BoE to leave policy unchanged and be relatively sanguine about economic outlook

Chris Scicluna

Asian equity markets struggle as bond yields rise and Yellen confirms will meet today to discuss market volatility with regulators
Following two days of solid gains, Wall Street took a breather yesterday with the S&P500 advancing just 0.1% and the Nasdaq closing essentially unchanged. While both the ISM services index and ADP report contained some better-than-expected news regarding the performance of the labour market, this simply reinforced a further sell-off in the Treasury market. The 10Y UST yield increased 3bps to 1.13% at Wall Street’s close and has continued to nudge higher in Asian trading.

Against that background, during a relatively quiet day for local economic news, equity markets in the Asian region struggled to make headway, with most bourses backtracking slightly after advancing strongly earlier this week. Indeed, the tone in markets deteriorated as the session wore on, with tech stocks eyeing a warning from Qualcomm regarding a growing semiconductor shortage and as US futures moved lower after Treasury Secretary Yellen confirmed that she would meet with regulators today to discuss recent volatility in equity markets. In Japan, the TOPIX was a relative outperformer, closing with a modest loss of 0.3%. In China, where repo rates have begun to creep higher again following yesterday’s liquidity withdrawal, the CSI300 also fell a modest 0.2%. By contrast, the Nikkei 225 and South Korean KOSPI dropped more than 1.0%.

Markets also struggled in the Antipodes, where bond yields remain under upward pressure due both to robust local data and the sell-off in US Treasuries. The ASX200 fell 0.9% and the 10Y AGCB yield rose 5bps to a new post-pandemic high of 1.22%, notwithstanding this week’s announcement of further RBA bond purchases. Meanwhile, with the ANZ’s first Kiwi business survey for the year pointing to a further rise in firms’ activity expectations and a marked increase in pricing pressures, the relentless sell-off in Kiwi bonds continued with 10Y yields hitting a new high of 1.35%.

BoE to leave policy unchanged but be cautiously optimistic about UK outlook
The conclusion of the BoE’s first monetary policy meeting of the year will be accompanied today by a new Monetary Policy Report featuring updated economic projections. Since the December meeting, the agreement and implementation of the UK-EU Trade and Cooperation Agreement (TCA) avoided the disruption that a no-deal end to the Brexit transition would have caused, but nevertheless imposed significant new barriers to trade between the two blocs and also between Great Britain and Northern Ireland. That would have been broadly in line with the BoE’s expectation. However, economic data have pointed to greater resilience in UK GDP in Q4 than was expected by the MPC in its November projections, which foresaw a drop of about 3%Q/Q – in contrast, overall output now looks to have been broadly flat last quarter. And while conditions in Q1 now appear weaker than the BoE expected – e.g. preliminary data this morning suggest that new car registrations fell about 40%Y/Y in January – restrictions on activity persist, and the near-term profile of fiscal policy is uncertain ahead of next month’s Budget announcements, the relatively swift start to the UK vaccination programme should have bolstered the MPC’s confidence in the growth outlook for coming quarters.

Moreover, inflation has recently been behaving much like the MPC expected. And with the November projections having suggested that inflation would rise close to or above 2%Y/Y by the end of this year, and remain thereabouts over the following couple of years, a reaffirmation of that profile today would point to little need to adjust monetary policy over the horizon.

So, the MPC seems bound to leave policy unchanged today. And it also seems likely to retain its forward guidance, leaving open the possibility of further action if the inflation outlook weakens and repeating that it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made eliminating spare capacity and achieving the 2% inflation target sustainably”. The BoE will also publish the findings of its survey of commercial banks on the potential impact that negative rates might have, and thus how such a policy tool might be implemented if necessary. But we expect the MPC to underscore that, while the option should be there, there should be no need to cut rates to negative territory if economic conditions unfold as it expects.

Retail sales data and construction PMIs ahead in the euro area
Today will bring euro area retail sales figures for December along with the January construction PMIs. Given the significant differences between the member states in the timing and consequences of imposition and relaxation of pandemic containment measures– e.g. with France enjoying vigorous growth in sales that month as its lockdown restrictions were relaxed but Germany recording a drop of almost 10%M/M as its restrictions were tightened – the euro area retail sales figure is difficult to forecast with confidence. Nevertheless, overall, modest growth in euro area sales of around 2½%M/M is expected in December following the drop of 6.1%M/M in November. Meanwhile, the construction PMIs are likely to continue to point to subdued activity in the sector at the start of 2021.

