BoJ sits tight

Chris Scicluna
Emily Nicol

Having wobbled following Jay Powell’s words of caution about the economic outlook last Wednesday, risk appetite received a shot in the arm yesterday from the same source, as the Fed provided its long-awaited update on its plans for purchases of corporate bonds. In particular, ahead of Powell’s testimony to Congress later today, the Fed confirmed its intention to create a portfolio based on a broad, diversified index of US corporate bonds, to complement its existing purchases of ETFs.

So, after US stocks reversed their earlier losses, Asian markets rallied. Japan led the way, with the Topix closing up 4.1% even as the BoJ offered little new at its latest policy announcement, bar the expected confirmation of an increase in its loan-support programme (see below). And most European equity markets have opened up 2% or more this morning, with US stock futures higher too. In bond markets, having fallen following the Fed’s announcement, USTs are only a touch firmer this morning (10Y yields down a little more than 1bp to 0.73%). But while Bunds are weaker, euro area periphery bonds have made further gains (10Y BTPs down 6bps to below 1.40%). Gilt yields are 1-2bps higher across the curve despite some predictably weak UK labour market data (see below for more on these figures and today's other data from Australia and Germany).

After the Fed reignited risk appetite with its latest announcement, at the conclusion of its latest two-day policy meeting today the BoJ was able to sit tight, predictably leaving its main tools unchanged. So, of course, the short-term policy rate was left at -0.1%, with the Bank maintaining its commitment to purchase JGBs “without setting an upper limit” to keep 10Y yields around zero percent. The BoJ also left unchanged its purchase targets for ETFs (¥12trn) and J-REITS (¥180bn), and reaffirmed that it would buy a total of ¥20trn of corporate bonds and commercial paper through to March 2021. It also pledged again to maintain an ample supply of foreign currency funds without limit to its USD funds-supplying operations. However, following the augmentation of the government’s loan guarantees and rate subsidy measures in the second supplementary budget, which was approved by the Diet at the end of last week, the BoJ also automatically augmented its special loan support facility by a further ¥35trn to take its total support for corporate financing to at least ¥110trn.

The BoJ will publish updated economic forecasts next month. For now, it expects activity to resume gradually, while judging that the economy is likely to remain in a “severe situation” for some time. And with inflation set to remain negative for the time being and momentum for reaching the 2% target having been lost, in his press conference Governor Kuroda stated that the BoJ wouldn’t raise rates for at least two years, matching Jay Powell’s signal on US rates last week. That, of course, should come as no surprise to anybody. Indeed, he inevitably reiterated his regular mantra that the Policy Board will not hesitate to take further easing measures if required. And the Bank’s forward guidance makes clear that further cuts to the short-term policy rate or 10Y yield target remain options. But with neither option being particularly palatable to the BoJ, we doubt very much that it will pull the trigger on either measure. So, if it was to act again, a further expansion of its loan-support programme would seem most likely.

This morning’s UK labour market data were predictably grim. While we already knew from HMRC that about 8.7mn workers are currently on the government’s Job Retention Scheme furlough programme, the ONS reported early estimates suggesting that the number of payrolls in May was still down 612k (2.1%) from March. In addition, the Claimant Count, which includes those employed with low income or hours as well as those who are unemployed, rose almost 530k in May following an increase of 1.03mn in April to about 2.8mn, the highest since the mass unemployment of the first half of the 1990s. The ONS also suggested that the number of vacancies fell in May to a record low, down about 60% from March.

The other data reported this morning by the ONS from its Labour Force Survey were not so timely, covering the three months to April and suggesting that unemployment and employment had remained relatively stable over that period. Nevertheless, employee average pay growth already slowed notably over this period, down 1.3ppt to a near-six-year low of 1.0%3M/Y (or down 1ppt to 1.7%3M/Y excluding bonuses), to leave total pay falling in real terms for the first time in more than two years. The detail showed that pay declined in industries where furloughing was most widespread, not least in the (already low-paying) hospitality sector. Moreover, the total number of weekly hours worked in the three months to April 2020 fell a record 8.9%Y/Y.

Looking ahead, the easing of lockdown restrictions, including yesterday’s reopening of many non-essential stores, should provide support to labour demand, while the government’s Job Retention Scheme should encourage firms to postpone decisions on staffing. Nevertheless, from August the subsidies under the scheme will be gradually reduced before the programme concludes in October. And so, we still expect a non-negligible share of workers currently furloughed to be made formally unemployed in due course as and when the government support is withdrawn.

Euro area:
The final German inflation data for May offered no surprises, aligning with the flash estimate that showed headline inflation (on the EU harmonised measure) declining 0.3ppt to 0.5%Y/Y, the lowest since August 2016. This solely reflected a steeper drop in energy inflation last month (-8.2%Y/Y). Food inflation was unchanged (4.8%Y/Y) from April, as was services inflation (1.3%Y/Y). But with non-energy goods prices having edged slightly higher (0.8%Y/Y), core inflation increased 0.1ppt to 1.1%Y/Y, albeit still the second-softest reading for seven months. Later this morning, the German ZEW survey is likely to suggest improved investor perceptions of both current conditions and the economic outlook.

Ahead of Thursday’s monthly labour market report, today’s weekly figures published by the ABS suggested a very gradual improvement in May, with payrolls having increased by 1% over the month and up about 1½% from the April trough. Nevertheless, this still left the number of payrolls down around 7½% from the pre-Covid peak. And payroll wages remained very weak, falling around 3% in May to leave them about 8% below pre-crisis levels. Within the detail, the largest increase in payroll jobs was seen in accommodation and food services as the sector continued to resume operations (up more than 2% in the final week of May), although this still left them down a whopping 29% since mid-March. Jobs in the arts and recreation services were also still down by more than a quarter, with double-digit percentage drops in admin services, real estate, info and telecommunications industries too. Overall, Thursday’s official monthly labour market report is expected to show a further fall in employment in May, by 80k following a drop of 594k in April.

The main events over the remainder of the day come in the US, not least with Fed Chair Powell giving the first leg of his semi-annual monetary policy testimony to the Senate’s Banking Committee. Despite yesterday's boost with the announcement on corporate bond purchases, expect more of what he came up with in last week’s post-FOMC press conference, with plenty of caution about the outlook for the labour market and inflation, and hence the need for monetary policy to remain supportive over the forecast horizon. 

Data-wise, the retail sales and industrial production data for May will be closely watched. Expect retail sales to claw back about less than half of the drop of 16.4%M/M in April. And despite a likely pickup in factory output, weakness in the mining component means that the rise in industrial production is likely to be very muted following the drop of 11.2%M/M the prior month. The June NAHB housing survey and business inventory data for April are also due.

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