BoJ’s first five-year special loan operation saw solid demand

Chris Scicluna
Emily Nicol

JGB yields down again as BoJ’s first five-year loan operation draws strong demand
The BoJ will take some comfort from the fact that, for now at least, JGB market conditions have stabilised somewhat in the wake of last week’s Policy Board announcement, with 5-10Y bonds 2-3bps firmer this morning, and so 10Y yields now well below the Bank’s YYC target ceiling at 0.37%. This followed another day of near-record lending of its JGB holdings back to the market today (¥8.0trn). And most notably, the BoJ’s first five-year special loan operation – announced following the Policy Board meeting last week – saw demand at three times the amount offered (¥1.0trn), with an average interest rate of 0.145%, helping to lower 5Y JGB yields close to that level. Those funds-supplying operations should support stability of the curve from now on, not least given the carry-trade opportunities that the loans should offer if and when YCC is abandoned.

Separately, the BoJ’s senior loan officer survey today saw banks report a rise in firms’ demand for loans over the past three months, with the respective diffusion index up 3pts to 8, the highest since Q320 and Q417 before the initial onset of the pandemic. Within the detail, demand was strongest among large construction firms – the respective DI rose 13pts to 20 – while demand from finance firms also increased. But while some lenders suggested that funding was required for an increase in planned investment, disappointingly the most common reason reflected a decline in customers’ internally-generated funds. But while demand for housing loans fell again in Q422 as residential investment declined, lenders reported a modest pickup in consumer loans – the respective DI rose 4pts to 3, the highest since Q221 – amid a reported pickup in household consumption.

Tokyo CPI data this week’s Japanese data highlight
After last Friday’s national CPI figures for December reported a rise in the BoJ’s forecast core measure (ex fresh food) to a four-decade high of 4.0%Y/Y, this week’s Japanese dataflow brings further insights into Japanese inflation. Tomorrow brings the BoJ’s estimates of underlying inflation in December, which are likely to show the share of items in the CPI basket with rising prices up to a series high. And Friday brings Tokyo CPI figures for January, which are expected to report a further rise in the BoJ forecast core measure, of 0.2ppt to 4.2%Y/Y, which would suggest a similar rise in the national figure due next month. Inflation would then drop about 1½ppts in February thanks to the government’s energy bill support measures. In an otherwise relatively quiet week for Japanese data, the January flash PMIs and department store sales are also due tomorrow.

Euro area govvies weaker as Knot again signals desire for two 50bps rate hikes in Q1
Euro area government bonds initially weakened this morning, as efforts by ECB policymakers to push against the steep drop in yields at the start of the year continue. After the account of the December monetary policy meeting noted concerns about the evolution of the yield curve – suggesting that it had been consistent with an unwelcome loosening of financial conditions – ECB President Lagarde last week insisted that market pricing should shift higher to reflect the fact that the Governing Council would “stay the course” on monetary tightening. Other national bank governors, from the Netherlands, Austria and Finland, echoed such remarks. And over the weekend, leading hawk Klaas Knot, Governor of the Dutch National Bank, repeated his preference for further hikes of 50bps over the near term. In particular, in an interview with La Stampa, Knot insisted that 50bps “will be the pace for a multiple of meetings… So that means at least the two in February and March”. He added that “I do think that we will continue to be in tightening mode until the summer.” And his message was also reportedly repeated in a WNL interview yesterday.

Euro area focus on surveys, with consumer confidence today and the flash PMIs tomorrow likely to suggest modest further stabilisation in economic conditions
The euro area data focus this week is January economic sentiment, with the most notable new figures being the flash PMIs tomorrow, which should suggest further stabilisation in economic conditions at the start of the year. Having risen in December (49.3) for a second consecutive month, the composite output PMI is forecast to rise to 50 in January, admittedly a level that merely implies stagnation rather than a return to positive growth. With energy prices having fallen at the start of the year and supply constraints continuing to ease, the survey should also report a further slight moderation in input cost and output price pressures. The German ifo, French INSEE and Italian ISTAT indices on Wednesday, Tuesday and Thursday respectively are likely to provide a similar story.

Today’s focus will be the Commission’s flash euro area consumer confidence indicator, which is similarly expected to move higher – in this case for a fourth successive month – albeit from a low level as inflation and future price expectations edge lower. Also today, ECB President Lagarde will speak publicly, no doubt repeating her mantra that the ECB intends to “stay the course” on monetary tightening, with the intention perhaps of micro-managing the curve.

UK flash PMIs likely to be consistent with modest contraction at start of the year
Like in the euro area, tomorrow’s release of the January flash PMIs is of most interest in the UK this week. In December, the composite PMI rose 0.8pt to 49.0, reflecting tentative signs of recovery in the services sector at the end of the year. But the anticipated further improvement at the start of the New Year is likely to be more moderate, with the Bloomberg survey median forecast for the composite index up just 0.3pt to 49.3 and therefore still in contractionary territory. The latest CBI industrial trends and distributive trades reports are also due tomorrow and Thursday respectively. Inflation-wise, Wednesday will bring the postponed release of PPI figures for November and December, with revisions to past data possible following data quality checks. Finally, public finances figures for December will be published tomorrow.

US GDP estimate expected to report respectable growth in Q4
In the US, one focus will be the first estimate of Q4 GDP (Thursday), which is expected to report respectable growth of close to 2½%Q/Q annualised, down a touch from 3.2%Q/Q ann. in Q3, driven by household consumption, as well as positive contributions from business spending and inventories, while construction and net trade are likely to have been a drag. Our colleagues at Daiwa America forecasts growth bang on 2.5%Q/Q ann. Meanwhile, in terms of inflation, Friday will bring the PCE deflators for December – broadly similar to the CPI figures – which are expected to report that the headline index was unchanged on the month with the core measure up 0.3%M/M, which would push the annual core PCE deflator rate down 0.3ppt to 4.4%Y/Y. Those data will come with personal income and spending data for December. And other releases of note over the coming week include December’s advanced goods trade, durable goods order and new home sales data (Thursday) and pending home sales for the same month (Friday).

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