Morning comment: No BoJ surprises

Chris Scicluna

All eyes remain on the bond market. While yields moved higher again yesterday as the US tax bill finally cleared Congress and US existing home sales rose unexpectedly to a pace last seen in 2006, those bond market shifts weighed on equity markets, albeit more so in Europe than the US where energy stocks were supported by the upwards move in oil prices. And bonds and equities have started on the back foot again in Europe this morning. Earlier today in Asia, however, the focus was more on local matters. In Japan, JGB moves were inevitably limited while a modest morning loss in the Nikkei was largely erased after the lunch break as investors reacted to a ’status-quo’ outcome from the final BoJ Policy Board meeting for this year (more on this below). Elsewhere, in China (especially on the Mainland) equity markets rose solidly, whereas South Korea’s Kospi slumped to a 10-week low. In currency markets, the Kiwi dollar rose after the release of stronger-than-expected GDP data (more on these below too).

The BoJ’s final Policy Board meeting for this year concluded with no great surprises. While there had been some chance of a minor tweaking of policy settings, Kuroda and co. decided to leave all parameters completely unchanged. So, specifically, the Bank maintained the -0.1% interest rate on banks' marginal excess reserves and decided to continue purchasing JGBs with the aim of keeping 10-year yields at “around 0%”. To achieve the latter, the Bank repeated that it will expand its JGB holdings at “more or less the current pace”, which the Bank continues to characterise as being “about ¥80trn” per year notwithstanding the fact that it will fall short of that sub-target this year by roughly ¥20trn. And as regards other asset purchases, there was no change to those plans either. So, while Japan’s equity markets are at their loftiest levels in more than two decades, the Bank continues to aim to purchase ETFs at the not-insignificant annual pace of ¥6trn as well as J-REITs at an annual pace of ¥90bn.

As was the case at the last two meetings, Goushi Kataoka registered the lone dovish dissent, this time arguing that it would be desirable to achieve the inflation target in FY18 and thus calling on the Bank to purchase JGBs with the intention of lowering yields for bonds with a maturities of 10-years and longer (however, he quietly dropped his proposal, rejected at the previous meeting, to keep the 15-year yield below 0.2%).  In his post-meeting press conference, meanwhile, Kuroda seemed merely to go through the motions once again, offering little more to what he’s said in recent speeches. Indeed, suggesting again that he doesn’t yet buy into the ‘reversal rate’ arguments that might suggest that ultra-low JGB yields could be contractionary due to an adverse impact on the financial sector,  he again noted that the BoJ would be willing to add stimulus in due course if the inflation outlook demanded it.

In terms of the BoJ’s economic assessment, meanwhile, the short statement accompanying the decision was largely in line with that which the Bank has issued previously, with the economy again said to be “expanding moderately, with a virtuous cycle from income to spending operating”. As before, the BoJ assessed that exports had remained on an “increasing trend”, and – in an improved judgement – so had business investment in light of improving corporate profits and business sentiment (the latter both clearly evident in last week’s Tankan survey). The Bank also now characterised consumer spending as “increasing moderately”, albeit with the stumble in Q3 recognised.

On the inflation front, however, the Board acknowledged that its forecast measure of core CPI (CPI ex fresh food) remains in a range between 0.5%-1.0%Y/Y and that inflation expectations “have remained in a weakening phase”. Even so, the bulk of the Board continues to expect that a continued “moderate expansion” in the economy will create further pressures on productive capacity and a rise in medium- to longer-term expectations, ultimately driving the CPI inflation towards the Bank’s target. Kataoka opposed this view, saying that the probability of inflation rising toward 2% was “low” given current policy settings – a view that seems to be shared by most businesses (at least those respondents in Monday’s BoJ Tankan release) as well as participants in financial markets, including ourselves. Indeed, contrary to the majority view on the BoJ Policy Board, we expect inflation to fall back gradually over the coming year, and to remain in that 0.5%-1.0%Y/Y range. 

The Bank’s next policy decision will be released on 23 January, on which date the Board will also release updated growth and inflation forecasts in its Outlook Report. At this point, it seems unlikely that the Bank will make major revisions to these forecasts (positive news on the economy at least means that there should be no downward revisions to the Bank’s inflation forecasts on this occasion). But, policy-wise, that language related to the amount of JGBs to be bought might then be brought closer in line with reality, while we would not be surprised to see a decision to scale back those incongruous ETF purchases. We would also expect an announcement to extend deadlines for applications to some of the BoJ’s special liquidity facilities too. 

