Year to date, the yen has fallen by 10% versus the U.S. dollar. Consequently, the decline is catching the market’s attention. Trading seemed to get out of hand on Sunday night when the yen whipsawed in a 5% range. It opened trading down 2%, falling to its lowest level since 1990. Despite being a Japanese holiday, the BOJ responded aggressively by buying yen. Within hours, the yen surged versus the dollar. The yen opened on Monday morning, New York Time, up about 5% from its lows set only hours before. Until Sunday night, the BOJ had been taking a hands-off approach to the depreciating yen. That changed as the market may have weakened the yen beyond the BOJ’s line in the sand. The graph below charts the yen and its daily price range using standard deviation (sigma). Monday’s price action was nearly an 8-sigma move.

In May 2022, we wrote an article on Japanese inflation and the potential pitfalls for global liquidity if Japan were forced to take drastic actions to support the yen. To wit:

However, as the BOJ tries to stop rates from rising, they weaken the yen. Japan is in a trap. They can protect interest rates or the yen but not both. Further, its actions are circular. As the yen depreciates, inflation increases and the Japanese central bank must do even more QE to keep interest rates capped.

The markets are pushing Japan into a corner. Certainly, their actions significantly impact Japan’s economy and markets. Equally important, the BOJ can have consequences for global stock and bond markets due to the yen carry trade. Stay tuned!

What To Watch Today

Earnings

Economy

Market Trading Update

As discussed yesterday, the market’s first hurdle is the 50 and 20-DMA’s initial challenge. Unfortunately, that test was inconclusive, with the market trading into it but failing to break above it. The market’s fate remains in the “bear’s hands” until that resistance is breached. Today, earnings from Amazon (AMZN), Ely Lilly (LLY), and AMD (AMD) will likely determine the direction of the market tomorrow, given their market cap weightings and importance to the “thematic” trades of “weight loss” and “A.I.”

If you haven’t already done so, use the current rally to rebalance portfolio risk as needed. In addition to earnings, the Fed meeting announcement on Wednesday and employment on Friday will determine the market’s next direction.

Shale Oil Becoming Costlier To Produce

The chart below potentially has significant implications for the price of oil. The Dallas Fed recently surveyed energy companies and found the breakeven point on new shale wells in the Permian Basin has recently risen by $10-$15 a barrel. Hence, since shale oil is among the cheapest to drill for, a higher breakeven price should translate into higher oil prices. Consequently, if prices fall below breakeven, energy companies pull back on drilling, which can push the price higher. The data appears to be annual. Therefore, the recent surge of breakevens is likely a function of inflation for employees and machinery.

The Health Of Small Businesses Continues Downward

Two weeks ago, we wrote Economic Warnings From The NFIB to share the most recent survey data on small businesses. To wit:

While recent government data on economic growth and employment remain robust, the NFIB small business confidence survey declined in its latest reading. Not only did it fall to the lowest level in 11 years, but, as far as an economic warning goes, it remained at levels historically associated with a recessionary economy.

In addition, the graph below, courtesy of Alignable, adds to our concern for small businesses. Small business owners have the highest national delinquency rate in over three years. Further, the 4% increase was the largest in over a year. Per Alignable:

It highlights what many small business owners have shared with us — that all of the economic issues following the COVID Era were as bad, if not worse on many businesses than the pandemic itself. Those post-COVID economic hurdles have prevented many small businesses from recovering fully financially.