However, wages are still climbing much too fast for the Fed’s liking. While the central bank is getting closer to the end of its interest-rate hiking cycle, the data suggest that borrowing costs will stay high for an extended period until policymakers are more confident that price pressures are on a sustained downward trend.
Inflation-adjusted consumer spending flat-lined in November, but officials will want to see more than a month of data to indicate demand is substantially cooling.
“All in all the data releases painted a picture of a slowing economy heading into the end of the year, which should help support a continued deceleration in inflation as we head into 2023,” Sam Millette, fixed income strategist for Commonwealth Financial Network, said in a note.
After reaching 40-year highs earlier in the year, price pressures are finally ebbing. The personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading, was up 4.7% in November, down from 5% in the prior month.
The overall PCE price index increased 0.1% and was up 5.5% from a year ago, the lowest since October 2021 but still well above the central bank’s 2% goal.
Even though that should come as welcome news to Powell and his colleagues, wage gains — particularly in the service sector — have remained stubbornly robust. Inflation-adjusted disposable income rose 0.3%. Wages and salaries, unadjusted for prices, were up 0.5% for a second month, the Commerce data showed.
While that’s been a boon for American workers, officials see it as potentially worrisome for the trajectory of price increases. Powell has zeroed in on compensation as a guide in the central bank’s inflation fight, which may support why the Fed sees borrowing costs staying higher for longer than investors do.
“Incoming data continue to present an economy that has not sufficiently cooled to bring down too-high inflation,” Citigroup Inc. economists Andrew Hollenhorst and Veronica Clark said in a note. “While goods price pressure has softened along with demand, we see no similar dynamic in services.”
What Bloomberg Economics Says...
“November’s deceleration in the Fed’s preferred price measure, the PCE deflator, adds to evidence of near-term downward momentum for inflation... Nonetheless, robust wage income and real income suggest the labor market has yet to cool meaningfully, and officials are unlikely to view this report as convincing enough to cause them to back off from a terminal rate fed funds rate above 5%.”
—Anna Wong and Eliza Winger, economists
Other parts of the economy show a more notable impact from the Fed’s most intense tightening cycle since the early 1980s, separate government data out Friday showed. Orders placed with US manufacturers for non-defense capital goods excluding aircraft rose 0.2% in November after a sharp downward revision to the prior month, and total bookings for durable goods sank 2.1%, the most since April 2020.
The housing market, which is particularly sensitive to changes in interest rates, may be stabilizing as mortgage rates retreat from a two-decade high. Sales of new homes unexpectedly rose in November for a second month, though the data are extremely volatile.
“I suspect that builders are much more motivated sellers (especially given the surge in financing costs) than current homeowners, who do not want to part with their 3% or lower mortgages,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said in a note. “This may explain why new home sales are rising while existing home sales plunge.”
Consumers are growing more optimistic about the path of price pressures, with short- and long-term inflation expectations dropping this month, the University of Michigan data showed. That reflected easing price pressures and relief at the gas pump, which boosted sentiment, but the data reflect a high degree of uncertainty.
“While sentiment appears to have turned a corner from its all-time low from June, its trajectory, as well as that of consumer spending, will be contingent on strength in labor markets and incomes,” Joanne Hsu, director of the survey, said in a statement.
Unfortunately, I don't see strength in the US labor market picking up next year.
Quite the opposite, I see unemployment picking up significantly next year, especially in the second half of the year.
The US housing market is in the doldrums.
That and the auto sector are typically the first to feel the brunt of a steep rise in interest rates:
US home sales are quickly approaching the March 2020 low pic.twitter.com/gysTbL8Vcs— Genevieve Roch-Decter, CFA (@GRDecter) December 23, 2022
As housing and auto sales plunge, the construction and manufacturing sectors will see unemployment pick up and then it will slowly spread to the service sector but it takes time, typically 12 to 18 months to see the full effects of rate hikes on the economy.
There is however some new Fed research which suggests lags in monetary policy transmission have been shortened:
We shall see but if that's true, we shall see the effects of steep rate hikes sooner rather than later.
What worries me is a deep and prolonged US and global recession because all central banks are on the same page and we are heading toward a very hard landing:
Soft landing my a** pic.twitter.com/XlbfmmphAF— Alf (@MacroAlf) December 22, 2022
This week's main event was Bank of Japan's risky path toward exitng quantitative easing:
Bank of Japan Governor Haruhiko Kuroda just gave investors a glimpse of what to expect when the world’s boldest experiment with ultra-loose monetary policy comes to an end.
In the face of sustained market pressure, Kuroda shocked markets Tuesday by saying he’ll now allow Japan’s 10-year bond yields to rise to around 0.5%, double the previous upper limit of 0.25%.
Whether this is a strategic tweak to buy time for his yield-curve control settings until his decade-long term ends in April or the start of the end for his unprecedented monetary easing remains to be seen.
But one thing is clear: a crack has opened that markets around the world will keep pricing in the weeks and months ahead.
“This is a step toward an exit, whatever the BOJ calls it,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “This opens the door to a chance of a rate hike in 2023 under a new governorship.”
