Market 10/31: Stability returns to the market

Japan abandons interest rate cap

Bank of Japan (BOJ) finally moves to abandon yield curve control policy (YCC) - super QE policy over the past 7 years (since 2016):

Accordingly, 8/9 BOJ members voted to decide: the +/-1% limit for Japanese 10Y bond yields (JPB) will now only be considered as "a reference".

- That means BOJ may no longer aggressively buy and sell 10Y JPB on the open market to maintain the YCC limit as before.

- Abandoning YCC is BOJ's rather weak way of curbing inflation in the country (and avoiding having to raise the base interest rate).

- BOJ believes that inflation in Japan (above the 2% target for the past 18 months) is only due to rising import prices and crude oil. BOJ wants to use this global inflation wave to pull Japan out of the mild deflation and deflation that has plagued the country for the past 10 years.

OPINION: According to Viet Hustler, it will take time for Japanese 10Y bond yields to adjust to free-market yield levels. Until then, as Japanese bond yields rise, it will pull investment capital from Japanese investors back domestically. Two bad possibilities could occur:
(1) US T-bond yields may continue to rise, creating debt pressure for the US government: could a public debt crisis erupt in the US for this reason?
(2) Credit crunch in international markets will become more severe.
In addition, this could be the end of Yen Carry Trade activities as the JPY will soon appreciate. - Linh Hà

Basic Options - Part 2: How to buy and sell calls and puts?

After a very long time of neglect, Steve now has time to return to the Basic Options series where Steve will guide everyone on options theory, factors affecting options premium, and explain options strategies from basic to advanced.

In part 2 of this basic options series, Steve will introduce the options chain and go through a few examples of profitable options trades. In this video, we will get familiar with the first factor affecting options prices, and in the following parts, we will dive deeper into the remaining factors.

Part 3 will discuss the impact of time and volatility on options prices.

Yields rise sharply after Labor Costs recovery

In Q3, labor costs suddenly increased, raising concerns about rising inflation. The Employment Cost Index shows wages up 1.2%.

ECI up 4.3% year-over-year, the lowest increase since late 2021, but still significantly higher than the pre-Covid average.

Wages rose slightly in the private sector, while at local and state government agencies, they rose sharply.

This has put pressure on the yield curve, especially short-term bond yields.

Conference Board Confidence Index falls in October. Inflation expectations rise

The Conference Board's Consumer Confidence Index fell to 102.6 in October, both in current situation and expectations.

While the labor market has improved compared to before.

Expected inflation over the next 12 months is projected to rise significantly, and at the same time, consumers' continuous complaints about price increases are raising concerns about inflation and negatively affecting daily living costs.

According to Peterson, most consumers still hold the view that the likelihood of a recession is quite high.

Chicago PMI disappoints at 44, below expectations, indicating the Chicago economy is in a prolonged recession for 14 consecutive months.

Home prices rise for 5 consecutive months

Home prices recorded a 1.01% increase from the previous month, the 5th consecutive increase and higher than the expected 0.8%.

Home prices are rising in the US, especially in 20 major cities, at a strong and faster pace than previous periods.

However, with rising mortgage rates since the Case-Shiller data point, home prices may be expected to continue declining.

Nevertheless, Millennials continue to rush to take out mortgages to buy homes, even as rates rise sharply, with mortgage borrowing up about ~20% since Q4/2021.