By Jamie McGeever
ORLANDO, Florida (Reuters) -U.S. tech was the major outlier in an otherwise buoyant day for global stocks on Tuesday, as relief around the expected end of the U.S. government shutdown lifted the Dow to a record closing high and other indices to new peaks too.
More on that below. In my column today I look at the Japanese yen, and how its slide toward 155 per dollar is raising the risk that Tokyo intervenes to support it. Imminent action is perhaps unlikely, but investors should be vigilant.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Today’s Talking Points
* AI’s slight returns
AI spending is expected to run into the trillions of dollars in the coming years, meaning the bar for return on that investment is high. A deep-dive analysis from JPMorgan this week will intensify the debate even further.
Among the nuggets of the report ‘AI Capex – Financing The Investment Cycle’ garnering most attention is this: “Big picture, to drive a 10% return on our modeled AI investments through 2030 would require ~$650 billion of annual revenue into perpetuity, which is an astonishingly large number.” As the authors note, that’s 58bp of global GDP, or $34.72/month from every current iPhone user, or $180/month from every Netflix subscriber.
* UK rate cut bets soar
UK labor market figures for the third quarter on Tuesday were much weaker than expected, with unemployment rate rising to 5% for the first time in nearly five years. Gilt prices jumped, and the probability of a Bank of England rate cut next month leaped to 75%.
Rates futures are fully pricing in 50 basis points of cuts by April. JPMorgan’s Allan Monks went one step further – he now expects three more cuts, in December, March and June, taking rates down to 3.25% by the middle of next year. His previous call was for a 3.5% terminal rate.
* 50-year U.S. mortgages?
Sticky inflation, sky-high rents, and the cost of living crisis in the United States are having political consequences – the Democrats scored notable mayoral and gubernatorial electoral successes last week, and President Donald Trump’s approval ratings are tanking.
One way to ease housing affordability could be 50-year mortgages, an idea floated by the Trump administration over the weekend but already drawing sharp criticism from politicians and economists of all stripes. With next year’s mid-term elections looming into view, this won’t be the administration’s last trial balloon.
Yen intervention warnings flash amber
The yen’s fall against the U.S. dollar is raising the specter of Japanese intervention to slow or reverse the slide. While imminent action is unlikely, investors should remain on high alert.
The Japanese currency is already below levels that prompted Tokyo to intervene to support it in the recent past, and is now hovering close to the 155 per dollar level that many Japanese companies say is a pain threshold. Last year’s record low near 162 per dollar isn’t all that far away either.
Tokyo’s first yen-buying intervention in over a decade came in September and October of 2022 when it spent around $60 billion boosting the currency, first after dollar/yen rose above 145 and then again as it approached 152. The Ministry of Finance also spent some $36 billion in July last year buying yen as the dollar pushed multi-decade highs near 162 yen.
Does that mean intervention is imminent? Not necessarily.
That’s primarily because of the fundamentals putting pressure on Japan’s currency.
The yen’s current swoon partly reflects the stabilization of the U.S. dollar since mid-year and recent appreciation as traders bet that the Federal Reserve is cooling on interest rate cuts.
Domestic policy is also playing a role. The yen’s drop has accelerated in the past month on expectations that the new Japanese government could be preparing a fiscal stimulus package worth close to $100 billion, while the Bank of Japan’s rate-hiking cycle seems to have stalled.
These dynamics were brought into sharp focus on Monday by new Prime Minister Sanae Takaichi. She sketched out plans to allow for more flexible spending in the years ahead, essentially watering down Japan’s commitment to fiscal consolidation, and renewed calls for the BOJ to go slow with any tightening.
Little wonder the yen is falling.
Given how these fundamentals are stacked up against the currency, Japan’s Ministry of Finance is unlikely to sanction yen-buying intervention, as it would likely be ineffective. What’s more, it’s unclear if Japan would get buy-in from Washington, no matter how much the Trump administration would probably like the dollar to weaken.
CORPORATE PAIN THRESHOLD
That said, the close correlation between dollar/yen and U.S.-Japanese bond yield spreads has completely broken down, suggesting the yen may be unusually weak. Analysts at Mizuho say current spreads are consistent with dollar/yen below 145.00.
Meanwhile, Finance Minister Satsuki Katayama said last week the government continues to monitor “one-sided and rapid movements” in the yen with a “high level of urgency.”
And Takaichi’s nod on Monday to more accommodative fiscal and monetary policies pushed the dollar back up to within touching distance of 155.00 yen.
That’s potentially a key level. A survey carried out last year by Nikkei Research for Reuters showed that it was a pain point for around half of the 229 companies that responded. None of the firms in the survey saw a dollar/yen rate above 160.00 as favorable.
So the yen is in recent intervention territory.
WEAK YEN IS STOKING INFLATION
Inflation dynamics are worth considering too. Although BOJ officials see business and consumer inflation expectations settling around 2%, actual inflation is still around 3%. The yen is already historically weak, so one wonders how much more currency weakness authorities are willing to accept.
Economists at Mizuho estimate that a 1% depreciation in the yen increases core inflation by around 0.05%. So a move in dollar/yen to 160.00, perhaps the peak in Tokyo’s tolerance, from 147.00 early last month, would therefore increase inflation by around 0.4 percentage points. That’s meaningful.
Right now, though, analysts are reasonably confident nothing is imminent. The yen’s slide hasn’t been excessively rapid and Japanese policymakers’ ‘verbal’ intervention hasn’t yet reached the most serious alert levels.
What will change that calculus? Deutsche Bank analysts reckon a quick dollar burst above 157.00 yen might do it. They say a 10-yen move in a month is a decent intervention trigger – so far, the dollar is in a fairly normal 6-7 yen move territory.
Analysts at Goldman Sachs are more sanguine. They say the yen isn’t particularly weak right now, although that would change if the dollar were to spike to 161-162 in short order.
History suggests Tokyo is likely to intervene if market conditions – speculators’ positioning, flows, and the speed of the yen’s move – give it a chance of succeeding.
The stars may not be aligned right now. But they could be soon.
What could move markets tomorrow?
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever;)
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