Markets Today: Stocks Move Higher Despite Bank of Japan's Surprising Bond Yield Shift

Rich Asplund - Barchart - Tue Dec 20, 2022

Morning Markets

The S&P 500 ($SPX) is up +0.44% this morning and the Nasdaq is up +0.50%.

Stock indexes this morning are moderately higher despite global bond yields surging after the Bank of Japan (BOJ) unexpectedly raised the upper limit of its 10-year JGB bond yield range to 0.50% from 0.25%, a hawkish move that raises expectations the BOJ may be close to ending its ultra-easy policies and joining other central banks in raising interest rates.

Today’s action by the BOJ to widen its 10-year yield target range pushed the 10-year Japan JGB bond yield to a 7-year high of 0.444%. Also, the 10-year German bund yield rose to a 6-week high of 2.302%, and the 10-year UK gilt yield rose to a 6-week high of 3.642%. The 10-year T-note yield climbed to a 2-1/2 week high of 3.707%.

Nov housing starts fell -0.5% m/m to 1.427 million, stronger than expectations of a decline to 1.400 million. However, Nov building permits, a proxy for future construction, tumbled -11.2% m/m to a 2-1/2 year low of 1.342 million, weaker than expectations of 1.480 million.

Overseas stocks are lower. The Euro Stoxx 50 index is down by -0.13% and fell to a 1-1/4 month low. European stocks fell, and government bond yields jumped, after the BOJ surprised the markets and doubled its yield target range on 10-year Japanese bond yields. That sparked a surge in the 10-year Japanese bond yield to a 7-year high, which pushed the yields on 10-year German bunds and 10-year UK gilts up to 6-week highs.

Hawkish comments today from ECB Governing Council members Nagel and Vasle also helped push bond yields higher and weighed on equities. Stocks recovered from their worst levels as inflation concerns eased after today’s German Nov producer price report was weaker than expected.

ECB Governing Council member and Bundesbank President Nagel said the ECB remains "a long way" from achieving its goal of inflation of 2% over the medium term and that last week's 50 bp rate hike from the ECB was "robust" and "won't be the last."

ECB Governing Council member Vasle said an economic slowdown expected in 2023 won't significantly lower Eurozone inflation and bring it close to the 2% target soon, and that quantitative tightening and additional interest rate hikes will be needed.

German Nov PPI rose 28.2% y/y, weaker than expectations of +31.1% y/y and the slowest pace of increase in 9 months.

China’s Shanghai Composite closed down -1.07%, and Japan’s Nikkei Stock Market Index closed down by -2.46%.

The Shanghai Composite fell to a 3-week low today as a pickup in Covid deaths in China has soured market sentiment. Also, despite dismantling Covid restrictions, activity in major Chinese cities has slowed as new Covid infections spike, diminishing the economic boost from reopening. Chinese property developer stocks retreated today as more firms raised funds via stock sales.

Japan’s Nikkei Stock Index today sank to a 2-1/4 month low and closed sharply lower after the BOJ unexpectedly raised its 10-year yield target range to 0.50% from the previous upper limit of 0.25%. The move by the BOJ paves the way for possible monetary policy normalization under a new BOJ Governor next year. Exporter stocks sold off as the BOJ’s hawkish action caused the yen to surge to a 4-month high against the dollar, reducing exporters' earnings prospects. Also, the 10-year JGB bond yield soared today to a 7-year high of 0.444%.

The BOJ, as expected, maintained its policy balance rate at -0.10% but unexpectedly widened its 10-year yield target range to 0.50% from the previous upper limit of 0.25%.

BOJ Governor Kuroda said it is too early for the BOJ to consider an exit from easing or for a policy review, and today's measures were focused on market functionality.

Pre-Market U.S. Stock Movers

Lucid Group (LCID) jumped more than +4% in pre-market trading after it said it had completed its stock sale program and successfully raised about $1.5 billion.

Conagra Brands (CAG) gained more than +1% in pre-market trading after Morgan Stanley upgraded the stock to overweight from equal weight.

JM Smucker (SJM) rose nearly +1% in pre-market trading after Morgan Stanley upgraded the stock to equal weight from underweight.

MKS Instruments (MKSI) rose more than +1% in pre-market trading after KeyBanc Capital Markets upgraded the stock to overweight from sector weight.

Ciena (CIEN) climbed nearly +2% in pre-market trading after JPMorgan Chase upgraded the stock to overweight from neutral.

Trade Desk (TTD) rose more than +1% in pre-market trading after Piper Sandler initiated coverage of the stock with a recommendation of overweight and a price target of $60.

Heico Corp (HEI) climbed more than +2% in pre-market trading after reporting Q4 net sales of $609.6 million, better than the consensus of $601.3 million.

NetApp (NTAP) fell more than -1% in pre-market trading after JPMorgan Chase downgraded the stock to neutral from overweight.

Generac Holdings (GNRC) dropped more than -1% in pre-market trading after Baird downgraded the stock to neutral from outperform.

Owens Corning (OC) slid more than -1% in pre-market trading after JPMorgan Chase downgraded the stock to underweight from neutral.

Today’s U.S. Earnings Reports (12/20/2022)

FactSet Research Systems Inc (FDS), FedEx Corp (FDX), General Mills Inc (GIS), NIKE Inc (NKE).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.