Net PEPP purchases likely to end in March, reiterates ECB policymaker

Chris Scicluna

Japanese business surveys signal widespread improvement in conditions in Q4 ahead of next week’s BoJ Tankan
Ahead of next week’s BoJ Tankan survey results, a couple of monthly surveys today suggested that conditions in Japan’s economy have continued to improve, even though the Omicron variant clouds the outlook somewhat. Most notably, the Reuters Tankan presented the first snapshot of business sentiment in December, and firms in most sectors judged current conditions to have become much more favourable. In particular, with suggestions that supply bottlenecks continued to ease, manufacturers judged conditions to be the best since August (the respective current conditions index rose 9pts to 22, well above the long-run average). The improvement was most marked in autos (up 29pts to zero), with various machinery sub-sectors and chemicals also judging conditions to have improved significantly. Beyond manufacturing, firms considered conditions to be the best since February 2020 at the onset of the pandemic (the respective index rose 5pts to 6) with marked improvement in sentiment among wholesalers and retailers to the highest since 2019.

Looking ahead, the Reuters Tankan suggested that manufacturers and services companies alike are more optimistic about the near-term outlook, with the 3-month ahead index for manufacturers up 7pts to 26 (the best since August) and for services up 6pts to 21 (the best since June 2019). We caution, however, that many responses to the survey (which was conducted from 24 November to 3 December) will have been submitted before the identification of the Omicron variant and associated tightening of travel restrictions. Moreover, while the Cabinet Office’s economy watchers survey today pointed to improved conditions in November, with its headline index up more than 2pts to 58.5, the highest on the series dating back three decades on improved assessments among manufacturers and non-manufacturers alike, the expectations index dropped almost 4pts to a 3-month low of 54.6.

Drop in Japanese Q3 GDP bigger than previously estimated
Japan's economy contracted a little more than previously estimated (and a little more than expected) in Q3 as the jump in coronavirus cases and associated state of emergency weighed on consumer spending and supply bottlenecks constrained production. In particular, GDP fell 3.6%Q/Q annualised last quarter, 0.6ppt more than initially calculated and 0.5ppt more than the consensus forecast on Bloomberg. The downwards revision was primarily due to a steeper drop in private consumption, now estimated to have dropped 1.3%Q/Q ann., 0.2ppt more than previously thought, as spending on durable goods plunged 16.3%Q/Q ann. As suggested by last week’s capital spending survey, private investment dropped less than initially estimated, down 2.3%Q/Q ann. (vs 3.8%Q/Q ann. in the preliminary release). But public investment was a touch weaker (down 2.0%Q/Q ann.) and both inventories (+0.1ppt) and net trade (zero) provided a little less support than initially thought.

Ahead of next week’s BoJ policy meeting, Amamiya says no need to amend monetary stance
As suggested by today’s survey results, GDP seems bound to have rebounded in Q4, and probably in excess of the pace of contraction in Q3. And in the absence of new bad surprises from Omicron, fiscal stimulus should help to maintain the recovery trend into the New Year. Given the absence of price pressures seen in other major economies, however, it was no surprise today that BoJ Deputy Governor Amamiya suggested that there is no need to amend Japan’s monetary policy, although a decision on the special pandemic programmes that expire in March would come either next week or next month.

Bank of France survey indicates ongoing growth in GDP above pre-pandemic level in Q4
Despite the worsening wave of pandemic, the Bank of France’s latest business survey (conducted from 26 November to 3 December) suggested that French economic activity continued to pick up last month, with activity stronger in industry, services and, albeit to a lesser extent, construction. And firms expect continued improvement in December too. Nevertheless, 51% of firms cited challenges recruiting new staff while more than half of firms in manufacturing (57%) and construction (56%) also reported continued problems with supply bottlenecks, with autos still most severely hampered. And firms in hospitality, leisure and personal services reported the negative impact of the revival in the spread of Covid-19 and associated restrictions. Nevertheless, after French GDP returned to its pre-Covid level in Q3, the BoF estimates growth of a little less than ¾%Q/Q in Q4 to take full-year growth in 2021 to 6.7%Y/Y.

ECB policymaker reiterates that net PEPP purchases are likely to end in March despite Omicron; Lagarde highlight climate and cyber risks
While there are no further noteworthy data due from the euro area (or UK) today, several ECB Executive Board members are scheduled to speak today at the European Systemic Risk Board annual conference. President Christine Lagarde’s remarks are already published, and she focused on climate and cyber risks as the stand-out threats to stability. Given the focus on financial stability of today’s event, insights into next week’s ECB monetary policy deliberations are likely to be thin on the ground. Earlier today, however, Governing Council member Martins Kazaks (who is Latvia’s central bank governor) reiterated in an interview that the net PEPP purchases were still likely to come to an end in March “unless [the Omicron variant] spills over into significant and large negative revisions to the outlook for growth”. He suggested that the ECB could wait until February to decide whether the outlook had deteriorated sufficiently for such a change of course. Nevertheless, he maintained his expectation that inflation will be back below 2.0%Y/Y by 2023.

JOLTS survey to signal no let-up in tightness of US labour market in October
A quiet day for US economic data features the latest Job Openings and Labour Turnover Survey (JOLTS) report. Expect another extremely high figure for job openings in October, close to the 10.4mn level in September and thus well above the number of unemployed, underscoring the tightness of the labour market at the start of Q4.

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