In the latter part of this week we have seen three of the world’s major central banks decide that they can turn a blind eye to the inflationary risks provided by the conflict in the Middle East, of which the latest is the Bank of Japan.
At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:
[Note]
The Bank will encourage the uncollateralized overnight call rate to remain at around 1.0 percent.
You don’t need to take my word for it as they confess it here.
The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is likely to accelerate to a level clearly above 2 percent from the second half of fiscal
2026.
This is in spite of government efforts.
due to factors such as the effects of the government’s
measures to reduce the household burden of higher energy prices (electricity and gas charges) during summer.
Even more important is what it will be and here are their thoughts on that.
Regarding the outlook for the CPI, risks are skewed to the upside. As for underlying CPI inflation, there is a risk that it will deviate upward to a level above the price stability target of 2 percent, given factors such as firms’ behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations continuing to rise. It is necessary to pay due attention to keep such a risk from materializing and thereby exerting an adverse impact on the economy afterward.
If we translate that from central banker speech to ordinary language they expect inflation to be over 2% and their response is open mouth operations ” pay due attention to keep such a risk from materializing” rather than raising interest-rates as they should. I pointed out on October 2nd 2023 that their policy would be driven by their balance sheet because each interest-rate increase raises their costs and mean they make bigger losses and even more crucially cannot deny it. I am not sure how I could have been more right about that.
Wealth Effects
The conventional view is that central banks use house prices for this and of course they do. But we have also seen this week another in the phase of equity friendly policies of which this week’s version has been no interest-rate rises in the US,UK or Japan. Let me start with the state of play in my home country the UK.
The FTSE 100 climbed to another record high on Friday morning, moving closer to the 11,000-point mark as strong gains from Sainsbury’s and NatWest lifted the index. London’s blue-chip benchmark rose around 0.7% during the opening half hour and reached a new intraday peak of 10,981.83. (Share Talk)
The UK is an intriguing case because for so long nothing happened.
The FTSE 100 reached 7,000 in 1999. It didn’t sustainably surpass that level until 2015. 16 years of flat returns for someone who invested at the peak.Dividends mitigated some of that. (Michael Ajih)
It broke 8000 in the spring of 2024 and then did not do much until a year later when the recent surge began and this morning we have made 10,991. So let us ask the Carly Simon question, why?
It clearly isn’t economic growth as we have struggled there. In fact we had better economic growth times when it was singing along with Talking Heads.
We’re on a road to nowhereCome on insideTakin’ that ride to nowhereWe’ll take that ride.
We did see an extraordinary effort by the Bank of England post credit crunch which is doubled up on in the Covid era. The money supply growth implicitly financed government spending via QE. But we have seen the real boost since interest-rates have been higher albeit the Bank of England has done the minimum amount. Of course one area does benefit as Governor Bailey pointed out at Mansion House earlier this month.
This is an important point, because for much of the post-financial crisis period major UK banks earned returns below 10 per cent, a lower-end estimate of the return required by equity investors over the longer term. Aggregate returns rose above 10 per cent in 2023 and reached 15.4% earlier this year. These banks’ price to book ratios are also now around 1.7 times, indicating that equity investors expect future returns to exceed the cost of capital.
You can almost hear his mind saying “The Precious! The Precious!”
But the UK has seen plenty of inflation on his watch. Is the equity rise another feature of that? It is almost impossible to measure.
The Korean Casino
Back in time Craig David sang about 7 days.
We were making love by WednesdayAnd on Thursday and Friday and Saturday.
Korea has a different view as yesterday we saw this.
Song Mi-kyung pocketed a profit of about Won300mn ($200,000) earlier this year as South Korea’s stock market surged on the AI boom.
The 60-year-old Seoul resident has now found out the hard way that stocks can go down as well as up after a wild week on the Kospi.
Her portfolio now shows a paper loss of more than 60 per cent as the index heads for a record monthly slide. The index is now down nearly 40 per cent from its June peak, wiping about $2tn off its value. (Financial Times)
Anyway yesterday’s message was of disaster.
After a blistering rally this year led by Samsung Electronics and SK Hynix, which account for nearly half the Kospi, the index shed just over 17 per cent in three days to its lowest level since early April following a savage sell-off for both companies. (FT)
I would now like to take you back to June 6th 2017 when I wrote. In the future will equities be allowed to fall? Well apparently not.
Share prices jumped in South Korea on Friday, partly reversing a three-day rout that wiped hundreds of billions of dollars off the value of the country’s stock market.
The benchmark Kospi index closed almost 18% higher, driven by chip makers SK Hynix and Samsung Electronics. (BBC)
The individual moves were extraordinary.
SK Hynix, which is a major supplier to leading AI chip firm Nvidia, saw its shares gain almost 30%, while Samsung was up by 28%.
John Maynard Keynes put it like this in his General Theory.
“when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”
Imagine you were stopped out yesterday.
Comment
Perhaps the UK equity market and the Korean one are an example of the tortoise and the hare. But this era of equity market highs has ignored the higher interest-rates again question the central banking measures of neutral and restrictive interest-rates. But whilst there are some gainers via those who take their profits via share sales and vesting of pension funds, plus some businesses make advances, for those buying much of this is inflationary.
Except the central bankers will count it all as Wealth Effects.