[Weekly Economic Memo] Nikkei Average records 3rd largest drop of 3,318 yen. US prices rise, while long-term interest rates in both Japan and the US fall

The decline in semiconductor stocks in the US market on the 14th local time spread to Tokyo, causing the Nikkei Average to record its third-largest drop ever. Although US prices rose, long-term interest rates in both Japan and the US have fallen together.

This week’s topics

1. Nikkei Average records 3rd largest drop on October 15
The Nikkei Average closed at 64,425.95 yen on October 15, down 3,318.34 yen (4.90%) from the previous day, marking its sixth consecutive day of decline. This was the third-largest drop in history, with the index falling by more than 3,600 yen at one point during trading. According to the Nikkei, following the decline in US semiconductor stocks on the 14th, selling pressure on Advantest, Tokyo Electron, and SoftBank Group pushed the index down. The following day, the 16th, it rebounded for the first time in seven business days, closing at 65,324.29 yen, up 898.34 yen from the previous day.

2. US semiconductor stock index falls for 8th consecutive day. Nasdaq down 4.5% for the week
In the US, the Philadelphia Semiconductor Index (SOX), which consists of major semiconductor stocks, fell for eight consecutive days through the 16th. The Nikkei reported that the stock price of AI cloud company CoreWeave plummeted, and concerns over the profitability of AI investments and financing spread selling to other AI infrastructure stocks. While the Nasdaq Composite Index fell 4.5% for the week, the Dow Jones Industrial Average rose 0.7%.

3. US prices exceed expectations, and Fed Chair does not signal decision for October
The US Consumer Price Index (CPI) for September, announced on October 14, was 3.7% year-on-year, accelerating from 3.4% in August and exceeding the market expectation of 3.6%. The core index, excluding food and energy, also rose 2.6% year-on-year, accelerating from 2.4% in August. The Producer Price Index (PPI) for September, announced on the 15th, rose 6.3% year-on-year, the highest growth since December 2022. Fed Chair Warsh did not signal the results of the Federal Open Market Committee (FOMC) meeting on October 27-28 during an IMF event in Bangkok on the 16th, and Bloomberg reported that this statement bolstered expectations for an interest rate hold in October.

Despite rising prices, long-term interest rates in both Japan and the US have fallen

Although US price statistics rose, what stood out this week was anxiety over AI and semiconductors. Fisco reported that buying of US Treasuries as a safe asset occurred due to caution regarding the AI boom, and long-term interest rates in both Japan and the US have fallen compared to the end of the previous week.
This week’s stocks and interest rates
(Japan figures are closing prices in the Tokyo market on October 16; US and dollar-yen figures are closing prices in the New York market on October 16. Figures in parentheses are comparisons with the closing prices on October 9, the end of the previous week.)

• Nikkei Average: 65,324 yen (-3,707 yen, -5.4%) / TOPIX: 4,066 (-39, -0.9%)

• Dow: $52,002 (+$347, +0.7%) / S&P 500: 7,659 (-152, -1.9%) / Nasdaq Composite: 26,140 (-1,226, -4.5%)

• Japan 10-year government bond yield: 2.930% (-0.080 points)

• US 10-year government bond yield: around 5.07% (approx. -0.17 points)

