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IMF report on Japan

MF article 4 policy proposal to Japan:

  • Japan’s economic recovery is expected to strengthen in 2022 but balance of risks tilted to downside
  • Japan must maintain policy fiscal support to vulnerable households near-term, but continue to scale down pandemic-relief steps as recovery takes hold
  • looking ahead, Japan’s fiscal policy should be ‘nimble and flexible’
  • longer run, Japan must consider taking steps for fiscal consolidation such as raising consumption tax rate, hike taxes on property and capital income
  • BOJ must maintain accommodative monetary policy with inflation projected to remain below 2% target in medium term

Senior IMF official:

  • BOJ should continue current easy policy as inflation likely to move in 1% range over next few years
  • Japan likely to see inflation momentum build up this year as consumption rebounds
  • now is not time to shift yield target to shorter maturity, which becomes option if BOJ needs to ramp up stimulus
  • BOJ should consider further steps to make policy framework sustainable, such as targeting yield with shorter maturity than current 10-year yield

Nothing of much insight from the IMF here. (more…)

Oil – 4 potential Russia-Ukraine scenarios & energy market impacts

  • A simple guide to the Ukraine-Russia crisis: 5 things to know | Ukraine- Russia crisis News | Al JazeeraWe expect the situation in the energy markets to remain unchanged. Nevertheless, in this scenario, natural gas prices stay elevated for a longer period of time as the markets continue to be tight, at least until the spring of 2023. In the event of a harsh winter, either in Europe or in Asia or both, pressure would increase on the LNG markets. However, these extra price gains will probably disappear as soon as the cold period is over.

2 is a de-escalation that leads to the normalisation of markets, assessed at a 15% likelihood

  • Energy markets would start to normalise. There will be enough gas supply available for consumers in Europe in the course of 2022. Natural gas prices would normalize towards the pre-2021 levels of the low EUR 20s/MWh or even lower as soon as the ongoing tight market conditions for this winter are over.

3 is a heightening of strains with Russia stopping gas exports to Europe, a 5-10% likelihood

  • With no short-term alternatives to fully replace Russian gas exports towards Europe, energy supply would need to be rationed, in particular for industry. In addition, prices of natural gas would jump significantly higher, and reach new record highs for a large part of the forward curve. The TTF monthly contracts could trade above EUR 200/MWh for an extended period, with peak prices significantly higher. As an indirect effect, prices of electricity would jump higher throughout the whole of Europe.

And 4 is a bigger escalation, which would also affect oil markets. Assessed at a <5% likelihood

  • Russia would decide to halt oil exports towards Europe. Such a shift in the oil markets would lead to higher oil prices. Oil prices would be trading above $100/bbl and in case of serious supply worries even head for a new test of the all-time high ($149/bbl). Due to tighter market conditions, this situation could hold for the rest of the year.

US requests a UN Security Council meeting on Monday to discuss Russia – Ukraine

The US has requested a public UN Security COuncil meeting on Monday (January 31).

To discuss the build-up of Russian forces on the Ukraine border.

Info via Reuters, the news service citing unnamed diplomats

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Adding, this via Twitter sources so it may or may not be reliable, passing it on though:

  • Biden told Zelensky that a Russian invasion of Ukraine is now virtually certain and that Kyiv needs to “prepare for impact” … comment said to be from a senior Ukrainian official to a CNN reporter

ADDED FURTHER – the US admin says this invasion comment is not correct. (Yep, always be wary of Twitter sources like this):

  • President Biden said that there is a distinct possibility that the Russians could invade Ukraine in February. He has previously said this publicly & we have been warning about this for months. Reports of anything more or different than that are completely false.

“distinct possibility” vs. “virtually certain” is a big difference, yes. The distinction/clarification was made by a White House National Security spokesperson,

All indices are now lower on the day. Another snatch defeat from the jaws of victory day

All the major indices are now lower on the day with the Dow more recently turning negative and giving up a 605.23 point gain.

  • Dow -99 points or -0.29% at 34068
  • S&P -29 points or -0.66% at 4321.32
  • Nasdaq -163 points or -1.2% at 13377
  • Russell 2000 -39.97 points or -2.03% at 1936

Last year it was largely about not being able to keep a down market down. This year, there have been a number of rallies, that have fizzled and given up the gains.

In the US debt market the curve continues to flatten with the 2 year up 8 basis points while the 10 year is down around 6 basis points on the day.

US yields
The US yield curve flattens

The 2-10 year spread has moved to the lowest level since November 2020 as the market prices in higher rates from the Fed and slowing economy.

US 2-10 year spread

US Q4 advance GDP +6.9% vs +5.5% expected

US GDP

  • Q3 was 2.3% annualized
  • Personal consumption +3.3% vs +2.0% in Q3
  • GDP deflator +7.0% vs +5.9% prior
  • Core PCE +4.9% vs +4.6% prior
  • GDP final sales +1.9% vs +0.1% in Q3

Details:

  • Inventories added 4.9 pp to GDP
  • Exports added 2.43 pp to GDP
  • Imports cut 2.43 pp from GDP
  • Home investment cut 0.03 pp from GDP
  • Personal consumption added 2.25 pp GDP
  • Gross private domestic investment added 5.15 pp
  • Government spending cut 0.51 pp from GDP

This is a strong reading and the 2021 annual growth was the strongest since 1984. A good chunk of this is inventories but that’s going to be a tailwind all year long as companies move from just-in-time delivery to just-in-case inventories.

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