There Is Already Enough Interest Rate Clamor in United States Stock Markets
Published in Toyokeizai
(Japan) on 25 April 2022
by Haruyoshi Mabuchi (link to original)
(Japan) on 25 April 2022
by Haruyoshi Mabuchi (link to original)
Translated from
by Henry Anthonis.
Edited by Gillian Palmer.
How Serious Are Concerns about Rising Interest Rates?
The United States stock markets, as before, see continued interest rate disturbance.
On April 21, Federal Reserve Chairman Jerome Powell participated in an event sponsored by the International Monetary Fund, where his remarks moved the market.
Powell, who said while part of that International Monetary Fund panel, "It is appropriate in my view to be moving a little more quickly," and "I also think there is something to be said for front-end loading any accommodation one thinks is appropriate.... I would say 50 basis points will be on the table for the May meeting," will attend the Federal Open Market Committee meeting on May 3-4. [https://www.cnbc.com/2022/04/21/us-bonds-treasury-yields-climb-ahead-of-remarks-by-fed-chair-powell.html]
The Dow was down 368 points, or 1.0%, from the previous day, as concerns about a rapid rate hike were interpreted as bad news, with investors fearing that a little faster pace than 0.5% would be 0.75%.
Unexplained 981-Point Drop in the Dow on April 22
Although the market's performance on April 21 was understandable, on the next day the Dow fell as much as 981 points, or 2.8%, from the previous day. This decline was attributed to Powell's comments on Thursday. However, if this interpretation is correct, it cannot be explained that the decline on April 22 was much larger than that on April 21.
The Dow Jones Industrial Average slid only slightly to start April 22, while the NASDAQ Composite Index, which is said to be weak against a rise in interest rates, rose around the opening. If the market was concerned about Powell's remarks on April 21, it would have been strange if the stock price had not declined substantially from the beginning of the market on April 22.
Above all, in the bond market, the country's 10-year government bond yield fell slightly (0.008 points) from the previous day on April 22. No, it's not just 10 years. Bond yields have fallen slightly from the previous day for most maturities, excluding 30-year bonds, such as three-month, one-year and five-year. Concerns about rising interest rates, which will lower government bond yields, must be some kind of joke.
The correction in United States stock prices over the weekend was probably due to some large position adjustments ahead of the weekend. The index fell sharply after Netflix announced on April 19 that its membership had started to decline.
This may have caused investors to wonder whether the stock prices of other stocks that had been supported by growth expectations were really safe.
The Turmoil Is Likely To Continue in the Short Term, but Will Be Overcome in the Long Run
Investors are probably fed up with this interest rate frenzy, feeling that enough is enough. However, the market is in the business of making noise; in the short term, stock prices will continue to move up and down in a random manner, regardless of whether interest rates rise or fall, then force a rationale from the interest rate perspective onto the movement.
Therefore, it is essential to invest in a relaxed manner and be philosophical about the current bumpy situation. There is no use in regretting the situation.
However, from a long-term perspective, it is expected that the markets will gradually reduce their fluctuations over interest rate concerns. This is where some content is repeated from the previous column, as follows.
First, from November of last year to early March of this year, the rise in international commodity prices proceeded while the market was still not sufficiently confident about the economic and corporate profits. The Fed started tapering in November, and in December as the tapering accelerated, it began to suggest that interest rates will rise soon.
The market was dominated by the view that the Fed was rushing to reduce easing in order to respond to inflation, even though the economy and corporate profits were not particularly remarkable. For this reason, rising interest rates hurt stock prices.
Indeed, the price of West Texas Intermediate crude oil futures, which is an international indicator of crude oil, has been more than $130 per barrel since early March, with the Russian invasion of Ukraine. But now the price is stable at around $100 a barrel.
The strength of the employment situation in the United States was also a cause for concern at first, with investors focusing only on wage inflation. Now, however, interest is turning to the strength of retail sales as wage growth supports consumer spending. In United States stock markets, consumer spending related stocks such as Visa, Walmart, Home Depot and Procter & Gamble have also been attracting attention from time to time.
Thus, it goes from the situation that the economy and corporate profits are not good, but inflation is conspicuous, so the interest rate rises, to one where the interest rate rises because the economy is good, namely that investors are gradually moving to the view that the interest rate rises because corporate profits are good and so stocks can be bought even if interest rates rise. Short term stock market turmoil is likely to continue, but gradually United States stock prices will overcome rising interest rates.
