Rise of Nikkei Fueled by NVIDIA Amidst BoJ Policy Uncertainty

Highlights

• Private sector business in Japan reduced in speed during February.
• Inflationary forces lessened in Japan, leading to increased uncertainty regarding the Bank of Japan's exit from negative interest rates.
• NVIDIA's (NVDA) earnings drove a surge in the Nikkei index, while the ASX 200 and Hang Seng Index experienced negative movements following the release of the overnight FOMC Meeting Minutes.  

Private Sector PMIs from Japan Pose Challenges for Monetary Policy

In February, there was a notable decline in both the Jibun Bank Manufacturing PMI, dropping from 48.0 to 47.2, and the Jibun Bank Services PMI, which decreased from 53.1 to 52.5. Initial forecasts by economists had anticipated PMIs of 48.2 for Manufacturing and 53.2 for Services.

While the overall PMI figures drew attention from investors, it was the finer details within the Services PMI that carried significance. Preliminary data from the February survey revealed a moderated increase in input and output prices as the first quarter progressed.

The Bank of Japan has recently emphasized the importance of the services sector in driving inflationary pressures fueled by demand. The subdued rise in input costs suggests a potential slowdown in wage growth, which could influence the Bank of Japan's plans regarding exiting negative interest rates in April.

The USD/JPY responded to the weaker-than-expected PMI figures by climbing to a morning session high of 150.458. By Thursday morning, it had edged up by 0.05% to 150.354.

USDJPY 30 Minute Chart 220224

Impact of NVIDIA's Performance

NVIDIA (NVDA) exceeded earnings expectations overnight on Wednesday, underscoring the growing interest in Artificial Intelligence (AI). The company reported a remarkable 265% rise in total revenue year-on-year, primarily driven by sales of AI chips.

Despite NVDA shares closing Wednesday's session down 2.85% at $674.72, they surged by 9.07% to $735.94 in after-hours trading following the earnings announcement.

The Australian and Hong Kong markets exhibited minimal reaction to NVIDIA's earnings report. The Hang Seng Tech Index (HSTECH) experienced a slight decline of 0.23%, while the S&P ASX All Technology Index (XTX) saw a modest increase of 0.07%.

Conversely, AI-related stocks on the Nikkei responded strongly to NVIDIA's earnings, with Softbank Group Corp. (9948) and Tokyo Electron Ltd. (8035) rising by 4.59% and 4.20%, respectively, leading to a 1.56% increase in the Nikkei early in Thursday's session.

Nikkei 220224 Daily Chart

Market Response to FOMC Meeting Minutes and Future Rate Cut Probabilities

Both the Hang Seng Index and ASX 200 experienced marginal declines of 0.02% and 0.10%, respectively. The market reaction to the FOMC Meeting Minutes released on Wednesday influenced the appetite for riskier assets. Notably, the minutes echoed recent FOMC member speeches, expressing concerns about premature rate cuts.

It's worth noting that the FOMC monetary policy meeting occurred before the release of hotter-than-expected US consumer and producer price figures.

According to the CME FedWatch Tool, the likelihood of a 25-basis point June Fed rate cut decreased from 53.9% to 52.2% this morning. Similarly, the probability of a 50-basis point June rate cut fell from 21.7% to 16.7%.