BoJ measures of underlying inflation highlight absence of pressures

Chris Scicluna

Hard reverse in US markets with UST yields and stocks lifting together as fears about Fed tightening appear to ease; Asia follows suit today
Investors’ previous concern about last week’s Fed policy ‘pivot’ appeared to fade yesterday, with markets largely reversing the moves seen during Friday’s US session. After trading as low as 1.35% during the bout of volatility the Asia session, the 10Y UST yield backtracked substantially once European markets opened and went on to close the US session at 1.49%, where it had been prior to the Fed’s policy announcement on Wednesday. Meanwhile, the 30Y UST closed at 2.11%, a notch above Thursday’s endpoint. Meanwhile, the S&P500 rebounded 1.4% to finish up fractionally above last Wednesday’s post-FOMC close. And with risk aversion suddenly abating, despite the rebound in UST yields, the greenback weakened against most currencies aside from the yen. Notably the recovery in markets was completed before a speech made by the New York Fed’s Williams, who noted that he expected annual inflation in consumer prices to fall back to 2% next year, albeit acknowledging “a great deal of uncertainty about the inflation outlook”. Likewise, the market was unperturbed as the Dallas Fed’s Kaplan – a well-known hawk who votes neither this year nor next - said that he would prefer to begin the QE taper “sooner rather than later”.

Since the close, the Fed has released the prepared remarks that Fed Chair Powell will make during his House testimony later today. Predictably, these remarks closely follow those he made at post-FOMC press conference and so there has been no market reaction. And with US equity futures up a couple of tenths and Treasuries trading about in line with their US closing levels, the about-face in US markets has been the key driver of price action in the Asia-Pacific region. Not surprisingly, by far the biggest gains have been in Japan, where yesterday’s slump in the TOPIX – that had been limited by the BoJ’s first purchases of ETFs since April – has been more than erased by an advance of 3.2% today. Similarly, after falling a steep 1.8% yesterday, Australia’s ASX200 has increased 1.5%, with the rebound perhaps limited by news of a further 10 community coronavirus cases in Sydney. Elsewhere in the region, the gains are generally less than 1%, reflecting the smaller declines experienced yesterday. In the bond market, yields have rebounded somewhat across the region, especially in the Antipodes, with the 10Y AGCB climbing 7bps to 1.58%.

BoJ measures of underlying inflation highlight continued absence of pressures with only a small share of prices up; nationwide department store sales up 65.7%Y/Y in May, but weak excluding base effects
Following on from Friday’s national CPI report, today the BoJ released its analytical measures of underlying inflation that, unlike the regular measures of core inflation, are less-impacted by extreme relative price shifts such as the steep decline in mobile phone call charges that occurred in April. Nevertheless, these reinforced the message that the price pressures due to supply bottlenecks that are preoccupying investors in other industrialised economies are largely absent in Japan. Thanks to favourable rounding, the trimmed mean inflation rate, which the BoJ regards as best correlated with the state of the economy, edged up just 0.1ppt to 0.0%Y/Y in May. This compares with the Bank’s preferred exclusion-based core measure (CPI excluding fresh food and energy), which was steady at -0.2%Y/Y. The weighted median and the modal increase in prices were steady at a negligible 0.1%Y/Y. Meanwhile, only a net 11.3% of items in the CPI recorded a price rise over the year to May, unchanged from April and so still running at about half the share recorded prior to the pandemic.

In other news, Japan’s national department store sales grew 65.2%Y/Y in May – down from 167.0%Y/Y in April. Base effects from the first coronavirus wave lockdown eased somewhat but still remained very much in play. Indeed, the level of sales fell over 22%M/M in May to the lowest level since May last year and were over 44% lower than in May 2019. In the detail, spending on clothing and accessories more than doubled from the especially depressed levels recorded a year earlier, while spending on household goods increased over 35%Y/Y.

UK public borrowing undershoots expectations again; CBI Industrials Trends Survey due
As repeatedly been the case over recent months, UK public sector net borrowing again undershot expectations in May, coming in at £24.3bn (excluding banking groups), more than £1bn below the consensus forecast and more than £4bn below the OBR’s most recent forecast, and down from the record May reading of £43.8bn a year earlier. In addition, net borrowing in April was also revised down £2.6bn from the initial estimate. So, cumulative net borrowing in the first two months of the fiscal year of £53.4bn was more than £14bn below the OBR’s forecast at £53.4bn. The drop in borrowing from a year earlier reflects both increased revenues related to the firm economic recovery (central government receipts were up £7.5bn in May from a year earlier) and lower spending (central government spending was down £10.9bn from a year earlier), benefiting among other things from the drop in the number of workers on the government’s job retention scheme.

Looking ahead, the CBI’s industrial trends survey for June due later this morning seems highly likely to signal firm recovery in the sector, even as overseas orders continue to lag those from at home. In light of continued supply bottlenecks, the survey measure of selling prices could well rise to the highest since the early 1980s.

June consumer confidence the euro area data highlight, with further ECB-speak to come
On another relatively quiet day for economic data from the euro area, the highlight is likely to be this afternoon’s flash estimate of consumer confidence in June. A fifth successive rise in the Commission’s index to the highest level since early 2018 is expected. Meanwhile, after some dovish comments yesterday from ECB President Lagarde – who flagged the need to “remain vigilant and ensure that policy support continues… well into the recovery”, saw limited risks of spill overs from high US inflation to the euro area, and also noted scope to cut rates again if necessary – today’s ECB-speak comes from Chief Economist Lane and key Executive Board member Schnabel.

Fed’s Powell to testify before a House subcommittee today; Existing homes sales likely to have continued to moderate in May
The key focus over the coming day will be Fed Chair Powell’s testimony before a House select subcommittee hearing on the Fed’s pandemic response and the economy. Predictably, Powell’s prepared remarks on the economy – already released ahead of the testimony – echo those he made at last week’s post-FOMC press conference, and note that as “transitory supply effects abate, inflation is expected to drop back toward out longer-run goal”. So, the focus will be on Powell’s responses to the questions posed by committee members. We imagine that investors will be trying to gauge whether Powell see’s scope for policy to tighten even sooner than the majority of committee members forecast last week.

On the data front, the only notable release is the existing home sales report for May. Given softness in pending home sales and mortgage applications, Daiwa America Chief Economist Mike Moran expects sales to have declined a further 1.7%M/M following steeper declines over the preceding three months.

Australia’s ANZ-Roy Morgan consumer confidence index edges up last week
The only economic releases in Australia today were the weekly update on consumer confidence and the ABS’ experimental high-frequency measure of payrolls. Regarding the former, the ANZ-Roy Morgan consumer confidence index increased 1.3% last week to 112.4, marking the highest reading in four weeks but nonetheless remaining in the tight band seen in recent months. Most of the improvement this week reflected a more upbeat assessment of the near-term economic outlook – doubtless assisted by the containment of the virus outbreak in Melbourne – and of developments in respondents’ financial situation over the past year. Meanwhile, the ABS reported that the number of payrolls jobs declined 0.9% over the past fortnight – not least due to the impact of the short lockdown in the state of Victoria – but was 6.7% higher than a year earlier.

Kiwi consumer confidence improves a little in Q2
In New Zealand the long-running Westpac measure of consumer confidence increase 1.9pts to 107.1 in Q2 – the highest reading since the pandemic struck but still a touch below the historical average for the series. While respondents judged that both present and expected conditions had improved this quarter, only the latter – now at its highest level in four years – was above pre-pandemic levels, reminding that the economic recovery is not yet complete.

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