Monetary policy

After the Fed, ECB and BoE last week tightened policy further, the conclusion of the BoJ’s Policy Board meeting tomorrow should be a non-event. Despite the continued rise in consumer price inflation to almost double the BoJ’s 2% target, not least reflecting downside risks to the near-term growth profile, the Policy Board will maintain the view that the medium-term outlook is inconsistent with meeting its inflation target in a sustained manner. And so, expect the Policy Board to leave unchanged its key policy parameters, including the 10Y yield target of “around 0%” and negative policy rate (-0.1%). And, contrasting sharply with other major central banks, it will likely reiterate (rather unconvincingly perhaps) that it stands ready to ease policy further if necessary. For further background on the BoJ, including the outlook for the new year, please see the note from Daiwa Securities’ BoJ-watcher in Tokyo here.

The week’s key data releases

Today:
After last week’s flash December PMIs suggested an easing in the economic downturn heading towards year-end, this morning’s German ifo survey results did likewise. In particular, the headline business climate index rose 2.2pts to 88.6, a four-month high. The pickup reflected a decline in pessimism regarding both the current economic situation (the index rose 1.2pt to 94.4), as well expectations for the coming six months, with the respective index for the latter rising 3pts to a six-month high. Firms in the manufacturing, services and retail sectors considered current conditions to be less severe than in recent months and were notably less downbeat about the near-term outlook. Overall, the headline business climate index in Q4 (86.6) was the lowest quarterly average since Q220 and before that Q209 during the Global Financial Crisis, therefore reinforcing the view that Germany’s economy is on track for recession.

Looking ahead, Euro area labour costsfigures for Q3 due later this morning are likely to show limited signs of second-round effects from the upwards trend in inflation to record highs over the summer. Indeed, labour cost growth of 4.0%Y/Y in Q2 was flattered by a very low base a year ago due to pandemic-related distortions. And so, while growth in negotiated wages in Q3 (2.9%Y/Y) was the strongest since 2008, the year-on-year pace of increase in labour costs is highly likely to have moderated last quarter. Euro area construction output data for October, as well as the UK CBI industrial trends survey are also due.

Tomorrow:
The European Commission flash consumer confidence index is expected to report a third successive modest improvement in December, perhaps reflecting the slight moderation in euro area inflation last month and diminishing near-term concerns about energy supply. The level of confidence however will remain a long way below the long-run average and still suggestive of a drop in consumer spending in Q4. German PPI data are likely to report a second successive monthly easing in pipeline price pressures in November due to lower energy and intermediate goods prices. Meanwhile, US housing starts figures are likely to report a third successive monthly decline in November to their lowest for the year, amid an ongoing adjustment in the housing market due to elevated inventories of unsold new homes and a lack of demand.

Wednesday:
The German GfK consumer confidence survey is unlikely to report much festive cheer around the turn of the year, with an anticipated modest pickup in the index for a third consecutive month likely to leave it still below its level in September, almost 36pts lower than its level at the start of this year and roughly 48pts below the pre-pandemic level. The CBI distributive trades survey is highly likely to report that UK retailers are having a tough end to the year. Meanwhile, contrary to the Bloomberg consensus, our colleagues in Daiwa America expect the headline sentiment index in the USConference Boardconsumer survey to have fallen for a third consecutive month in December due to the ongoing squeeze on household budgets and concerns of recession, albeit the index is still likely to remain above the summer low.

Thursday:
A quiet day for top-tier releases bringsjust revised UK GDP figures for Q3. We expect these to confirm a contraction of 0.2%Q/Q last quarter, led by a decline in household consumption (-0.5%Q/Q). This release will be accompanied by the balance of payments figures for Q3, with the UK current account deficit expected to narrow significantly further from £33.8bn to around £20bn due to a marked improvement in the trade balance last quarter related in part to precious metals. Meanwhile, revised US GDP figures for Q3 are expected to broadly align with the previous estimate that reported annualised growth of 2.9%Q/Q

Friday:
Japan’s CPI figures are expected to report that the headline inflation rate rose in November to 3.9%Y/Y, which would be the highest since the early 1980s and almost double the BoJ’s 2% target, despite the government’s discounted travel scheme. The BoJ’s forecast measure of core CPI is also expected to have risen 0.1ppt to 3.7%Y/Y, although the internationally comparable core CPI measure (excluding food & energy) will likely remain comfortably below 2%. In the US, personal income and spending figures will be of note. Recent data suggest a moderate increase in wages and salaries, with our Daiwa America economists forecasting growth of 0.3%M/M. On the spending side, a decline in new vehicle sales could restrain outlays for durable goods, and a soft performance in key retail categories points to weak spending on nondurable items – our colleagues expect no growth last month. Meanwhile, the core PCE price index is expected to report only moderate increases in November, to leave the annual core PCE deflator down 0.3ppt to 4.7%Y/Y.