The stock market closed up 200 points today, which should have been the market’s proper reaction to yesterday’s 50bp rate cut by the Federal Reserve - but better late than never.
Risk appetite is slowly returning to the markets which suggest that equity traders may be banking on a strong non-farm payrolls report. We caution against becoming overexcited about carry traders at this moment because there is still a lot of volatility across the financial markets. Also, the relationship between equities and carry trades is starting to break down and that is clearly evident today because the 200 point rally in the Dow should have triggered a more meaningful bounce in carry trades. Unfortunately, USD/JPY is only up 20 pips from yesterday’s close while GBP/JPY is only up approximately 60 pips. Last night’s Japanese economic data was mixed with manufacturing PMI holding steady, labor cash earnings falling short of expectations, and construction orders rebounding. As usual, Japanese data has had no major impact on the Yen crosses but comments from Bank of Japan member Nishimura last night is worth mentioning. Nishimura said that the BoJ will not rule out any policy options. Although the market has been mostly focused on a rate hike from the BoJ, his comments suggest that they may open to cutting rates if their economy slips into a recession.
