Japan’s Nikkei 225 Faces Uncertainty

What you'll read in this issue:

• What could be ahead for Japan’s Nikkei 225?
• 2024 was a global turning point for monetary policy
• The key factors shaping crude oil markets
• How Fed policy can impact FX markets
• Thanksgiving dinner costs were down this year

TOP STORY

Japan’s Rising Rates Could Impact the Nikkei 225

The Nikkei 225, Japan’s major stock index, has seen significant fluctuations in recent years.

Background: In 2020, the majority of global central banks began to announce massive stimulus measures to head off the potential deflationary spiral related to the COVID-19 shutdowns. Japan was in a different situation, having dealt with deflation for the previous 30 years, and their plan involved keeping rates negative while injecting 300 trillion yen into its struggling economy.

The looser policies eventually ushered in global spikes in inflation and rates began to rise nearly everywhere except Japan. The belief was that the long-term, persistent worry in Japan was the deflation that had plagued it for decades – not the upstart inflation.

Deflation: Although the Bank of Japan's policies were likely trying to address deflation, there was an interesting secondary derivative: the Nikkei soared. 

• From January 1, 2021 through July of 2024, the Nikkei rallied over 55%, fueled in part by the declining yen. Japan is the fourth-largest exporter nation on the planet, and a weaker yen makes Japanese exports cheaper to the rest of the world.
• However, in March, the BOJ abandoned its negative rate policy. A radical reacceleration of inflation in Japan could push the BOJ to hike more aggressively, potentially boosting the yen at the expense of the Nikkei.

Looking Ahead: The future direction of BOJ monetary policy remains a key area to watch, said Erik Norland, CME Group Chief Economist, in a recent video covering Japan’s economic resurgence. “Japan has a colossal level of debt… If they keep raising rates and the yen keeps going back up, that could put a lot of downward pressure on Japanese stocks.”

➜ Read more about the impact of rising rates in Japan.

FEATURED ARTICLE

What's Next for Global Monetary Policy?

As rates look to be rising in Japan, rate cuts could be ahead for many other countries.

Background: 2024 was a global turning point for monetary policy. After two years of massive policy tightening, central banks began to ease policy pretty much across the board. 

2025: Going into next year, futures curves for SOFR, Euro ESTR and analogous products on other markets suggest that traders still see some room for further interest rate reduction in the U.S., the eurozone, the U.K., Australia and Canada. Recently, however, traders have curtailed these expectations for rate cuts.

Inflation Dilemma: While inflation is way down from its peak levels in 2022 and 2023, it has stopped falling in many countries and remains about 1-2% above pre-pandemic levels. This creates a dilemma for the Fed and other central banks:

• On the one hand, they might like to cut rates further, especially if economic growth slows in response to their policy tightening in 2022 and 2023.
• On the other hand, persistent core inflation might give them pause, especially if further rate cuts risk igniting second rounds of inflation later this decade.

➜ Read more about what could be ahead for global monetary policy.

INSIGHTS

What to Watch in Crude Oil Markets

Supply-side constraints, geopolitical risks and global economic trends will be in focus for the remainder of this year.

OPEC+ Production Cuts: Before the U.S. emerged as a major global producer, the strategy of production cuts from OPEC+ would typically lead to price spikes. However, in recent years, it has been less effective. The effect of recent cuts on crude prices has been mixed, prompting concerns about the negative effects on certain economies within the OPEC and OPEC+ groups.

China Demand: Top oil importer China has experienced slowed economic growth. The International Energy Agency (IEA) says that the downturn in China has been even more acute than expected, noting that Chinese oil demand is firmly in contraction, falling by 1.7% year-on-year in July 2024 which is in stark contrast to the 9.6% average pace of growth in 2023.

Why It Matters: Weakening global demand in crude oil has helped send oil prices well below the May 2022 peak of around $120 per barrel. By mid-November 2024 the front-month price of CME Group WTI Crude Oil futures was trading around $71 per barrel, which is around 10% below the level seen at the beginning of the summer 2024 season. 

➜ Read more about the demand outlook for oil and other areas to watch.

U.S. Rates Have Global FX Market Impacts

While lowering interest rates generally weakens a nation's currency, the specific reactions can vary.

Euro: As the world's second most traded currency, the euro would be expected to rise against the dollar in proportion to the rate differential between the countries, primarily due to global capital flows.

• When U.S. rates are relatively high, global capital tends to flow into dollar-denominated assets.
• Conversely, when U.S. rates fall, there's an incentive to sell dollars and invest in higher-yielding currencies.

Safe Haven Currencies: Historically viewed as "safe haven" currencies, the yen and Swiss franc tend to benefit during times of economic distress.

• If markets perceive the Fed rate cut as globally stimulative, these currencies might be sold as investors seek higher-risk assets.
• However, if the market interprets the Fed's action as a response to an impending economic downturn, these currencies could benefit from their safe-haven status. If an investor believes the dollar will weaken, they could buy futures in currencies expected to strengthen, such as the yen.

Emerging Markets: Perhaps the largest potential impact of U.S. rate policies is in emerging market economies. Many emerging market countries and companies have dollar-denominated debt, and a weaker dollar would make it easier to service this debt. Additionally, lower U.S. rates allow emerging economies more freedom to adjust their own rates without fear of significant capital flight.

➜ Read more about how FX markets may respond to U.S. rate cuts.

Thanksgiving Dinner Costs Drop Again

The price of a Thanksgiving dinner soared over the past few years but began easing last year.

Background: Last year, the average cost for a dinner of 10 was $61 according to the American Farm Bureau Federation (AFBF). That was down approximately 5% from a record $64.05 in 2022. The AFBF estimated that the cost this year will be $58.08 for 10 people, down another 5% from last year. 

Turkey Time: Despite bird flu reducing U.S. turkey inventories to their lowest level in nearly 40 years, turkey prices have decreased. This decrease is having the largest impact on the overall price decline this year – a 16-pound turkey accounts for 44% of the overall Thanksgiving grocery tab.

Inflation: This year’s cost is still 19% higher than pre-pandemic. However, when adjusted for inflation, this is the least expensive Thanksgiving meal in the 39-year history of the AFBF Thanksgiving survey (except for 2020).

➜ Read more about the items driving dinner costs.

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