Corporate earnings disappoint, Get paid to borrow from the Bank of Japan, Basel Committee abandons additional capital rule for rate risks

The trading session in equities this morning has been influenced by disappointing corporate earnings, especially in the technology sector.  Alphabet, Inc. (the parent of Google) and Microsoft were two technology names with disappointing news.  Both companies have lost a combined $30 billion in market cap as a result of weak earnings announced after the bell yesterday.  Not surprisingly, all three major equity indexes in the U.S. are down at the time of this writing with NASDAQ leading the way down 1.2% to 4,885.

If the headline regarding the BoJ paying you to borrow from them caught your attention and you want to send in your application to refi your home loan, we have some bad news for you!  It is not for you, the individual, but for banks in Japan.  In yet another interesting twist to the negative interest rate phenomenon in Japan, the BoJ is being reported to consider helping banks lend by offering them negative interest rates on some loans.  The BoJ meets next week and we will be watching this story with great interest.  Nonetheless, this news overnight has already helped the Yen slide even further against the Dollar as it slid the most in 17 months, currently trading at 111+.

Treasury and swap rates in the U.S. continue to grind higher and are poised to finish with a second weekly increase and worst week in 5 months on the back of higher energy prices and an improving U.S. jobs market.  Increase in oil prices has increased worries about inflation and the decline in jobless claims number yesterday  has increased the bets the FOMC is poised to increase rates this year.  The yield on benchmark 10 year treasury has gone up more than 13 bps this week alone and is currently trading at 1.88%.  Meanwhile, the 30 year yield – most sensitive to inflation expectations – has climbed close to 30 bps as well.

In an important development for the financial institution sector, and after much lobbying effort by industry organizations in the United States, the Basel Committee has dropped plans to impose tougher capital requirements for interest rate risks.  The committee continues to maintain that risk to bank balance sheets remains “material” when rates “may normalize from historically low levels” it essentially agreed to adopting a more flexible approach that leaves the matter to national regulators.  The ABA discusses the matter in more detail, which you can find here.

Next week is FOMC week and a busy one for economic data as well with new homes sales on Monday, durable goods orders and consumer confidence on Tuesday, the FOMC rate decision on Wednesday, GDP on Thursday, and the BoJ rate decision on Friday.  While the market expects the FOMC to raise rates this year, we do not anticipate the FOMC to begin that tightening cycle starting next week.  Expect the FOMC to keep rates “unched” next week.