Indices continue to show bullish hammer patterns despite the BOJ shock – Market Brief, December 21, 2022

 Bond rates increased as a result of a surprise BOJ policy move, but stocks recovered from early lows to end largely higher and posted bullish hammer candles.

-Indices post bullish hammer patterns (despite BOJ)

-Yen holds most of its gains after BOJ shock

-Coming up today: Canada’s CPI

Wall Street finished flat despite BOJ

The BOJ’s policy shift, announced during one of the years’ lowest liquidity periods, sent European and US indices down, making the situation appear disastrous (in the run-up to the holidays); however, that was not to be.

Major indices mostly finished flat to slightly higher – which for chartists resulted in bullish ‘hammer’ candle patterns across the board. Both the S&P 500 and the Euro STOXX 50 hammer landed at the 3800 round number, while the Dow Jones ‘hammered right back at its 50-day moving average, which recently crossed over the 200 DMA (golden cross).

Yen holds most of its gains after BOJ shock

USD/JPY modestly rose early Wednesday, topping 132 before declining again to 131.728 at the time of writing. Knowingly, USD/JPY saw huge moves on Tuesday, where the pair broke its 200 DMA and probed lows last seen in August just above 130.50. 

The BOJ widened the band on the yield of 10 year JGB (Japanese government bonds). Markets are projecting the considerably higher likelihood of more adjustments based on this single move. The yield curve control (YCC) policy has mostly had the effect of depressing long term yields, so the widening allows yields to rise and diminishes the yield gap available in Japan versus other countries, including the US – hence the slump in USD/JPY.

Data recap

In the US session, it was mostly housing data releases – and the clear theme was one of more weaknesses. US Build Permits slumped -11.2% m/m in November, following a -3.33% drop previously. The housing market is suffering in 2022 after the boom years of 2020 and 2021 and will likely be an economic drag headed in 2023.

In Europe, German PPI came in softer than expected, diving -3.9% m/m in November when a fall of -2.6% had been expected after a 4.2% drop in October. Although producer prices remain well up on the year (+28%) they appear to be losing steam quickly in some signs of weakness at the factory gate in Europe.

Coming up 

Inflation data out of Canada will be the standout item from the economic calendar today. Expectations are for no monthly change (0% m/m) in consumer prices in November but for the annual rate to tick higher in both the standard reading (from 6.9% to 7.4%) and in the BOC measure (from 5.8% to 6.4%). 

It would likely take a big jump above consensus in this inflation data to dissuade the Bank of Canada from raising rates at a slower pace of 50 basis points again at its next meeting. However if inflation remains ‘sticky’ at these higher levels, then the BoC – like other central banks – will face the tricky choice of choosing between fighting inflation and defending the economy against possible recession.

The Loonie (USD/CAD) has been pretty flat around 1.36 in the past few days with the forex pair caught in the middle of broad dollar weakness as well as a sharp drop in oil prices (Canada’s main export). 

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters 

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