Kuroda offered no surprises at his final policy-setting meeting, with the BoJ maintaining a negative policy rate and the current 10Y yield target range
As the Diet approved Kazuo Ueda to succeed Haruhiko Kuroda as BoJ Governor next month, the conclusion of the last Policy Board meeting under Kuroda’s leadership was uneventful. As was widely anticipated ahead of the forthcoming change in leadership and updated economic projections due to be published next month, the BoJ left the key parameters under its YCC framework – the policy rate at -0.1% and the 10Y JGB yield target around zero with a +/-50bps range – unchanged. The BoJ signalled some caution about the recent economic recovery, noting that exports and industrial production had been impacted by the slowdown in external demand. But overall it left its economic assessment broadly unchanged, judging that private consumption had increased moderately as the waning impact of the pandemic was offsetting the impact of higher prices. Indeed, today’s household spending numbers reported a notable recovery at the start of the year, up for the first month in three, by 2.7%M/M, the strongest for ten months. Admittedly, spending on core items was more subdued (-0.1%M/M), to be some 0.3% below the Q4 average. And the BoJ continued to flag that risks to the outlook remained extremely high.

In terms of the inflation outlook, the BoJ again stated that headline inflation would fall back over the near term to be back below the 2% target in the latter half of FY23. That reflects the government’s household energy bill support as well as a waning in the impact of the pass-through from the rise in import prices. Certainly, today’s goods PPI data offered signs of further easing in price pressures at the factory gate, reporting the first monthly drop in prices in February (-0.4%M/M) since November 2020, to leave the annual inflation rate down a further 1.3ppts to 8.2%Y/Y, the lowest since October 2021. But while the BoJ expects inflation to pick up moderately thereafter, Kuroda reiterated that there remain several uncertainties, not least related to the outlook for wages. So, the Policy Board’s statement maintained its suggestion that the BoJ would not hesitate to do more should it be required. And in his final post-meeting press conference, Kuroda unsurprisingly insisted that it was still premature to debate an exit from its ultra-loose policy stance. Of course, this view might well be disregarded when Ueda takes the reins next month, although his comments so far point to a cautious approach to any further policy amendments, which are not expected to be implemented before a comprehensive assessment of the current policy framework.

UK GDP beats expectations in January on special factors but trend broadly flat
Following the drop of 0.5%M/M in December, UK GDP reversed only some of that lost ground in January. The increase of 0.3%M/M was a touch firmer than had been expected. But it left the three-month rate at zero, suggesting that the underlying trend is at best flat. And the level of GDP in January was still 0.2% below the pre-pandemic level of February 2020.

Growth at the start of the year came from the services sector, where activity rose 0.5%M/M following the drop of 0.8%M/M the prior month to be similarly unchanged on a three-month basis. Indeed, growth in the sector in January largely reflected the reversal of special factors, including the return of more children to school following high levels of absenteeism before Christmas, the resumption of a full schedule in English football’s Premier League following the pause for the FIFA World Cup, and increased postal deliveries following strike-related disruption the prior month. As the adjustment in the housing market to higher rates took a greater toll, real estate was the only one of the major services subsectors to contract in January.

Beyond the services sector, industrial production in January fully reversed the prior month’s growth of 0.3%M/M but was up 0.3%3M/3M. Within the detail, declines at the start of the year in output of pharmaceuticals, machinery and transport equipment were only partly offset by growth in chemicals, rubber and plastics and clothing. Extraction of crude oil and natural gas fell too. Finally, following no change the prior month, construction dropped 1.7%M/M in January to an 11-month low, to be down 0.7%3M/3M. Looking ahead, with February having seen increased strike action, not least in schools, we expect services output to decline once again. And with construction likely to remain a source of weakness and surveys suggesting no major cause for optimism in manufacturing, we maintain our forecast that GDP will drop 0.2%Q/Q in Q1.

Final German inflation data align with flash estimates confirming further rise in food and services pressures
The final estimates of German consumer price inflation in February aligned with the flash estimates, thus thankfully avoiding the confusion that had reigned over January’s figures. As a result, the EU-harmonised HICP rate was confirmed at 9.3%Y/Y in February, up 0.1ppt from start of the year, while the national CPI rate was unchanged from January at 8.7%Y/Y. The detail on the national measure confirmed that food inflation was a key driver, up a further 1.6ppts to a new series high of 21.8%Y/Y, with exceptionally high rates recorded in staples such as dairy, eggs, bread, cereals and sugar. In contrast, energy inflation dropped more than 4ppts to a thirteen-month low of 19.1%Y/Y, benefiting from the government’s utility charge freeze as well as softer petrol price inflation. Meanwhile, services inflation rose 0.2ppt to a new high of 4.7%Y/Y. And so while core goods inflation moderated very slightly (7.7%Y/Y), the core CPI rate (excluding food and energy) rose 0.1ppt to a new high of 5.7%Y/Y. The absence of a revision to the German figures increases the likelihood that the euro area inflation data, due one week today, will also align with the flash estimates (8.5%Y/Y headline, 5.6%Y/Y core).

US labour market report key release today ahead of forthcoming FOMC meeting
Ahead of the forthcoming FOMC meeting on 21-22 March, and following Jay Powell’s hawkish comments this week, insisting that the Fed would respond to strong data if required, all eyes today will be on the February payroll report. Notwithstanding the uptick in yesterday’s weekly numbers, low levels of initial claims for unemployment insurance have suggested that layoffs have been modest. Nevertheless, today’s report seems bound to reveal a sharp slowing in employment growth after a burst of 517k in January. Our colleagues at Daiwa America forecast an increase in non-farm payrolls of 225k, a touch firmer than the Bloomberg survey consensus (215k) but well below the average of 357k in the second half of 2022. Revisions to recent payroll data should also be watched. Meanwhile, the unemployment rate is expected to be unchanged at a very low 3.4%, but average labour earnings growth is expected to remain moderate at 0.3%M/M.