Euro area:
Politics return to the fore in the euro area today. After the Spanish government imposed direct rule and dissolved the regional government in the autumn, Catalans are going to the polls today to elect a new regional assembly. Opinion polls suggest a finely balanced race, with both pro-independence and unionist parties expected to receive a similar share of votes suggesting that tensions will remain unresolved. Nevertheless, the central government might judge that its current containment strategy is working. Indeed, in contrast to the independence vote in October, no violence is expected today. And surveys continue to suggest no substantive adverse effects on business or consumer sentiment. Certainly, events in Catalonia still appear to be no show-stoppers for the relatively vigorous Spanish economic recovery.

The flow of euro area economic survey results continues this afternoon with the Commission’s flash estimate of consumer confidence for the current month. Having risen in November to 0.1, the highest since January 2001, ongoing improvement in the labour market as well as buoyant business sentiment might point to a further increase today. Indeed, the latest INSEE French business climate survey, released this morning, suggested that the euro area’s second largest economy is going from strength to strength with the headline indicator rising 1pt to 112, a level last seen a decade ago. With the average in Q4 2pts higher than in Q3, this survey adds to evidence of a possible acceleration in economic growth in the final quarter of the year.  Within the detail, while confidence in manufacturing and retail eased slightly from the post-crisis high reached in the previous month, this was more than fully offset by improved sentiment in construction and services. And with the survey also highlighting that labour market conditions remain very strong and stable – the relevant indicator moved sideways for a third consecutive months, at 108, the highest level since the summer of 2011 – the French economy looks set to maintain positive momentum well into 2018.

In marked contrast to the euro area, UK consumer confidence remains in a steady downwards trend. With Brexit uncertainty still weighing, high inflation and stagnating wage growth stretching household budgets, and recent data suggesting a more adverse shift in labour market dynamics, there’s no shortage of factors for consumers to worry about. Reflecting that, the GfK consumer confidence indicator for December, released overnight, slipped back further, from -12 to -13, a level last seen four years ago and 6pt lower than the level in December last year. Weaker indicators for consumers’ assessments of their personal financial situation and the climate for making major purchases accounted for the decline, while the assessment of the economic situation was unchanged but very downbeat compared to the norms of the last few years. And looking ahead, with the economic backdrop unlikely to improve significantly over coming months, we won’t be holding our breath for any improvement in consumer sentiment.

Today will be the busiest day of the week for US economic data, most notably bringing the final GDP report for Q3. There should be little, however, to sway the market mood one way or the other. The national accounts, however, should see minimal revisions with the headline growth rate expected to remain broadly unchanged from the current estimate of 3.3%Q/Q annualised. Today will also bring several new economic data of second-tier importance – the December Philly Fed, the November Chicago Fed and October FHFA house price indices – as well as the usual weekly claims numbers. In addition, the US Treasury will sell 5Y TIPS.

New Zealand:
The focus in New Zealand today was on the Q3 national accounts, which revealed that the most widely-followed production-based measure of real GDP rose 0.6%Q/Q, meeting market expectations. And thanks to upward revisions to previous quarters – the result of incorporating new annual benchmarks – annual GDP growth came in at a firmer-than-expected 2.7%Y/Y, compared with the RBNZ’s most recent forecast of 2.5%Y/Y. Indeed, cumulative revisions, especially large over the past two years, means that the economy is 2.7% larger than had been estimated previously. The equally-valid (but occasionally more volatile) expenditure-based measure pointed to growth of 0.9%Q/Q and 3.0%Y/Y. In the detail GNE rose 1.0%Q/Q in Q3, with private consumption rising 0.8%Q/Q and business investment rising a modest 0.3%Q/Q (the 7th consecutive quarter of growth). Residential investment jumped 3.3%Q/Q and public consumption rose 2.5%Q/Q. While exports rose 0.8%Q/Q, this was outpaced by a 2.1Q/Q lift in imports. Finally, nominal GDP rose a solid 2.3%Q/Q to be up 6.8%Y/Y.

As for what this means for monetary policy, a good portion of the stronger activity depicted by today’s report will be interpreted as positive news on the supply side. So, we suspect it will likely find its way into the RBNZ’s estimates of trend labour productivity and economic growth, rather than into the Bank’s assessment of the ‘output gap’, and will thus we be no game-changer for policy. The RBNZ’s next Monetary Policy Statement will be released on 8 February.

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