Optimism Slays Bears on Japan Cash, Cheap Gas

Stocks surged late last week as Japan surprised markets with a new bout of quantitative easing and low oil prices brought cheaper gas to more American pumps.

Stocks surged late last week as Japan surprised markets with a new bout of quantitative easing and low oil prices brought cheaper gas to more American pumps.

The Bank of Japan voted to enlarge the monetary base to 80 trillion yen, or $724 billion, about a 23% increase from its previous target. Declining oil and energy costs, as well as a lower projected inflation rate in Japan and worldwide, encouraged Bank of Japan Governor Haruhiko Kuroda to raise the monetary base of the Japanese yen. Most economists had expected Japan to keep its stimulus target at the prior guidance of 60 to 70 trillion yen.

The news took global markets by surprise, helping the Nikkei 225 to close up nearly 5% on Friday’s trading. The news also caused markets to rise in Europe and the United States, where the S&P 500 rose above 2,000 in pre-market trading and stayed well above that mark throughout the day.

Cheap Gas, Higher Demand

Economists are becoming more optimistic about the implications of cheap gasoline, as fears of deflation wane and hopes of greater consumer spending wax. Oil futures have fallen to $80 a barrel. WTI crude oil futures fell to $80.24, while Brent futures fell to $85.28 on Friday. Some analysts believe both futures prices could dip below $80 by the end of the year.

Lower gas prices are causing heating oil and gasoline prices to fall. According to AAA, gasoline in the U.S. is likely to fall below $3 on average. The last time gas averaged below $3 was in 2010. According to analysts at IHS Inc., low gas prices could save American consumers $500 per year on average, which in turn could raise consumer confidence and total spending. Many analysts are upgrading their expectations for retail spending in the fourth quarter, as low gas prices encourage more travel and discretionary spending throughout the nation.

Confident Consumers

The U.S. consumer is more confident than at any point since the global financial crisis. A new report shows that consumer confidence is at its highest point since June 2007. The Thomson Reuters/University of Michigan study of consumer confidence in October showed an index reading of 86.9, up from 84.6 in September and at its highest rating in over seven years.

The strong U.S. consumer will bolster retail, according to survey director Richard Curtin. “The gains in confidence over the past three months point toward improved holiday spending by consumers,” he said.

A more optimistic view of aggregate demand is not translating into inflation acceleration. The 10-year U.S. Treasury remained steady at 2.33% on trading Friday, with most economists expecting it to remain below 3% for the rest of the year and most, if not all, of 2015.