As we begin April, we’re noting several possibly historic macro trends. In this post we’ll take a look at the end of an era for the Bank of Japan, the solid growth of the U.S. economy, and the new popularity of zero day to expiration (0dte) options. Understanding these shifts can help advisors to gain a deeper understanding of investor behavior and relevant global macro movements as we progress further into 2024.
Bank of Japan ends its negative interest rate regime
On March 19, the Bank of Japan (BoJ) marked the end of an era by raising its target overnight policy rate from -0.1% to +0.1%. Despite being a small change in absolute terms and one that the market widely read as “dovish,” this shift was the first time since 2007 that the BoJ had raised its policy rate and the first time since 2016 that this rate has been in positive territory.
Beyond the historic significance of the move, the change in interest rate regime could raise long-suppressed borrowing costs for the government, businesses, and consumers, while potentially heralding a repatriation of trillions of dollars’ worth of assets that had sought better returns abroad.1 For example, Japanese investors’ significant holdings of foreign government debt—Japanese investors are the largest holders of U.S. Government debt, having owned over $1.1 trillion in August 2023—have raised fears that large sales could disrupt markets. As of early April, however, there is little evidence of that.2
Despite also announcing the discontinuation of purchases of ETFs and J-REITs and ending the bank’s policy of yield curve control, the BoJ is maintaining its purchases of Japanese government bonds at a pace of roughly ¥6 trillion ($40 billion) per month. In describing the changed policy mix, the bank’s governor, Kazuo Ueda, stated, “It is important to maintain accommodative financial conditions even as we carry out a normal monetary policy.”3
Although JGB yields have generally risen over the last month—the 3-month bill yielded 0.02% on March 4, up from -0.08% a month prior—the yen remains the lowest-yielding currency globally, sporting a negative real yield at the 10-year tenor, and trades near its three-decade low versus the U.S. dollar.4 The yen remains a popular funding source for the carry trade. While the BoJ has taken its first meaningful steps towards normalization, the global impact thus far has been limited, and a much more hawkish stance would be needed to upset the current balance.
By: Michael Wedekind, CFA, Senior Investment Analyst - Fixed Income Research
U.S. economic strength
Economies around the world have failed to keep pace with the American economy. Despite sticky inflation after a pandemic and two foreign wars, the U.S. economy is posting solid growth. The story isn’t quite the same across Europe and parts of Asia as growth remains sluggish. Although a soft landing has yet to be achieved, the chances of one seem highest in the United States.
In response to elevated inflation, central banks around the world increased interest rates. Those increased rates have elicited different responses from consumers. In the U.K., consumer spending fell in the back half of 2023 despite wage growth outpacing inflation. Consumers in Japan saw prices outpace wages and responded similarly by cutting spending in the fourth quarter. All the while spending in the U.S. remains strong, GDP grew by 3.4% in the fourth quarter of 2023.5,6
Part of the explanation behind the performance deviations lies in governmental response. The U.S. government continues to spend. According to the IMF, government expenditures as share of output jumped from 35% pre pandemic to above 40% during the pandemic. Post pandemic spending remains elevated due to large investments with the CHIPS and IRA acts. Another reason is the geographic isolation from current geopolitical conflicts. America is isolated while European and Asian countries are at the front lines of these conflicts.7
The performance divergence from economies around the world compared to America is stark. Aided by governmental spending and distant proximity from ongoing conflicts, the American economy remains strong in hopes of a soft landing.
By: Brandon Rick, Investment Analyst - Equity Research
Zero day to expiration options (0dte)
The options market has seen considerable growth in activity over the past few years, and 2024 looks like it will be another record year, as the average daily trading volume for options surpasses 45 million contracts this year. When looking at option volume this month, the notional value of contracts was 8.7% of the Russell 3000 market capitalization, a level above the historical average. When decomposing the option volume data, we find an interesting trend that is accelerating the growth of option markets, this is the spectacle of zero day to expiration (0dte) options. 0dte are short-dated options that expire the same day the contract is written, and is a recent phenomenon, only attracting high volumes in the past few years. The use of 0dte options has grown so much that half of all the S&P500 options expiring in March were 0dte options.8
This trend of 0dte seems to run counter to the prudent, long-standing history of option contracts being used for hedging, a tool to offset risk. Instead, 0dte options are apparently being used to assume risk, as contract writers are utilizing 0dte to leverage risky short-term bets. 0dte options first gained tractions as traders placed bets around big market moving announcements, such as economic data, the Federal Reserve’s interest-rate decisions, or corporate earnings. As reports of traders making big 2,000% payouts emerged, the fear of missing out (FOMO) set in driving 0dte to the levels we are seeing today. This trend in financial markets has coincided with an increase in sports betting, and meme stocks, reaching a fever pitch where individuals are betting on anything they can.9,10,11
In light of such aggressive risk taking, many are wondering if this is actually investing or rather another form of gambling, akin to placing chips at a roulette table or buying a lottery ticket. Jay Clayton, former chairman of the Securities and Exchange Commission, suggests that the use of 0det is a form of gambling, and that they should not be allowed. However, regardless of your opinion, 0dte exist and are seemingly gaining in popularity. While such risky behavior is not likely to be sustainable, the increased use of 0dte is likely to introduce even more leverage and volatility in to the financial markets.
By: Scott Keller, Portfolio Manager
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