Stocks and Treasuries Both Advance on Surprise BoJ Announcement

Global stocks and Treasuries both rallied on the last trading day of January after the Bank of Japan unexpectedly introduced negative interest rates, just days after saying such a move wasn’t being considered.  The BoJ will now charge 0.1% on certain excess holdings of cash in a move intended to spur bank lending.  The 5-4 vote in favor of the cut will augment the BoJ’s quantitative easing program, which remained unchanged otherwise.  Japan’s central bank joins the ECB and central banks of Sweden, Denmark and Switzerland in introducing this unorthodox move.  BoJ Governor Kuroda also announced they won’t hesitate to add additional monetary stimulus if needed and could make further cuts to the negative rate.  The Yen dropped to a 6 week low on the news, while the Japanese stock market approved the move with the Nikkei having finished the day 2.8% higher.

There were a number of new US economic releases today providing a mixed US outlook overall.  US GDP rose 0.7% in the fourth quarter, narrowly missing the 0.8% analysts were expecting.  For comparison, the economy had advanced 2% in the third quarter and 3.9% in the second quarter.  For all of 2015, GDP expanded 2.4%, the same as in 2014 and slightly above the 2.1% average since 2010.  The main drags on fourth quarter GDP were inventory investment, trade and business spending.  Inventory figures can be volatile and may be poised to reverse course in early 2016, while the fall in net exports can largely be attributed to the strong dollar and cooling global demand.  The fall in business investment highlights an interesting dynamic where the consumer is benefiting from a robust labor market and cheaper oil, while businesses struggle due to the strong dollar and weakness abroad.  The employment cost index (ECI) rose as expected in the fourth quarter, with wages increasing 0.6%.  The modest rise should fit the Fed’s narrative that the economy is strengthening and can support slow, but gradual tightening in 2016.