Morning comment: Japan PPI, US & UK CPI, EA IP and RBNZ

Chris Scicluna
Emily Nicol
Wall Street rallied on Tuesday, with the S&P500 closing up 1.3% as investors reacted to the more positive news that had boosted equity markets in Asia earlier in the day, i.e. improved prospects for avoiding both a further US government shutdown and an escalation of trade-related tensions between the US and China. After moving higher during Asian trading, Treasury yields simply maintained those higher levels during the regular US trading day. The more positive tone in markets has continued since the New York close, with both US equities futures and the 10-year Treasury yield moving a little higher still, the latter to 2.69%. Further comfort was taken from President Trump’s indication that he will not veto the government spending deal reached by Congress (although he mooted raising additional funds for his much-wanted border wall by carrying out on his threat to declare a national emergency). Trump also confirmed his willingness to refrain from increasing tariffs on China from 1 March, provided that real progress towards a trade deal is made in the interim – comments that clearly put additional focus on meetings between senior Chinese officials, US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer, which begin in Beijing tomorrow.

Given these developments most bourses in Asia have made further gains today, especially in Japan and China where the TOPIX and CSI300 rose 1.1% and 2.0% respectively. In bond markets the 10Y JGB yield edged higher towards a flat 0.0%. In New Zealand the 10Y bond yield jumped 8bps and the NZ dollar appreciated by about 1½% after the RBNZ delivered a message that was not nearly as dovish as the market had been expecting. These moves also helped to drive Australian bond yields and the Australian dollar a little higher too, with a reported rebound in consumer sentiment also providing a boost.

A relatively quiet day for local data saw the BoJ release the goods PPI for January, which for a second consecutive month was much weaker than market expectations. The headline index fell a further 0.6%M/M – the same as in December – so that the annual pace of inflation slowed to a two-year low of 0.6%Y/Y from 1.5%Y/Y previously. Within the detail, prices in the manufacturing sector also fell 0.6%M/M – and were up just 0.1%Y/Y – not least due to a 5.8%M/M drop in prices for petroleum and coal. Also of note was a further 2.0%M/M decline in the price of non-ferrous metals and a 1.8%M/M decline in the price of chemicals. In a similar vein, measured in yen terms, import prices slumped a further 5.0%M/M in January so that prices were down 1.6%Y/Y – the first annual decline since December 2016. Prices for energy products slumped 10.1%M/M – the second consecutive double-digit decline – with smaller declines seen across other goods. Meanwhile, final prices for consumer goods fell 1.1%M/M in January to be down 1.8%Y/Y – the weakest outcome since December 2016 and clearly a discouraging development for the BoJ.

In other news, ahead of tomorrow’s preliminary national accounts report, the Cabinet Office reported that the Synthetic Consumption Index – the best available monthly indicator of private consumption spending – had declined a somewhat disappointing 0.5%M/M in December, following a revised 0.4%M/M decline in November. Even so, the index rose 0.6%Q/Q in Q4, confirming that private consumption will still be a strong contributor to a likely return to positive GDP growth during the quarter. Unfortunately the weakness over the past two months does not bode well for Q1, however.

Euro area:
The data focus in the euro area will today turn to the manufacturing sector, with aggregate industrial production figures for December. Given the sharp declines seen in Germany (-1.4%M/M), Italy (-1.7%M/M) and Spain (-1.8%M/M), we expect euro area industrial output to have dropped a little less than ½%M/M in December, which would leave production down around 1% over the quarter as a whole, the third quarterly contraction out of the past four and the steepest since 2012.

Meanwhile, the Spanish Parliament will today vote on the government’s 2019 budget. But with Catalan parties seemingly unwilling to support the fiscal plans at a time when the trial of separatists who led the charge for the 2017 independence referendum is just getting underway, expectations have risen for an early election in the spring.

In the markets, after Friday saw 10Y Bund yields slip below 0.1%, and the 10Y spread of BTPs over Bunds briefly touch 300bps, the bond auctions from Germany and Italy will be watched. Meanwhile, after yesterday saw the typically hawkish Dutch central bank governor Knot recognise that the case for tightening had diminished, instead advocating a ‘wait-and-see’ approach to policy, ECB Governing Council members Lane (soon-to-be chief economist) and Villeroy (potential successor to Draghi) are also scheduled to speak publicly. 

In the US, the main economic release today will be the January CPI report, which Daiwa America’s US economist Mike Moran expects to show prices falling for the second successive month on the back of lower energy prices. That should leave the annual rate of headline CPI down at least 0.4ppt to 1.5%Y/Y or less, which would be the lowest since at least September 2016. The core CPI, however, is expected to rise 0.2%M/M once again to leave the drop in the core inflation rate limited to just 0.1ppt to 2.1%Y/Y. Elsewhere, FOMC members Mester (who yesterday repeated that, if her baseline forecast is correct, rates “will have to go up a bit”) and Harker are due to speak publicly on the topic of the US economy. 

