Kuroda likely to leave policy unchanged to maintain the squeeze on investors shorting 10Y JGBs
The main event of the week will be the final monetary policy meeting of BoJ Governor Haruhiko Kuroda ahead of his replacement by Kazuo Ueda early next month. Given his imminent departure, it might seem inappropriate for Kuroda to make any final significant policy adjustments this week, and all the more so as the BoJ will not update its economic projections until the April policy meeting. Moreover, all Policy Board members have recently been singing from the same hymn sheet, insisting that current policy appropriate. But, of course, Kuroda is never one to shy away from a surprise policy decision. He also previously argued that the lifting of the 10Y JGB target ceiling in December should not be judged as a monetary tightening measure. And most importantly, as YCC appears to be firmly past its sell-by date, causing JGB market dysfunction and encouraging speculation of an eventual lifting or abandonment of the 10Y yield target, there might still seem a non-negligible case for a policy shift this week. On balance, however, with the BoJ undoubtedly keen to keep squeezing those (predominantly foreign) investors who have shorted the 10Y JGB in anticipation of a policy shift, and an adjustment to YCC this week likely to generate unwelcome market volatility at the end of the fiscal year, we still see a strong probability that the BoJ will leave monetary policy unchanged on Friday.
In terms of economic releases, tomorrow’s labour earnings figures for January will be of note. While headline growth is expected to have roughly halved at the start of the year, to less than 2%Y/Y, this will still mark a historically fast pace of growth. Moreover, this will reflect a moderation in special payments following the jump in winter bonuses in December. The BoJ’s consumption activity data – also due tomorrow – will offer an update on household spending at the start of the year. Meanwhile, Thursday will bring updated Q4 GDP numbers, which might well see a modest downwards revision to the preliminary estimate of growth (0.2%Q/Q) due to weaker capex and inventories.
ECB consumer expectations survey, euro area retail sales and revised Q4 GDP data in focus
In light of the upside surprise to last week’s flash consumer price inflation estimates, arguably of most interest will be tomorrow’s publication of the ECB’s monthly survey of consumer expectations, which will shed more light on households’ perceptions about the outlook for inflation at the start of this year. In terms of activity, today kicks off with euro area retail sales figures for January. Given the slump in demand at the end of last year, we would expect to see some payback in sales at the start of the year, albeit growth is unlikely to fully reverse the near-3%M/M drop in December. In light of the broad-based weakening in activity in December and following a downwards revision to German GDP and Friday’s significant revision to the Irish GDP estimate – where the Statistical Office slashed growth from 3.5%Q/Q to just 0.3%Q/Q and thereby knocked roughly 0.2ppt off euro area GDP growth – Wednesday’s release of updated euro area national accounts numbers is likely to see the minimal growth initial estimated in Q4 (0.1%Q/Q) revised away. And we think there is a non-negligible chance of a negative print.
In terms of ECB speak, while various Governing Council members continue to call for ‘significant increases’ ahead, the Central Bank of Portugal Governor Centeno cautioned over the week that officials will need to take account of updated inflation figures at the March meeting, with headline inflation set to be revised notably lower from the December projections. ECB Chief Economist Lane is scheduled to give a lecture in Dublin this morning.
UK GDP set to have remained weak at the start of 2023
The key UK data release this week will be Friday’s GDP report for January. Having contracted sharply at the end of last year, and following a firmer outturn for retail sales at the start of this year, GDP growth might well have registered positive growth that month. Broadly in line with our own expectations, the Bloomberg survey consensus estimate is for an increase of just 0.1%M/M. And having fallen to its lowest level in fourteen months in December, this would leave GDP still firmly on a downwards trend and below the pre-pandemic benchmark. This week will also bring the construction PMIs and new car registrations data for February (today), followed by the BRC retail sales monitor and REC report on jobs (tomorrow) and the RICS Residential survey (Thursday), all for the month of February. In terms of BoE speak, external MPC member Dhingra – who in February voted to leave Bank Rate unchanged – is scheduled to speak on Wednesday.
Fed Chair Powell’s testimony to Congress and US payrolls report
All eyes in the US this week will be on Powell’s semi-annual monetary policy report to Congress (tomorrow and Wednesday) for further insights into the near-term path of policy. After the Fed slowed the pace of tightening at the 31 Jan-1 Feb to 25bps and hinted that the end of the tightening cycle might have been approaching, the US dataflow has strengthened, with a string of upside surprises. And so, we would expect a relatively hawkish tone from Powell’s comments this week, reiterating that the Fed would respond to strong data if required. In terms of the economic data, this week’s February payrolls report on Friday will be of most note. Low levels of initial claims for unemployment insurance suggest that layoffs have been modest, although a sharp slowing is expected after a burst of 517k in January. Our colleagues at Daiwa America forecast an increase of 225k, a touch firmer than the Bloomberg survey consensus (215k) but well below the average of 357k in the second half of 2022. Ahead of this will bring January factory orders figures (today), consumer credit numbers (tomorrow) and the full trade report (Wednesday).
Chinese trade and inflation data due this week
The weekend brought the start of China’s National People’s Congress, with official’s today confirming a relatively modest growth forecast for the year ahead, of around 5%, reducing the probability of a significant boost to government economic stimulus over the near term. Officials will also target CPI at around 3%Y/Y, while the report also noted that the PBOC will deliver ‘prudent monetary in a targeted way’, suggesting a limited role for monetary stimulus too. This week’s trade numbers (due tomorrow) might well report a rebound in the first two months of the year following a slump in demand at the end of 2022 amid widespread disruption following the relaxation of Covid restrictions. The latest inflation figures for February (Thursday) are expected to report that headline inflation moderated back below 2%Y/Y, with headline PPI set to remain in negative territory.