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This Is an Epochal Shift

Japan is ready for change.

The market’s attention only now will be focused entirely on the US central bank and the Federal Open Market Committee’s policy statement on Wednesday.

That’s because the Bank of Japan announced its first interest rate hike since February 2007.

According to the Nikkei, the BoJ “sees a chance to normalize its monetary policy now that inflation appears set to remain at 2 percent or higher” following substantial wage increases agreed to by big corporations and labor unions this year.

The BoJ was the last central bank to have in place a negative policy interest rate. BoJ Governor Kazuo Ueda had said wage negotiations were a "key consideration" in the central bank’s policy deliberations.

Negotiations with big corporations resulted in wage increases averaging 5.28 percent, the highest level in 33 years. Raises for employees of smaller companies averaged 4.42 percent.

A BoJ source told Nikkei that the recent wage hikes “are of a level that even reflationists who are cautious about modifying monetary policy would accept a change in policy." The BoJ also ended its yield curve control program and new purchases of exchange-traded funds and real estate investment trusts.

February 2007 predates the Global Financial Crisis, the Great Recession, and the birth of our Jack-Chi, Bowie, who’s still rocking as he approaches 16.

It was a long time ago!

BoJ officials say policy will remain accommodative even after a hike. But even this subtle divergence from the forecast direction of US monetary policy, for example, will impact global fund flows.

The Japanese yen, anchored by negative interest rate policy, yield curve control, and a 1 percent cap on the yield on the 10-year Japanese government bond, has been a lucrative foundation for carry-trade activity in the forex market.

The bigger picture is that Japan’s economy seems to be emerging from a long-term rut.

Rising wages should filter through the service economy and provide a lift for restaurants and retailers. A recovery in global manufacturing is boosting Japan’s export industries, and a semiconductor rebound has similar knock-on effects for servers and data centers.

The Nikkei 225 is one of the best-performing equity indexes in the world so far this year, rising 18.75 percent after adding another 2.67 percent on Monday.

Futures were indicating a lower open for Japanese equities on Tuesday.

But this still seems like the net-positive kind of epochal shift.

deep dive

Apple and Google Converge Subhead

$GOOG surged while $AAPL stayed positive.

“Everything That Rises Must Converge” is the title of a short story and a short story collection by the American writer Flannery O’Connor.

The title derives from a work by the French philosopher Pierre Teilhard de Chardin on the “Omega Point,” a term he invented

Teilhard writes, "Remain true to yourself, but move ever upward toward greater consciousness and greater love! At the summit you will find yourselves united with all those who, from every direction, have made the same ascent. For everything that rises must converge.”

Seems a little more interesting than “this is what happens when the law of big numbers operates on two companies that need a strategic boost”...

According to a report from Bloomberg, Apple $AAPL is negotiating with Alphabet $GOOG to use Google’s Gemini artificial intelligence engine in the iPhone, “setting the stage for a blockbuster agreement that would shake up the AI industry.”

AAPL would license GOOG’s set of generative AI models to power new features in iPhones to be introduced this year. AAPL also talked to OpenAI about using its model.

The tech-heavy Nasdaq Composite led US equity indexes higher yesterday.

GOOG was up 4.44 percent in regular trading, its biggest single-day gain since December 7, and AAPL was up 0.64 percent.

As Bloomberg’s Mark Gurman noted, “A deal would give Gemini a key edge with billions of potential users. But it also may be a sign that Apple isn’t as far along with its AI efforts as some might have hoped – and threatens to draw further antitrust scrutiny of both companies.”

Meanwhile, Nvidia $NVDA, the undisputed AI champ, added 0.70 percent heading into its annual developer conference in San Jose and is now up 78.62 percent year to date.

deep dive |
March 19, 2024

Apple and Google Converge Subhead

Weekly Market Outlook

Here’s What “FOMO” Looks Like

Hyped-up money is looking for action.

Take a look at this chart of fund flows into the Technology Select Sector SPDR Fund $XLK:

That’s explosive.

Record inflows also illustrate “FOMO,” or “fear of missing out,” and Mish Schneider talks about it at the top of her Weekly Market Outlook.

As Mich notes, modern economy stocks like NVDA and other semiconductor names and GOOG and AAPL too are doing well.  

“What we're starting to see,” Mish warns, “are some pockets that need to be watched.” Mish identifies the SPDR S&P Retail ETF $XRT as well as transports and the Russell 2000 Index $RUT.

All three were in the red on Monday, XRT sliding only 0.05 percent but the Dow Jones Transportation Average $DJT off 0.52 percent and the RUT down 0.72 percent.

Mish also notes “an overall acceptance that the Fed will not be nearly as dovish as people thought,” with expectations down to two to three cuts this year from five to six.

“So the question is, is the market really reconciled with that?” Mish is looking at a couple of things, No. 1 being junk bonds, as represented by the iShares iBoxx $ High Yield Corporate Bond ETF $HYG.

The key level to watch there is 76.50. If HYG breaks below that recent low, according to Mish, “It really tells me that there are cracks in the market.”

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