The main economic release in the UK today will also be January inflation figures, with a fall in the headline CPI rate expected, possibly by 0.2ppt to 1.9%Y/Y. The core rate might edge lower too, from 1.9%Y/Y in December. Today will also bring the latest official house price figures for December.

But there will inevitably be continued focus on Brexit today too. After Theresa May’s statement to Parliament yesterday saw her make the case for more time to secure an amended deal with the EU, today should bring details of any proposed amendments – aimed at giving MPs greater control over the process, not least to reduce the risks of a no-deal Brexit – to be voted on following tomorrow’s House of Commons debate. However, with May having promised to come back to Parliament on 26 February with a further update, and parliamentarians seemingly to be given another opportunity to influence Brexit policy the following day, tomorrow’s debate might prove to be a rerun of what happened a fortnight ago when MPs failed to agree on anything of substance. Of course, reports yesterday suggesting that May aims to leave policy in limbo right until the last week of March, in the hope that the lack of alternatives will force MPs to vote for her preferred deal, rang true. And that broadly tallies with the report of an ITV journalist claiming to have overheard UK civil servant negotiator Olly Robbins stating that May intends at end-March to offer MPs a choice of her (perhaps slightly amended) deal or a lengthy extension of the Article 50 deadline.

Following on from the somewhat stronger sentiment indicators contained in the NAB business survey yesterday, today’s Westpac survey cast consumer confidence in a stronger light too. After declining sharply in January, the headline index rebounded 4.3%M/M to 103.6 in February, thus almost recapturing its former level and moving slightly back close to the long-term average. All components of the survey rebounded this month, broadly in proportion to their previous declines. 

New Zealand:
The main focus in New Zealand today was on the outcome of the RBNZ’s first policy review for 2019 and the accompanying Monetary Policy Statement. As widely expected, once again the RBNZ left the OCR at 1.75%. More importantly, while the Bank’s stance moved in a slightly more dovish direction, the latest guidance did not validate the policy easing that has been priced into markets of late. Instead, the Bank’s formal forecasts continue to project a further long period of policy stability, to be followed by an eventual rate hike. The Bank continued to characterise the risks around the outlook for the OCR as “evenly balanced”, which is clearly at odds with the view of investors. Indeed, in the past-meeting press conference, Governor Adrian Orr stated that the risks of a rate cut had not increased since the November meeting.

Turning to the specifics, whereas in November the Bank had projected the beginnings of a tightening cycle in late 2020, the RBNZ post-meeting statement now bluntly states that the Bank expects to keep the OCR at the current level “through 2019 and 2020”. The Bank remains open to all possibilities, however, noting that “The direction of our next OCR move could be up or down.” With reference to the Bank’s new dual mandate, the statement observed that “Employment is near its maximum sustainable level”, but that core consumer price inflation remains below the 2% target mid-point. Indeed, the Bank’s revised projections suggest that CPI inflation will remain below 2% until the end of 2020. Despite a weaker global backdrop, the Bank expects GDP growth to pick up this year given low interest rates and a positive fiscal impulse. And as noted, rather than dwell on the negative risks, the Bank argued that there are both upside and downside risks to the central outlook. Specifically, while a more pronounced global downturn could weigh on domestic demand, the Bank stated that inflation could rise faster than projected if firms pass on cost increases to prices to a greater extent than has been assumed.

It is worth reminding that this was the last full Monetary Policy Statement meeting before the new Monetary Policy Committee (MPC) decision-making structure is introduced on 1 April with as-yet unnamed external MPC members (the next policy meeting on 27 March is an Interim Review). Therefore, it is perhaps unsurprising that Governor Orr would not want to make significant changes to the policy stance. A far more substantive change in the stance cannot be ruled out at the next major meeting on 8 May – even more so if data and other developments suggest that the balance of risks on the inflation outlook is moving decisively in one direction or the other. Meanwhile, it was announced today that the new Remit and Charter under which the MPC will operate will be released tomorrow morning. The policy target, which will be set out in the Remit, is unlikely to change materially from that set out in the current Policy Targets agreement. Comments made by the Governor today suggest that the Charter, which sets the transparency requirements and decision-making procedures for the MPC, will provide for the immediate publication of a non-attributable record of the meeting and of the vote if a consensus decision fails to be reached.

In other news, the QV house price index rose 2.9%Y/Y in January, down from 3.2%Y/Y in December – the weakest growth recorded since 2012. Looking ahead, QV – a valuation company – commented that they expected excess demand to continue to underpin prices. The recent slight easing of mortgage lending restrictions may also provide a modest boost to the housing market over coming months.

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