• Dollar-yen: 158.02 yen (closing price in the New York market, -0.29 yen)
  1. Nikkei Average down 5.4%, TOPIX down 0.9%.
  Even among Japanese stock indices, there was a large difference in the decline this week. Because the Nikkei Average is calculated in a way that stocks with higher prices have a greater impact on the index, the index moves significantly when high-priced semiconductor stocks like Advantest and Tokyo Electron fall. The TOPIX, which broadly reflects Tokyo Stock Exchange stocks based on free-float market capitalization, has a smaller weighting of semiconductor stocks than the Nikkei Average, and although it fell below 4,000 on the 15th, its weekly decline remained under 1%.
  In the US, it is reported that memory stocks were also sold off from the beginning of the week due to concerns over intensifying competition after a major Chinese memory semiconductor company announced its next-generation DRAM development plan. In Japan, in the same week that semiconductor stocks were sold, the 10-year government bond yield fell to 2.930%.
  Future schedules include earnings from major IT companies, starting with Meta on the 21st, followed by Microsoft and Alphabet on the 28th, and Amazon on the 29th (all US local time). These will serve as material to verify how much the massive investments in AI are leading to profits.
  2. Nasdaq down 4.5%, Dow up 0.7%. US stocks showed mixed results depending on the index
  The Nasdaq Composite, which has a high ratio of high-tech stocks, was down 4.5% for the week, and the S&P 500 was down 1.9%, but the Dow rose 0.7% for the week, with one day seeing a $556 gain on the 15th. In the week the Nasdaq fell, the US 10-year government bond yield fell to around 5.07%.
  The Nikkei reported that CoreWeave’s stock price fell by as much as 14% on the 16th, making it clear that AI stocks are being selected based on their financial conditions.
  According to OANDA’s Market Digest, New York crude oil futures (WTI) hit a closing high of $101.41 per barrel on the 16th, the highest in about a month, which cooled investor sentiment.
  3. US long-term interest rates fell from 5.24% to 5.07%. Despite rising prices, there was buying of US Treasuries
  Normally, if prices are stronger than expected, interest rate hikes are anticipated, making interest rates more likely to rise, and US long-term interest rates did rise immediately after the CPI announcement. The Nikkei reported that the resurgence of expectations for an early additional interest rate hike by the Fed also weighed on investor sentiment in the Tokyo market on the 15th.
  Nevertheless, the US 10-year government bond yield fell from around 5.24% at the end of the previous week to around 5.07% on the 16th. Fisco reported that even on the 15th, when the PPI accelerated, buying of bonds as a safe asset was dominant due to caution regarding the AI boom. Furthermore, because Chair Warsh did not signal an interest rate hike in October, expectations for a rate hike receded.
  The US policy interest rate is 3.75-4.00% following the September rate hike. Attention is focused on the movement of US long-term interest rates and the dollar-yen to see if there will be a hold or another rate hike at the October FOMC.
  4. Japan’s long-term interest rates fell below 3%, reaching 2.930% on the 16th. December is seen as the likely time for the Bank of Japan’s next rate hike
  Japan’s 10-year government bond yield also fell. According to the Nikkei, it fell below 3% to 2.995% at one point on the 13th, after the three-day weekend, following the decline in US long-term interest rates, reaching its lowest level since September 18 at that time. It fell to 2.920% on the 15th and closed at 2.930% on the 16th. Kyodo News reported that the rise in stock prices on the 16th served as material for selling government bonds.
  The Bank of Japan’s policy interest rate is around 1.25% following the September rate hike. On the 16th, Governor Ueda’s remarks (read by Deputy Governor Uchida) indicated an intention to “continue to raise the policy interest rate.” Meanwhile, according to Totan Research’s estimate on the afternoon of the 16th, the probability of a rate hike at the October 29-30 meeting is 5%, and 77% at the December meeting.
  The gap between the 10-year government bond yields of Japan and the US narrowed by about 0.09 points because the decline in the US was larger. The dollar-yen was around 158 yen, a slight yen appreciation of 0.29 yen from the end of the previous week.

Topics to watch over the next 3 weeks

• October 21 (US local time): Meta earnings (early morning of the 22nd, Japan time). As the first of the major IT company earnings, this will be the first material to verify if the recovery of AI investments is visible.

• October 23: September National Consumer Price Index. This will be material to verify views on the Bank of Japan’s December rate hike.

• October 27-28: US FOMC (statement around 3:00 AM on the 29th, Japan time). The focus is on whether they will raise interest rates or hold, following the rise in prices.

• October 28 – November 2 (US local time): Earnings for Microsoft and Alphabet (28th), Amazon (29th), and Apple (November 2). These will be material to verify if AI investments are leading to profits.

• October 29-30: Bank of Japan Monetary Policy Meeting and Outlook Report. The focus is on whether clues leading to a December rate hike will be shown.

• November 6 (US local time): October US Employment Statistics (22:30, Japan time). This will be material to forecast the direction of US long-term interest rates after the FOMC.

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