Investors aren't the only ones tired of saying enough is enough. We have heard that Fed officials are also feeling bitter about the behavior of the market, which is either making too much noise or not making any noise at all about what they are saying.
Therefore, it appears that the Fed officials will continue to emphasize the message that the United States economy is still strong while reiterating to the market that the Fed will continue to reduce its easing and accelerate its tightening.
The Yen Depreciation Fiasco Reflects the Seriousness of Japan’s Long-Term Situation
Meanwhile, the yen has been weakening rapidly in the foreign exchange market, and there is talk that this may not be beneficial yen depreciation. The author believes that the yen has already weakened too much based on an analysis of the price and interest rate differentials between the United States and Japan (a detailed discussion of such an analysis here would be quite lengthy, so I will refrain from going into it).
A United States investor recently said, "The yen's depreciation will not stop because Bank of Japan Governor Haruhiko Kuroda does not raise interest rates. Meanwhile, I suspect that Prime Minister Fumio Kishida's administration is very worried about Kuroda's stance due to fears that small and medium sized companies in Japan might lose support for the government because they were hit by a surge in yen denominated energy prices. Therefore, I expect the dismissal of Kuroda before the election of the House of Councilors. What do you think?"
Most of the time, I have experienced that such a sudden inquiry was a turning point in the market, judging from investor sentiment.
I do not expect that the yen will continue to depreciate in the long run, but the market sentiment is likely to be influenced by speculative yen selling. Therefore, it is likely that Japanese stock markets will continue to be battered by the yen's slump.
Originally, whether the yen appreciates or depreciates, each has its own merits and demerits, and it is not always a singularly bad thing. However, it is understandable that when the yen depreciates against the rising dollar denominated prices of international commodities, as is currently the case, there is a concern that corporate profits will be squeezed due to higher costs.
As Japan's economy is weak and demand is fragile, there is also a headache in that when firms pass on the increase in costs through price increases, sales will fall dramatically.
However, this does not mean that there is an effective way to push the yen higher. Although Finance Minister Shunichi Suzuki and other officials have been making statements to restrain the yen from weakening, investors seem not to be holding their breath, believing that even if they intervene, they will not be able to do anything in practice.
Even if they were to betray those investors' expectations, intervene in the currency markets and possibly modify monetary easing, they would not be able to continue their yen buying intervention forever, nor would they be able to raise interest rates in Japan at a pace that would exceed the pace of interest rate hikes in the United States. It is unclear whether they will be able to push back speculative yen selling.
The Only Way To Stop the Yen’s Depreciation Is To Become a Country Worth Investing In
The best way to roll the yen back to a strong position is to make Japan a country worth investing in. Japanese companies would become more profitable, and people would want to invest in Japanese stocks; the Japanese economy would boom as Japanese companies become more prosperous, and interest rates would naturally rise, making people want to invest in loans and bonds in Japan; and the value of real estate would increase as the economy expands, making people want to invest in Japan, either through J-REITs or direct purchases of real estate. If this happens, the yen will then naturally appreciate.
The reason this does not happen is because of the failure of Japanese companies and the Japanese economy, not because of the currency market.
Japanese companies will not be helped by fretting over whether a weak or strong yen will be a problem. What is important is to aim for a corporate structure that will increase profits regardless of what happens to the yen.
It is not about financial techniques (e.g., corporate finance departments hedging aggressively with currency futures), but about creating products and services that are so attractive that people around the world will line up to buy them, no matter what the price is. It can be the development of a new product or service, or the improvement of an existing product or service.
For example, there are many people who advocate an easy idea that if the government proposes some kind of fiscal policy, the Japanese economy will improve at once. However, the source of creating added value in the economy is corporate activity, and if Japanese companies are unable or unwilling to boldly create value, it is useless to come up with any economic policy. In addition, if corporate management is in such a state, it will be difficult for Japanese stock prices and the yen to rise significantly in the future.
What the Japanese government and the Bank of Japan should do is to get out of the way of forward-looking companies (i.e., no unnecessary fiscal contraction or monetary tightening), revise domestic laws and regulations that hinder the growth of motivated companies and entrepreneurs, focus funds on areas that will improve people's lives (e.g., earthquake resistance, disaster prevention, defense, information technology, environment improvement, support for positive education and basic research), and lobby foreign governments to change regulations that are detrimental to Japan.
