BoJ regional report more downbeat, but not a game-changer

Emily Nicol
Chris Scicluna

At face value, today’s signing ceremony for the first-phase US-China trade deal should avoid an overt intensification of protectionism between the two countries for a while yet. But it will still lock in a high-tariff environment governing their trade until after the Presidential election. And a report last night from Reuters suggested that the US Commerce Department has drafted a new rule to restrict further exports of items incorporating US components to Huawei. That did nothing to rekindle risk appetite, and so Asian equity markets largely took their cue from yesterday’s (more modest) declines in the S&P500 and NASDAQ.

In particular, as the yen appreciated back through ¥110/$ and the BoJ revised down its assessment of economic conditions in three of Japan’s nine regions, the TOPIX fell a touch more than 0.5% on the day. And China’s CSI300 fell a little more than that. Meanwhile, in the bond markets, USTs extended their gains made in the wake of the softer-than-expected US core CPI report, with 10Y yields back down to 1.80% (down about 6bps from this time yesterday). And while somewhat mixed, yields on 10Y JGBs edged back down to zero per cent while 5Y yields inched lower after a MoF auction met with decent demand. Euro area govvies have also strengthened this morning despite some cautiously optimistic comments from Bank of France Governor Villeroy de Galhau, which among other things underscored that the ECB has no pressing need to change policy.

Looking ahead, a busy day of economic data from the euro area will confirm a weak growth performance in Germany over the past year, while the latest UK inflation report should suggest that underlying price pressures are subdued, thus supporting the case for near-term BoE monetary easing. Producer price data will come from the US while Japan’s latest machine orders report will come tonight.

Ahead of next week’s BoJ Policy Board meeting and publication of updated economic forecasts in its quarterly Outlook Report, today’s BoJ Regional Economic Report attracted attention. Perhaps inevitably given the impact from the consumption tax hike and super-typhoon, this saw three of the nine regional representatives – Hokuriku, Tokai and Chugoku – revise down their assessment of economic conditions over the past three months. Indeed, most regions unsurprisingly observed fluctuations to the recent consumption profile due to the tax hike, while many remained downbeat about housing investment. And all suggested that production was weak, weakening or declining. This notwithstanding, regional reps remained generally encouraged about business investment with seven of the nine citing increasing or high levels of capital spending, while prospects for the labour market remained buoyant. And even before the government’s fiscal stimulus package feeds through, eight of the nine regions saw public investment increasing or at a high level.

So overall, despite the deterioration in three, all regional reps still assessed that the economy had been recovering or expanding, albeit moderately for most. As such, the Policy Board will likely feel little need to amend significantly its assessment about the economic outlook, maintaining the view that the economy is likely to continue on an expanding trend. But not least given the global backdrop, the BoJ will no doubt continue to flag that risks to the outlook remain skewed to the downside. And so, like at today’s Branch meeting, Kuroda is likely to reiterate that the BoJ stands ready to ease policy if required “if risks heighten to an extent that the momentum towards the price target is undermined “. Of course, given that the BoJ might well revise up its GDP growth forecast for FY19 due to recent revisions, and its forecast for FY20 on the back of the government’s fiscal stimulus package, we certainly don’t expect additional easing this month, or over coming quarters.

Certainly, while coming in short of expectations, yesterday’s economy watchers survey suggested that there was no need to significantly adjust its growth forecasts, with signs of further modest recovery in economic conditions heading into year-end. In particular, the headline current conditions DI increased 0.4pt in December to 39.8, to leave it more than 3pts higher than October’s slump. Of course, this still left the index 7pts lower than its level a year ago, the third-lowest reading since April 2014 when the consumption tax was last increased, and consistent with contraction in Q419. Within the detail, there was reportedly a notable rebound in corporate-related demand – the relevant index rose more than 2pts to 40.8 – as manufacturers saw a pickup after the typhoon-related disruption earlier in the quarter. But despite a further modest improvement in retail in December, overall household-related demand moved broadly sideways. And overall, the survey’s outlook DI moved broadly sideways suggesting little anticipated improvement heading into the New Year.

Euro area:
After a quiet day yesterday, today will be relatively busy for euro area economic data. The November euro area industrial production report is set to show growth of about ½%M/M but the goods trade figures for the same month will show a drop in exports and a narrower surplus. The first estimate of full-year German GDP in 2019 will reveal growth of about 0.6%Y/Y, down from 1.5%Y/Y in 2018 and the weakest rate since 2013. The associated fiscal numbers will report a German general government budget surplus of about 1.2% of GDP, about ½ppt lower than the previous year.

Meanwhile, the final estimates of French and Spanish inflation in December released this morning aligned with the flash figures of 1.6%Y/Y and 0.8%Y/Y respectively on the EU harmonised basis, up 0.4ppt and 0.3ppt from their levels in November. Meanwhile, ECB speakers include the hawkish Austrian Governing Council member, Robert Holzmann, and Villeroy de Galhau.

In the UK, the main economic focus today will be December inflation figures, which will be watched closely by the BoE as it weighs the case for further easing. The annual rates on the headline and core CPI measures are expected to remain unchanged at 1.5%Y/Y and 1.7%Y/Y respectively, the former thus matching the lowest since 2016. The core output PPI rate is expected to edge down to 1.0%Y/Y, which would be the lowest in more than three years. And house price growth on the official ONS measure is expected to rise just 0.3ppt in November to a still very modest 1.0%Y/Y. Meanwhile, BoE external member Michael Saunders, who voted for a 25bp rate cut at the November and December policy meetings, will also speak publicly and will no doubt restate the case for easier monetary policy.

In the US, following yesterday’s softer CPI release, producer price data and the Fed’s Beige Book, both for December, are also due along with the Empire manufacturing survey for January.

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