No surprises from the BoJ

Chris Scicluna
Emily Nicol

US markets steady ahead of today’s FOMC meeting; stocks reopen lower in Mainland China, also slightly weaker in Japan and Singapore
With markets earlier in the day showing some signs of stability as contagion worries associated with China Evergrande Group eased somewhat, and with today’s FOMC meeting looming large in investors’ minds, Wall Street steadied yesterday. At the close of a quiet session, both in terms of volume and volatility, the S&P500 was down less than 0.1%, while both the Treasury market and the greenback also closed at similar levels to Monday. The only economic news, while welcome, was a larger than expected lift in both housing starts and permits in August (the former also benefitting from favourable revisions to prior data).

After being on holiday, markets have reopened today in Mainland China. Unsurprisingly, in light of this week’s developments, Chinese stocks have weakened somewhat today. That said, the CSI300 is down just 0.7% at present, with the prospect of a larger decline perhaps averted, albeit maybe only temporarily, by news that China Evergrande Group’s onshore property unit had negotiated a plan to make a coupon payment on a bond that was due tomorrow. In addition, while the PBoC announced unchanged loan prime rates for a 17th consecutive month, this was fully expected given last week’s steady MLF auction rate and the Bank’s apparent preference to deliver support via increased liquidity rather than lower interest rates. On that score, no doubt mindful of current investor worries, today the PBoC injected a further net CNY90bn of short-term liquidity via reverse repo.

Looking elsewhere, the major equity indexes have also lost some ground in Japan today, thus further paring their significant outperformance this month against other major markets. The TOPIX has followed yesterday’s 1.7% with a further 1.0% loss today, with there being no material reaction to the outcome of the BoJ’s Board meeting. As widely expected, the BoJ left all of its key policy settings unchanged. It also maintained an optimistic medium-term outlook for the economy, while noting the constraint that supply bottlenecks are having on some exports and production (more on the BoJ below). Bucking the weaker trend (which was also evident in Singapore), Australia’s ASX200 had a better day, rising 0.5%. Energy and resource stocks led the gains, with iron ore futures bouncing off Monday’s 10-month low. There were no economic reports in Australia and bond yields were stable. Aside from further anti-lockdown protests in Melbourne, the main talking point of note was a rare (for Australia) magnitude 5.9 earthquake, centred 180km northeast of Melbourne. This has caused some damage to buildings near the epicentre, but no immediate reports of serious injury. Due to public holidays, markets were closed today in both Hong Kong and South Korea.

Given developments in China, US equity futures are presently several tenths firmer. There was little reaction to news that the Democratic-dominated House had passed a stopgap bill to keep the government open and to suspend the debt ceiling until the end of next year. Of course, with Republicans seeking to use the debt ceiling as leverage to constrain President Biden’s fiscal programme, this bill is certain to become a political football in the Senate over coming days. So, while the Senate will ultimately find a way forward on the debt ceiling – if necessary by the Democrats attaching this to a filibuster-beating budget resolution – in the meantime the expected impasse in the Senate leaves open the possibility of another temporary, but nonetheless disruptive, partial government shutdown from 1 October.

BoJ provides no surprises with unchanged policy settings
The first of this week’s major central bank policy announcements took place in Japan today, albeit one that was always unlikely to deliver any surprises. This month the BoJ’s Board again left all dimensions of its policy unchanged, including leaving its short-term policy rate at -0.1% and the 10Y JGB yield target at 0%. As usual, Kataoka was the only dissenter to the decision, maintaining his call for short- and long-term interest rates to be lowered. In addition, the upper limit for the Bank’s purchases of ETFs (about ¥12trn) and J-REITS (about ¥180bn) was unchanged, as was the Bank’s commitment to purchase, until the end of March, up to ¥20bn of CP and corporate bonds in total. Also untouched was the Bank’s commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target. As usual, the Bank’s forward guidance continues to indicate that it expects short- and long-term policy rates to remain at current levels or lower. While recent experience indicates a marked reluctance to lower interest rates further, the Board continues to assert that it will not hesitate to take additional easing measures if necessary.