The United States stock markets, as before, see continued interest rate disturbance.
On April 21, Federal Reserve Chairman Jerome Powell participated in an event sponsored by the International Monetary Fund, where his remarks moved the market.
Powell, who said while part of that International Monetary Fund panel, "It is appropriate in my view to be moving a little more quickly," and "I also think there is something to be said for front-end loading any accommodation one thinks is appropriate.... I would say 50 basis points will be on the table for the May meeting," will attend the Federal Open Market Committee meeting on May 3-4. [https://www.cnbc.com/2022/04/21/us-bonds-treasury-yields-climb-ahead-of-remarks-by-fed-chair-powell.html]
The Dow was down 368 points, or 1.0%, from the previous day, as concerns about a rapid rate hike were interpreted as bad news, with investors fearing that a little faster pace than 0.5% would be 0.75%.
Unexplained 981-Point Drop in the Dow on April 22
Although the market's performance on April 21 was understandable, on the next day the Dow fell as much as 981 points, or 2.8%, from the previous day. This decline was attributed to Powell's comments on Thursday. However, if this interpretation is correct, it cannot be explained that the decline on April 22 was much larger than that on April 21.
The Dow Jones Industrial Average slid only slightly to start April 22, while the NASDAQ Composite Index, which is said to be weak against a rise in interest rates, rose around the opening. If the market was concerned about Powell's remarks on April 21, it would have been strange if the stock price had not declined substantially from the beginning of the market on April 22.
Above all, in the bond market, the country's 10-year government bond yield fell slightly (0.008 points) from the previous day on April 22. No, it's not just 10 years. Bond yields have fallen slightly from the previous day for most maturities, excluding 30-year bonds, such as three-month, one-year and five-year. Concerns about rising interest rates, which will lower government bond yields, must be some kind of joke.
The correction in United States stock prices over the weekend was probably due to some large position adjustments ahead of the weekend. The index fell sharply after Netflix announced on April 19 that its membership had started to decline.
This may have caused investors to wonder whether the stock prices of other stocks that had been supported by growth expectations were really safe.
The Turmoil Is Likely To Continue in the Short Term, but Will Be Overcome in the Long Run
Investors are probably fed up with this interest rate frenzy, feeling that enough is enough. However, the market is in the business of making noise; in the short term, stock prices will continue to move up and down in a random manner, regardless of whether interest rates rise or fall, then force a rationale from the interest rate perspective onto the movement.
Therefore, it is essential to invest in a relaxed manner and be philosophical about the current bumpy situation. There is no use in regretting the situation.
However, from a long-term perspective, it is expected that the markets will gradually reduce their fluctuations over interest rate concerns. This is where some content is repeated from the previous column, as follows.
First, from November of last year to early March of this year, the rise in international commodity prices proceeded while the market was still not sufficiently confident about the economic and corporate profits. The Fed started tapering in November, and in December as the tapering accelerated, it began to suggest that interest rates will rise soon.
The market was dominated by the view that the Fed was rushing to reduce easing in order to respond to inflation, even though the economy and corporate profits were not particularly remarkable. For this reason, rising interest rates hurt stock prices.
Indeed, the price of West Texas Intermediate crude oil futures, which is an international indicator of crude oil, has been more than $130 per barrel since early March, with the Russian invasion of Ukraine. But now the price is stable at around $100 a barrel.
The strength of the employment situation in the United States was also a cause for concern at first, with investors focusing only on wage inflation. Now, however, interest is turning to the strength of retail sales as wage growth supports consumer spending. In United States stock markets, consumer spending related stocks such as Visa, Walmart, Home Depot and Procter & Gamble have also been attracting attention from time to time.
Thus, it goes from the situation that the economy and corporate profits are not good, but inflation is conspicuous, so the interest rate rises, to one where the interest rate rises because the economy is good, namely that investors are gradually moving to the view that the interest rate rises because corporate profits are good and so stocks can be bought even if interest rates rise. Short term stock market turmoil is likely to continue, but gradually United States stock prices will overcome rising interest rates.