The yen strengthened sharply against the dollar after the decision and continued gains, briefly touching 132.00 from 137.16 immediately before the decision. The yield on 10-year Japanese government debt jumped to 0.46% from the previously capped level of 0.25% following the BOJ’s move.
Japanese bank stocks surged in afternoon trading as investors expected improved earnings for financial institutions, but overall Tokyo stocks ended down.
The ripple effects also spread far outside Japan, with the fallout touching everything from US stock-index futures to the Australian dollar and gold.
The market moves suggested investors interpreted the move as a tightening measure.
But another way to view the latest surprise from the 78-year-old governor is as a step to make the yield curve control program more, not less, sustainable.
“This confirms our view that the BOJ is determined to stick to the YCC policy even after a change in leadership in April next year,” said Shigeto Nagai, a former BOJ official and head of Japan research at Oxford Economics. “It appears that the BOJ decided to accept the effective tightening as a cost to make YCC policy more sustainable.”
That was the message peddled by Kuroda in his post-decision press conference, where he said the tweak is designed to boost the effectiveness of his signature program. Kuroda has two more policy meetings to oversee before his term is up, meaning it will fall on his successor to complete the path toward policy normalization.
And Tuesday’s market gyrations highlight just how tricky it will be to reverse policy given the combination of unorthodox moves supporting the BOJ’s stimulus: keeping negative short-term interest rates, pinning 10-year yields near zero, making massive asset purchases and government interventions in currency markets to counter the yen’s fall.
Any misstep by the new governor could trigger market turmoil on a global scale.
“The BOJ has created so much tension in markets this year with its policy stance — the spring has been so tightly wound — the impact could be massive when they finally decide to let it go,” Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, said ahead of Tuesday’s meeting. “It will rip through every aspect of markets.”
Higher bond yields would mean unrealized losses on Japanese government bond holdings, including those held by the BOJ. A sustained policy change could also hammer Japanese equities, including shares in Uniqlo-operator Fast Retailing Co. and communications giant SoftBank Group, which number among the many that benefited from the central bank’s asset-buying spree.
The bigger concern for the rest of the world is that it could cut loose the last remaining tether on global bond yields and trigger a sell-off in dollar assets in favor of the yen. Tuesday’s tweak capped a year where virtually every major central bank has tightened, with China being the notable exception.
If a sustained tightening sees Japanese investors such as banks and pension funds dispose of overseas investments including global equities, that could even fuel contagion across assets including those in emerging markets.
Japanese investors have more than $3 trillion invested in overseas stocks and bonds, with over half of that stashed in the US. Other countries such as the Netherlands, Australia and France are also vulnerable to possible Japanese fund repatriation, according to Bloomberg data.
“Allowing rates to rise could see a tsunami of offshore Japan money flooding back home,” Amir Anvarzadeh, strategist at Asymmetric Advisors Pte, who has tracked Japanese markets closely for three decades, said before Tuesday’s meeting. “That is the big ‘reset’ move.”
To handle the delicate task, Prime Minister Fumio Kishida is expected to appoint someone who already has the trust of financial markets. Most economists surveyed by Bloomberg News see BOJ veterans as the best choices for the position, with current Deputy Governor Masayoshi Amamiya and former Deputy Governor Hiroshi Nakaso leading the list.
Both were named as candidates by Kishida’s right-hand man, Seiji Kihara, in a recent interview with Bloomberg.
Amamiya is widely considered the frontrunner, and a choice that would signal Kishida’s desire for continuity.
A fan of classical music, in particular the recordings of conductor Herbert von Karajan, he is known for orchestrating Kuroda’s early “shock and awe” campaign of massive bond purchases as well as the BOJ’s more recent yield curve control policy. His nickname in financial markets, “Mr. BOJ,” indicates how essential he’s been to the bank’s battle against deflation.
Nakaso, currently the chair of private think-tank Daiwa Institute of Research, is another favorite. Like Amamiya, he joined the BOJ straight out of university and eventually served as Kuroda’s deputy. He was involved in winding down the BOJ’s previous quantitative easing program in 2006, and is also known for leading the central bank’s fight against a home-grown banking crisis in the late 1990s.
One key difference with the dovish Amamiya is that Nakaso has spoken of the limits of prolonging the BOJ’s ultra-loose policy. In a book published earlier this year, he described what an exit could look like, saying it might be similar to the Fed’s moves and involve an intermediate step of buying bonds to cover those that mature until it can start withdrawing liquidity.
By choosing Nakaso, then, Kishida would signal a shift away from so-called Abenomics, the expansionist policies launched by the late Prime Minister Shinzo Abe who tapped Kuroda for the job back in 2013.
Not everyone believes it’s a two-horse race, though.
“I still think it’s not a done deal that Amamiya or Nakaso will take the helm,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG. “Both were heavily involved with Kuroda’s easing, so it’s a bit strange for them to be the one tasked with reflecting on Kuroda’s BOJ and then moving on.”
