- Month end may temper reaction to busy run of data, events and # earnings: digesting BoJ policy tweak, Japan/Korea Production,# UK Shop Prices and Business Barometer, France GDP & CPI, German# Retail Sales
- Awaiting Eurozone & Italy GDP & CPI; US Consumer Confidence, ECI# and House Prices, Canada monthly GDP; Energy companies, Caterpillar# and AMD top US earnings run; Italy and German debt auctions
- Japan: BoJ policy tweak necessarily ambiguous as part of gradualist# dismantling of YCC, anything else would court catastrophe
- China: NBS PMIs underscore need for stimulus, weakness of external# demand and margin related pressure on production
- Eurozone GDP set to narrowly avoid contraction, details of French# GDP much stronger than headline implies
- Eurozone CPI: set to fall more than expected on headline and core,# still very high, and base effect impact set to fade, but endorse # high for longer
- US Consumer Confidence set to slip again as softer labour demand # and high mortgage rates weigh, but caution advised on ‘counting out’# US consumer
- Recording of today’s GI Daily Energy Markets Podcast # YouTube: https://www.youtube.com/live/FN8_tti0_Ss?feature=shared
EVENTS PREVIEW
A bumper day for statistics, with the overnight BoJ policy meeting and forecast updates to digest, with some ECB speak featuring de Guindos and a final outing for Visco, as Panetta takes over as Banca d’Italia governor tomorrow. There are China’s NBS PMIs, Industrial Production from Japan and South Korea, Japan’s Retail Sales and Consumer Confidence, UK Lloyds Business Barometer and BRC Shop Prices, French GDP and HICP to digest. Ahead lie Eurozone and Italian GDP and HICP, Canada monthly GDP, US Employment Cost Index, CS and FHAF House Prices and Consumer Confidence. Govt bond supply takes the form of Italian 4, 6 & 11-yr and 2-yr FRN and a small tranche of German 30-yr. A good many conferences kick off in the commodity sector, while energy heavyweights dominate the earnings schedule via way of BP, Marathon Petroleum, OMV and Uniper, with AMD and construction and commodity sector bellwether Caterpillar also on tap.
** Japan – BoJ policy meeting **
– As had been touted in local media yesterday, the BoJ kept rates unchanged but loosened control on its 10-yr yield cap, and somewhat ambiguously redefined it as an ‘upper bound’, therefore reducing the pressure to intervene on every impending test of the 1.0%. Governor Ueda noted: “We will conduct market operations nimbly looking at the level and speed of long-term interest rates, while maintaining ultra-loose monetary policy. We could increase bond buying, or conduct emergency bond buying, even when long-term interest rates fall below 1%. We could also conduct unlimited bond-buying operations as needed. We don’t have a rigid cap now. But we don’t expect long-term interest rates to move sharply above 1%.” While markets will not like the ambiguity, it does fit well with a gradual process of dismantling YCC, and very necessary given that an abrupt move would likely trigger sharp changes in capital flows which would the rest of the world would not welcome in any shape of form, above given the plethora of geopolitical and economic risks. The upward revision to the 2024 CPI forecast to 2.8% from 1.9%, while only tweaking the 2025 CPI forecast at 1.7% looks to be a case of massaging forecasts to convey a wait and see policy message on rates, rather than reflecting actual expectations, which in truth is all that the BoJ can do at the current juncture. This was encapsulated in Ueda’s comment: “We’ve seen cost-driven inflation last longer than expected. But we haven’t revised up much our view on trend inflation. We still haven’t seen enough evidence to feel confident that trend inflation will (sustainably hit 2%). As such, we don’t see a big risk of being behind the curve.” He also noted: “The key is whether inflation will push up wages, as we’ve seen happen this year repeatedly. It’s also important for this cycle to push inflation towards 2%. Next year’s wage negotiation is one important factor we’re looking at. Another factor we’ll scrutinise is whether wage hikes will lead to higher inflation.” In terms of the policy outlook: “If we wait until the final outcome of next year’s wage negotiations, that will mean waiting until late next year. Whether we can confirm the kind of wage hike we are aiming at beforehand, using wage data and hearings on companies, would depend on economic developments at the time. We’re not looking just at wages alone in determining whether sustained achievement of 2% inflation is in sight. It’s a comprehensive judgement, looking also at whether inflation will push up wages. We don’t have any foresight on when we can make that call.” Further measures to unwind YCC are definitely to be expected in Q1 2024, but the BoJ will stick with gradualism, because, as Ueda noted: “The reason why we made YCC more flexible is that we wanted to forestall the future risk of market volatility, including exchange-rate volatility.”
** Eurozone – October CPI and Q3 GDP **
– Much lower than expected German and Spanish CPI readings, and in line from France, suggests that both headline and core CPI will undershoot the consensus for 0.3% m/m 3.1% y/y (vs. 4.3% y/y) for headline, and core to fall to 4.2% y/y from 4.5%. Base effects account for much of the headline fall, while the unwind of holiday-related and utilities pressures help to decelerate core and Services CPI. It offers a post hoc justification for the ECB’s latest policy moves, but still leaves inflation well above target, and with base effects set to have a more marginal impact going into 2024, the path back to 2.0% is likely to be protracted. French GDP was bang in line with forecasts, and implying that pan Eurozone GDP should be in line with forecasts at flat q/q 0.2% y/y. Nevertheless, the details of French GDP were a lot stronger than the headline implies, with Private Consumption up 0.7% q/q and Gross Fixed Capital Formation 1.0% q/q, offsetting a sharp drag from Net Exports.
** Asia: China’s NBS PMIs were much weaker than expected at 49.5 vs. expected 50.2 for Manufacturing, and 50.6 for Services, and underline the need for the extra stimulus. The details highlight that while domestic demand has troughed and looks to be picking up gradually, outside of the property sector, but external demand remains very weak, and this is squeezing margins, in turn prompting cuts in output. Once again it underlines the need to resolve the property sector woes, primarily to ensure that it no longer acts as a major drag on the economy, rather than attempting to engineer a major revival. Japan’s industrial production was a lot weaker than expected at just 0.2% m/m vs. forecast 2.5% m/m, though October production is seen carving out a 3.9% m/m gain, but a renewed setback is seen in November, and overall implying an overall flat trend. By contrast 1.8% m/m increase in South Korea’s Industrial Production, better than the expected -1.0% m/m, and paced by a strong 12.9% m/m rise in semiconductor output, was rather more encouraging, particularly given a y/y rise of 3.0%, which breaks a run of 10 consecutive declines, and as notable for a sharp rise in Chip shipments, and the first significant fall in bloated levels of sector inventories.
** U.S.A. – Q3 ECI, House Prices and Consumer Confidence **
– The Q3 Employment Cost Index is expected to be unchanged at 1.0% q/q, with perhaps some modest risk of a downside miss if the Atlanta Fed Wage index and monthly Average earnings are any guide, while House Prices are seen up 0.5% (FHFA) and 0.7% m/m (CoreLogic), again reflecting a lack of supply (above all of Existing Homes), though this data is for August, and the rise in mortgage rates should dampen increases somewhat in upcoming reports. Consumer Confidence is expected to ease again to 100.0 from September’s 103.0, reflecting both a modest loosening in labour demand and high mortgage rates, as well as an unwind of the summer ‘sugar high’ in personal consumption, though caution is advised in concluding that it will tail off sharply in coming months, even if there are obvious headwinds. But with the FOMC meeting tomorrow and the run of labour data this week, today’s reports may struggle to have anything more than a passing impact.
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