The week ahead: Fed, BoJ, BoE & Brexit

Chris Scicluna

It has been a mostly flat to modestly positive start to the week in Asian equity markets, which had pre-empted much of the near 2% decline that had eventuated on Wall St on Friday. In mainland China equity markets initially continued lower. However, with US equity futures rallying more than ½% off Friday’s close, the CSI300 pared those early declines to close down just 0.15%. Most other major bourses in the region have posted modest gains, typified by Japan’s TOPIX which rose 0.1%. Singapore Straits Times outperformed with a 1.3% gain, as did Australia ASX200 which rose 1.0%. In the forex market, the dollar has been broadly stable (DXY close to 97.4) as have USTs, with 10Y yields edging down slightly from 2.89%, at the start of a week to be dominated by the Fed’s announcements on Wednesday. The consensus expectation is for a ‘dovish tightening’ from the FOMC, while the BoJ and BoE policy announcements on Thursday will see policy and forward guidance left unchanged.

Today the BoJ released further details from its latest Tankan, including information on firms’ inflation expectations. As in previous surveys, this survey indicated that firms remain unconvinced that the BoJ will achieve its 2.0% inflation target, even inside a 5-year horizon. For all firms, the average expectation of year-ahead inflation was just 0.9%Y/Y – a modest 0.1ppt firmer than recorded in the September survey. Firms’ average expectation at the 3-year horizon was unchanged at 1.1%Y/Y for a seventh consecutive quarter while the expectation at the 5-year-ahead horizon nudged up 0.1ppt to 1.2%Y/Y. As usual firms’ expectations regarding their own output prices remain even softer. On average, they forecast an unrevised 0.8% rise in prices over the coming year and an unrevised cumulative 1.5% increase in prices over the next 5 years. Large manufacturers remain especially pessimistic, forecasting an unrevised 0.1% decline in prices over the latter period, whereas large non-manufacturers forecast a 1.3% increase.

Looking ahead to the remainder of this week’s diary, on Wednesday the November trade report will cast light on whether net exports might add to growth in Q4 following two consecutive quarters of subtraction. On Thursday, attention will turn to the final BoJ Board meeting this year where the Bank is unlikely to make any tweaks to policy. But the post-meeting statement and press conference will be watched to see whether Kuroda’s optimism has diminished. The All-Industry Activity Index for October should post a strong lift on Thursday. On Friday the main focus will be national CPI report for November. Given advance data from Tokyo, the latter is likely to report a steep fall in headline inflation – driven by fresh food prices – but little change in the BoJ’s forecast and preferred measures of core inflation. The final results of the Monthly Labour Survey for October will also be released on Friday. In the bond market, the MoF will auction 20Y JGBs on Tuesday and enhanced liquidity (maturities of 5-15.5Y) on Friday.

Euro area:
After last Friday’s dire December flash PMIs strongly suggested that the ECB’s latest growth forecasts – published only the day before – are way too optimistic, this week will bring further economic sentiment survey results for December including the German Ifo indices tomorrow and the flash estimate of euro area consumer confidence and French INSEE and Italian ISTAT business sentiment indicators on Friday.

Before then, the final estimate of euro area inflation in November is due today. While the final releases from Germany (2.2%Y/Y), France (2.2%Y/Y) and Spain (1.7%Y/Y) aligned with their flash estimates, Italy’s EU-harmonised rate was today downwardly revised by 0.1ppt to 1.6%Y/Y. And so, while we expect euro area headline inflation to be confirmed at 2.0%Y/Y and the core rate to be confirmed at 1.0%Y/Y, there is a non-negligible risk that the headline rate will be nudged lower. Euro area goods trade data for October are also due today, with figures for the same month for construction output due on Wednesday and for the balance of payments on Thursday. No notable euro area government bond auctions are scheduled this week.  

After Theresa May’s pitiful performance in Brussels at the end of last week, she’s set to make yet another statement on Brexit to the House of Commons this afternoon. Among other things, she’ll attempt to arrest the momentum that seemed over the weekend to be building further towards holding a second referendum. With May having confirmed that she will not call a meaningful vote in Parliament until the New Year, however, this afternoon’s events seem highly unlikely to be game-changing. And, certainly, her deal appears to have no chance in its current form of winning a meaningful vote in the House of Commons whenever it might be held. So, constructive cross-party cooperation is going to be required to extricate the UK from the current stalemate. But given the personalities leading the two main parties, and their evident desire to place the interests of party and self before country, how such co-operation might be achieved is unclear. As such, the UK’s political crisis looks bound to intensify in the New Year. In the meantime, May’s Cabinet is set to meet tomorrow to discuss intensified preparations for a ‘no deal’ Brexit, while the Commission will the following day publish its own proposals for ‘no deal’.

