Wall Street ekes out gains after surprise Japan move jolts markets

Stocks closed modestly higher on Wall Street, while bond markets around the world felt pain after a surprise move from Japan’s central bank cranked the pressure even higher on the already slowing global economy. The S&P 500 closed 0.1 per cent higher Tuesday after flipping between small losses and gains in the morning.

The biggest action was in the bond market, where yields pushed higher after one of the world’s last bastions of super-low and economy-aiding interest rates made moves that could allow rates to climb more than otherwise. Higher rates slow the economy and drag down on prices for stocks and other investments.

Small company stocks were held up better than the broader market, pushing the Russell 2000 index 0.6 per cent higher. “It was a surprise, a very unexpected move, but on its own it’s probably not enough to really be a risk-off event for markets,” said Ross Mayfield, investment strategist at Baird.

The biggest action was in the bond market, where yields pushed higher after one of the world’s last bastions of super-low and economy-aiding interest rates made moves that could allow rates to climb more than otherwise.

The Bank of Japan said Tuesday it still wants the yield on 10-year Japanese government bonds to remain at roughly zero, but it also said it would allow the yield to move up to 0.50 per cent instead of the 0.25 per cent cap it had held previously. What made Tokyo’s unexpected move a particular jolt was how much resistance it’s shown so far in joining the global campaign to hike rates in order to undercut high inflation.

“BoJ’s surprise move allowed it to take a small step away from the extreme dovish side of the monetary policy spectrum, where it had stood alone all year among major central banks,” wrote Jennifer Lee of BMO Economics in a note to clients. “It is not joining the rate-hikers out there, but it is now a tad closer.”

Higher yields make borrowing more expensive, which slows the economy while also pushing down on prices for stocks and other investments. Other central banks around the world, particularly in the United States and Europe, have been raising rates at such an explosive clip that a growing number of economists and investors see a recession hitting in 2023. Both the Federal Reserve and European Central Bank have pledged to keep raising rates into next year to be sure the job is done on getting inflation under control.

Aftershocks from the Bank of Japan’s move on Tuesday rippled through bond and currency markets around the world.

In the U.S., the yield on the 10-year Treasury rose to 3.68 per cent from 3.59 per cent late Monday. That yield helps set rates for mortgages and other economy-setting loans, which has already meant particular pain for the U.S. housing market.