• BoJ joins the party with negative interest rates The BoJ adopted negative interest rates in a surprise move today, for the first time in its history. Bank officials decided to cut rates to -0.1% from +0.1%, by a 5-4 split vote. Markets were caught unprepared by the BoJ’s decision, as it came only a few days after Governor Kuroda explicitly stated that negative rates were not in board’s plans. Bank officials had previously described negative rates as an incentive for hoarding cash, but introduced them nevertheless in order to pre-empt the manifestation of downside inflation risks and to achieve the 2% target as soon as possible. Officials also expressed their commitment to cut rates further into negative territory if judged necessary. The move was motivated by an economy struggling with persistently low inflation, a stronger yen, the slowdown in China and perhaps the Bank’s intention to influence the spring wage negotiations in order to encourage upward inflationary pressures. Japan’s Nikkei 225 traded in a rollercoaster ride on speculation that the move was a sign of the BoJ running out of policy bullets. Anyhow, the index closed up 2.8%.The yen on the other hand plunged, as USD/JPY gained 2% following the decision and recovered all the losses we saw since the beginning of the year. Given that the Bank signalled the possibility for further policy action, we could see the recent selling pressure on the yen to continue in the near-term.
• Oil price rallies on production-cut hopes WTI futures rallied 1.5 dollars yesterday following reports that Saudi Arabia proposed OPEC and non-OPEC producers to agree to cut production by up to 5% in in an attempt to end the supply glut that has caused oil prices to plummet in recent months. The comments came from the Russian Energy Minister Novak, while a senior OPEC delegate said that Saudi Arabia is willing to cooperate. However, there have been no official comments from Saudi Arabia yet to confirm its willingness for such a deal. What is more, even if producers did manage to strike such an agreement, Iran may not be willing to join in. Following the removal of the sanctions, Iran has aggressively boosted its oil exports in an attempt to recover its lost market share and any compromise appears doubtful. Still, in the absence of any deal there is a notable possibility that oil prices could recover by the end of the year. Baker Hughes has recently forecast that the total number of active global rigs could decline by as much as 30% throughout the year as many minor producers are driven out of the market, which could end the supply glut on its own.
• Today’s highlights: During the European day, Eurozone’s preliminary CPI for December is expected to show an acceleration from the previous month. The German preliminary CPI for the same month accelerated on Thursday, which increases the possibilities for Eurozone’s figure to meet its forecast as well. Eurozone’s M3 money supply for December is coming out as well.
• In Norway, retail sales excluding automobiles are expected to have fallen in December, a turnaround from the previous month. The official unemployment rate for January is expected to have increased considerably. Given that both of the indicators are released at the same time, this could take off some of the recent strength in NOK.
• In the US, the main event will be the 1st estimate of Q4 GDP. Given the decline in exports and the falling oil investments due to the oil price collapse, the forecast is for a significant slowdown in Q4. The expected slowdown is supported by a variety of disappointing key economic indicators throughout the quarter such as the ISM manufacturing index, industrial production, durable goods and retail sales. What is more, in the statement from their last meeting, Fed officials acknowledged that economic growth slowed late last year. The quarterly PCE deflator is also coming out and the forecast is for the rate to have slowed. A possible slowdown in both indicators could encourage USD-bears to add to their positions. We also get the Chicago PMI and the final UoM consumer sentiment index, both for January.
• From Canada, we get the monthly GDP data for November. Even though the data are outdated, the indicator is expected to show an acceleration from the previous month. This could add fuel to the recent strength of the Loonie.
• We only have one speaker on Friday’s agenda: San Francisco Fed President John Williams.