Productivity and factory orders data ahead today in the US
Following last week’s advance Q4 GDP report, today brings the release of the first estimates of labour productivity and unit labour costs for the quarter. Daiwa America Chief Economist Mike Moran notes that while activity grew respectably, this was achieved with a significant increase in labour input. So after rising sharply over the previous two quarters, Mike estimates that labour productivity has declined 1.5%AR in Q4. Today will also bring the release of the full factory orders report for December, which Mike expects will point to solid growth of around 1%M/M despite advance data pointing to a relatively soft 0.2%M/M lift in orders for durable goods. As always, the weekly jobless claims report will be of interest too.

Aussie trade surplus widens at end-2020 as exports rise but imports decline
Australia’s goods and services trade surplus widened by $A1.8bn to a six-month high of A$6.8bn in December, which is more-or-less what had been suggested by last month’s preliminary merchandise trade figures (curiously, the market consensus was expecting a considerably larger widening). Overall exports increased 2.8%M/M – about half as much as the market had estimated – reducing the annual contraction to 7.8%Y/Y. Exports of goods increased 3.5%M/M, led by a strong uplift in shipments of rural goods (especially cereals), and were up 1.5%Y/Y. However, exports of services fell 1.7%M/M and with the border closed to most foreign nationals, were down by more than 40%Y/Y for a sixth consecutive month.

After increasing sharply in November, imports fell 2.4%M/M and were down 13.1%Y/Y. The monthly decline was entirely due to some payback in capital goods imports which had jumped in November due to the arrival of high-value aircraft. Imports of consumption goods increased a strong 13.4%Y/Y, but lower energy prices continued to underpin an 11.1%Y/Y decline in imports of intermediate goods. Moreover, with few Australians travelling overseas, imports of services were down almost 56%Y/Y.

Given today’s figures, exports increased 7.5%Q/Q in Q4 while imports increased 3.1%Q/Q, with the seasonally-adjusted surplus widening by A$4.8bn during the quarter. While undoubtedly positive news for Australian incomes, it is worth noting that last month’s trade price indices had pointed to a sizeable improvement in the merchandise terms of trade during the quarter, implying that net export volumes were likely little changed. Further insight on how these figures have impacted the real GDP arithmetic will be provided when the ABS publishes the Q4 BoP statistics in early March.

In other news, consistent with the monthly survey, the details from the quarterly edition of the NAB business survey were encouraging. A net 19% of firms indicated that they expect a further improvement in business conditions over the next three months – up from 9% who had cited improved conditions over the past quarter. In addition, firms indicate that they expect improved profitability and an increase in hiring – the latter expected to lead to the largest pick-up in labour costs since the pandemic began.

Kiwi business confidence ticks higher, investment and pricing indicators up sharply; dwelling approvals hit new high in December
The first ANZ Business Outlook for this year pointed to a further modest improvement in business sentiment following a sharp lift at the end of last year. The headline general confidence index increased just 2.4pts to 11.8 while the closely followed activity outlook index inched up 0.6pts to 22.3 – nonetheless, the highest readings since August 2017 and September 2017 respectively. Elsewhere in the survey, the employment intentions index increased a welcome 1.8pts to 10.6, which is the highest reading October 2017. Most significantly, the investment intentions index more than doubled to 17.8, which is the highest reading since August 2017 and consistent with the reported increase in capacity utilisation. Perhaps of greatest interest, inflationary pressures appear to be stirring already with the proportion of firms signalling planned price rises increasing sharply for a second consecutive month to levels not seen for well over a decade and firms 1-year ahead forecast for inflation rising to a 1-year high of 1.8%Y/Y – now just below the mid-point of the RBNZ’s target range.

In other news, the run of strong housing-related data continued with the number of dwelling approvals rising by a further 4.9%M/M in December to be up over 19%Y/Y and at the highest level since monthly statistics began in the 1960s. Approvals for houses increased 3.6%M/M yet were up a more modest 6.2%Y/Y, with most of the growth last year driven by generally cheaper apartments and townhouses. However, given upward pressure on building costs, the value of dwelling approvals increased 28.0%Y/Y in December, while the value of approvals for non-residential buildings also increased a solid 16.3%Y/Y. But while the total value of all approvals was up 20.7%Y/Y in December, for the full calendar year approvals increased less than 1% compared with 2019, reflecting the disruption caused by the national lockdown early in the year.

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