The prime minister typically announces the government’s pick for central bank chief in February, based on a shortlist put together by advisers. The candidate is then expected to be questioned in parliament before lawmakers vote on the appointment around March. Parliamentary approval is expected to be easy, given the ruling coalition’s majorities in both houses of parliament.
Hooked on Stimulus
While the end of the Kuroda era could give Kishida a chance to break away from the legacy of Abenomics, it also puts greater pressure on him to wean the government off its heavy borrowing habit. Japan’s public debt load has ballooned to more than 260% of gross domestic product.
A low-interest comfort zone has allowed the government to fund seemingly endless stimulus efforts, including a recent package aimed at offsetting the impact of soaring energy prices — one of the few areas of the economy experiencing rapid inflation.
After two extra budgets this year, the government is now struggling to find a consistent source to pay for an additional 43 trillion yen ($325 billion) of security spending. The suspicion is that much of it will come from a familiar source: the bond market.
And Japan’s banks, which have often complained about the prolongation of ultra-low rates at the expense of their profit margins, aren’t sure they’re ready for a policy switch either. While they want higher rates, they’re also seriously concerned about market disruptions and potential losses on their Japanese government bond holdings in an abrupt policy shift, said two senior executives at Japan’s biggest banks who asked not to be identified as they aren’t allowed to speak publicly.
Kuroda has been grappling with market tests to the sustainability of his yield curve control settings for months now. In June, the yield curve cap came under the fiercest attacks since it was launched, after aggressive tightening by overseas central banks and the yen’s plunge to a multi-decade low prompted speculation of policy change.
The BOJ scooped up record amounts of debt in its daily fixed-rate buying operations to bat away the speculation. That triggered deterioration in an already distorted bond market as the central bank sucked away liquidity and effectively wiped out trading for days.
The yen was another casualty, weakening beyond 150 against the dollar in October as the yield gap with the US widened, forcing Japan to prop up the yen.
Kuroda has now acted to stem some of those pressures. Question is, will that move alleviate or exacerbate market bets against his policy framework?
“Yield curve control is approaching an effective end if a wider trading band is the BOJ’s way of normalizing policy,” said Naka Matsuzawa, chief strategist at Nomura Securities Co. in Tokyo. “Market volatility will only rise further.”
With Japan's core inflation rising to 3.7% in November, investors are rightfully getting worried:
⚠️BREAKING:— Investing.com (@Investingcom) December 23, 2022
*JAPAN CORE CPI INFLATION RISES TO 3.7% IN NOVEMBER, HIGHEST SINCE 1981
Once currency trader told me earlier this week that Japan's inflation rate is heavily understated because they lock in energy prices for two years and with the US onshoring more manufacturing activity, the Bank of Japan will shift its focus to fighting inflation.
He told me: "Remember this, central banks can lose battles but they always win the war."
Wise words. It's the same story all over the world, QE worked well in a deflationary environment spurring on a massive yen carry trade where investors borrowed in yen to invest in risk assets all over the world (mostly in the US).
By doing this, they're effectively short the yen and as you see below: that worked well, especially over the last year:
If the new Governor of the Bank of Japan, whoever he is, chooses to raise rates to fight inflation by raising import prices (Japan imports almost all its raw materials), then that would put an abrupt end to this massive yen carry trade and jolt global markets.
Alright, it's Christmas, let me end it there and wish everyone a Merry Christmas, Happy Hanukkah and Happy Holidays, time to rest up and enjoy family and friends.
Also, stay safe, this weather is very dangerous, drive carefully or better yet, avoid roads altogether.
Below, CNBC's Steve Liesman, joins 'Halftime Report' to discuss December's consumer spending, goods deflation versus service deflation, and driving factor of consumer spending decreases.
Next, Kari Firestone, Bryn Talkington, Rob Sechan join 'Halftime Report' to discuss the the last week of trading for the year, ways to make money despite downsides in the market, as well as investor sentiment heading in to next year.
Third, earlier this week, Bill Gross, PIMCO co-founder, joined the 'Halftime Report' to offer his outlook on the markets going into next year in the face of more Fed rate hikes.
Fourth, David Tepper, founder and president of Appaloosa Management, joined CNBC's 'Squawk Box' Thursday morning pre-market to discuss the Federal Reserve's moves to combat inflation and his expectations for 2023.
Tepper said he's listening ot the Fed and other central banks and 'leaning short' next year.
That sent stocks tumbling and the VIX up but this Tepper tantrum didn't last long as the panic didn't carry over into today and the VIX tumbled from its Thursday high yet again.
Fifth, Charlie McElligott, Nomura managing director for cross-asset strategy, says the dollar yen will move lower after the Bank of Japan unexpectedly joined a policy tightening campaign by central banks around the world. He speaks on on "Bloomberg Markets: Americas."
Lastly, on a very sad note, Scott Minerd, the Guggenheim Partners chief investment officer who was regarded as one of the kings of the bond market during its four-decade bull run, has died. He was 63. Bloomberg takes a look back at his life and legacy.
Enjoy the holidays, I'll be back after taking a couple of weeks off.