While noting that some exports and production have been affected by supply bottlenecks, and that activity in the customer-facing parts of the service sector will remain constrained for the time being, the Bank’s economic commentary maintained a constructive outlook overall. This outlook remains founded on the reasonable assumption that the negative impacts of coronavirus will wane as vaccination progresses, while the economy is expected to continue to receive support from growth in external demand, accommodative financial conditions, the government’s economic measures and an intensifying ‘virtuous circle’ from income to spending. As a result, the BoJ continues to forecast that core inflation (measured as CPI ex fresh food) will rise gradually from levels that will soon turn fractionally positive due mainly to the impact of the rebound in energy prices. However, prudently, the Bank continued to note the outlook is subject to “high uncertainties” over the impact of the pandemic on both the domestic and overseas economies. In particular, the Board will continue to pay close attention to how the pandemic is impacting growth expectations, financial intermediation and system stability.

Finally, the post-meeting statement also noted that the Board unanimously agreed on the details of the new “green” fund-provisioning measure, titled “Fund-Supplying Operations to Support Financing for Climate Change Responses”. This measure, which had been outlined in preliminary form at the July meeting, is designed to encourage financial institutions to make loans to companies investing in actions that address climate change. The Bank intends to make the first loan disbursement in December – with applications accepted from today – with loans offered biannually until the scheme scheduled closure on 31 March 2031. Funds will be provided at an interest rate of 0%. And to encourage institutions to access the facility, macro add-on balances in their BoJ current account (which are exempt from the -0.1% policy rate) will be increased by double the amount of funds received. Finally, while notionally funds will be provided for only one year, rollovers can be made an unlimited number of times while the scheme is running, in effect delivering long-term financing.

PBoC sets unchanged loan prime rates for 17th consecutive month; continues to provide support by boosting liquidity instead of lowering interest rates
As most analysts had expected – especially with the 1Y MLF rate held at 2.95% at last week’s auction – today the PBoC left its published prime loan rates unchanged for a 17th consecutive month. So the 1Y loan prime rate (the benchmark for corporate loans) was left at 3.85%, while the 5Y loan prime rate (the benchmark for mortgages) was left at 4.65%. Rather than cutting interest rates to support the economy, at present the PBoC clearly appears to favour offering more liquidity, as it did via a cut in the Reserve Requirement Ratio (RRR) back in July. The same approach has been taken to soothe investor nerves frayed by worries about developments at China Evergrande, with the PBoC injecting short-term liquidity via reverse repo in recent days.

Euro area flash consumer confidence expected to move broadly sideways
A relatively quiet day for European economic data will see the release later today of the preliminary European Commission consumer confidence indicator for September. This is expected to move broadly sideways from -5.3 in August, having fallen back from the 3-year high of -3.3 reached in June. That, however, would still leave it some way above the average since the start of the pandemic (-12.1).

Most interest in the US today will centre on the Fed’s updated QE taper guidance and medium-term policy projections; existing home sales data also due
The announcement of the outcome of the latest FOMC meeting dominates today’s diary in the US (and elsewhere). While there is essentially no prospect of the Fed changing its key interest rate settings at this meeting, there are nonetheless a number of points of interest for investors that will likely flow from the post-meeting statement, revised medium-term projections and Jay Powell’s post-meeting conference. One particular focus will be the Fed’s updated guidance on the likely timing of a start to the tapering of the Fed’s asset purchases. Writing in his latest weekly, Daiwa America’s Chief Economist Mike Moran notes that the Fed could easily justify backing away from its assessment that it might be appropriate to begin the taper this year, perhaps citing rising virus case numbers and recent soft payrolls and CPI readings. However, Mike expects the Fed to stick with its previous guidance, with record job vacancies and last week’s strong retail sales report suggesting that the recovery remains on track. Another key point of interest will be what the Fed’s updated projections imply about the timing of an eventual lift in the Fed’s policy rate. In particular, investors will be interested to see whether there has been any change from the June outlook, in which seven of 18 officials predicted a first lift in the target federal funds rate as soon as next year. Mike argues that while one or two participants might bring their predicted first rate hike forward, it is most likely that 2023 will remain the year of ‘lift-off’ for the median participant. Meanwhile, he expects the Fed’s economic projections to report slightly weaker GDP growth this year than envisaged in June, but about a 1ppt lift in the forecast of core inflation to circa 4%Y/Y.

Turning to the economic data flow, following this week’s better than expected NAHB housing survey and housing starts and permits data, the focus remains on housing indicators with today bringing the release of existing home sales data for August. While sales picked up modestly over the previous two months, the recent softness of pending home sales has led Mike to forecast that sales will have changed little from July.

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