Investors aren't the only ones tired of saying enough is enough. We have heard that Fed officials are also feeling bitter about the behavior of the market, which is either making too much noise or not making any noise at all about what they are saying.
Therefore, it appears that the Fed officials will continue to emphasize the message that the United States economy is still strong while reiterating to the market that the Fed will continue to reduce its easing and accelerate its tightening.
The Yen Depreciation Fiasco Reflects the Seriousness of Japan’s Long-Term Situation
Meanwhile, the yen has been weakening rapidly in the foreign exchange market, and there is talk that this may not be beneficial yen depreciation. The author believes that the yen has already weakened too much based on an analysis of the price and interest rate differentials between the United States and Japan (a detailed discussion of such an analysis here would be quite lengthy, so I will refrain from going into it).
A United States investor recently said, "The yen's depreciation will not stop because Bank of Japan Governor Haruhiko Kuroda does not raise interest rates. Meanwhile, I suspect that Prime Minister Fumio Kishida's administration is very worried about Kuroda's stance due to fears that small and medium sized companies in Japan might lose support for the government because they were hit by a surge in yen denominated energy prices. Therefore, I expect the dismissal of Kuroda before the election of the House of Councilors. What do you think?"
Most of the time, I have experienced that such a sudden inquiry was a turning point in the market, judging from investor sentiment.
I do not expect that the yen will continue to depreciate in the long run, but the market sentiment is likely to be influenced by speculative yen selling. Therefore, it is likely that Japanese stock markets will continue to be battered by the yen's slump.
Originally, whether the yen appreciates or depreciates, each has its own merits and demerits, and it is not always a singularly bad thing. However, it is understandable that when the yen depreciates against the rising dollar denominated prices of international commodities, as is currently the case, there is a concern that corporate profits will be squeezed due to higher costs.
As Japan's economy is weak and demand is fragile, there is also a headache in that when firms pass on the increase in costs through price increases, sales will fall dramatically.
However, this does not mean that there is an effective way to push the yen higher. Although Finance Minister Shunichi Suzuki and other officials have been making statements to restrain the yen from weakening, investors seem not to be holding their breath, believing that even if they intervene, they will not be able to do anything in practice.
Even if they were to betray those investors' expectations, intervene in the currency markets and possibly modify monetary easing, they would not be able to continue their yen buying intervention forever, nor would they be able to raise interest rates in Japan at a pace that would exceed the pace of interest rate hikes in the United States. It is unclear whether they will be able to push back speculative yen selling.
The Only Way To Stop the Yen’s Depreciation Is To Become a Country Worth Investing In
The best way to roll the yen back to a strong position is to make Japan a country worth investing in. Japanese companies would become more profitable, and people would want to invest in Japanese stocks; the Japanese economy would boom as Japanese companies become more prosperous, and interest rates would naturally rise, making people want to invest in loans and bonds in Japan; and the value of real estate would increase as the economy expands, making people want to invest in Japan, either through J-REITs or direct purchases of real estate. If this happens, the yen will then naturally appreciate.
The reason this does not happen is because of the failure of Japanese companies and the Japanese economy, not because of the currency market.
Japanese companies will not be helped by fretting over whether a weak or strong yen will be a problem. What is important is to aim for a corporate structure that will increase profits regardless of what happens to the yen.
It is not about financial techniques (e.g., corporate finance departments hedging aggressively with currency futures), but about creating products and services that are so attractive that people around the world will line up to buy them, no matter what the price is. It can be the development of a new product or service, or the improvement of an existing product or service.
For example, there are many people who advocate an easy idea that if the government proposes some kind of fiscal policy, the Japanese economy will improve at once. However, the source of creating added value in the economy is corporate activity, and if Japanese companies are unable or unwilling to boldly create value, it is useless to come up with any economic policy. In addition, if corporate management is in such a state, it will be difficult for Japanese stock prices and the yen to rise significantly in the future.
What the Japanese government and the Bank of Japan should do is to get out of the way of forward-looking companies (i.e., no unnecessary fiscal contraction or monetary tightening), revise domestic laws and regulations that hinder the growth of motivated companies and entrepreneurs, focus funds on areas that will improve people's lives (e.g., earthquake resistance, disaster prevention, defense, information technology, environment improvement, support for positive education and basic research), and lobby foreign governments to change regulations that are detrimental to Japan.
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