Beyond Brexit, it’s set to be a busy week for UK economic news, not least given the final BoE MPC meeting of the year, which will conclude on Thursday. Since the publication of the Bank’s Inflation Report last month, economic data have largely been soft, with growth momentum seemingly ebbing away, business and consumer survey indicators weakening, and inflation surprising on the downside despite further evidence of a tight labour market. And given the ratcheting up of uncertainty surrounding Brexit, the coming week’s policy meeting seems likely to see the Bank keep its powder dry, with Bank Rate unchanged at 0.75% and the key policy guidance from November repeated. So, the MPC will restate that “were the economy to continue to develop broadly in line with the November Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”

Data-wise, the coming week brings a couple of top-tier releases for November with figures for inflation due Wednesday and retail sales due Thursday. We forecast the headline and core CPI rates both to fall by 0.1ppt to 2.3%Y/Y and 1.8%Y/Y respectively, while retail sales might be expected to post a modest rebound of close to ½%M/M following two consecutive monthly declines to leave the average level in the first two months of Q4 still down on the Q3 average. Surveys due in the coming week include the CBI Industrial Trends and Distributive Trades indices on today and Wednesday respectively, and the GfK consumer confidence indices most likely at the end of the week. And Friday will also bring final GDP and current account figures for Q3 and public finance numbers for November.  

All eyes this week will be on the Fed’s announcements on Wednesday. The FOMC seems highly likely to hike the fed funds target rate by a further 25bps to 2.25-2.50%. But, not least given Jay Powell’s recent commentary and the minutes of the November meeting, the FOMC is also expected to amend its statement to suggest strongly that future rate hikes are data-dependent rather than firmly baked in. And it will also likely publish some more dovish dot-plots than the previous set issued in September, with the dots showing expectations for rate hikes next year likely to be clustered around the one-to-three range.

Before the Fed, a busy US data diary begins today with the December releases of the New York Fed’s manufacturing survey and NAHB housing index. November housing starts and building permits data are due tomorrow, followed by the existing home sales report the following day. After the Fed, on Thursday, the Philadelphia Fed will publish its manufacturing survey for December, while the Conference Board’s leading indicator for November will also be released. On Friday we will receive the ‘final’ estimate of GDP growth for Q3. More importantly, developments in activity during Q4 will become clearer with the release of the personal income and spending and advance durable goods orders reports for November. Needless to say, the outcome for the core PCE deflator will also be awaited with great interest. The final results of the University of Michigan’s consumer survey for December are also due that day. In the bond market the US Treasury will issue 5-year TIPS on Thursday.

Following on from Friday’s mostly disappointing activity reports, over the weekend China reported home price data for November. According to Bloomberg’s calculations, the simple average price movement across all cities was 1.0%M/M – the same as in both of the previous two months. While that growth remains less than that seen around the middle of the year, annual growth in prices still picked up to 10.3%Y/Y from 9.7%Y/Y previously. Prices in 1st tier cities rose just 0.2%M/M and were up just 1.5%Y/Y. However, price increases remained vigorous in 2nd and 3rd tier cities, where annual inflation now sits at 10.5%Y/Y and 10.8%Y/Y respectively. There are no further economic reports due to be released in China today and there are none scheduled over the remainder of this week either. As a result, the focus will remain squarely on any developments in the US-China trade dispute.

The main focus for local markets today was the release of the Government’s Mid-Year Economic and Fiscal Outlook, providing an update on progress since the Budget forecasts were issued back in May. As had been signalled by the Treasurer, the projected underlying cash measure showed a small improvement in the outlook compared with the May Budget update. A deficit of 0.3% of GDP is now forecast in FY18/19, down from 0.8%of GDP previously. Over the subsequent three years the Government now forecasts small surpluses of 0.2% of GDP, 0.6% of GDP and 0.9% of GDP respectively – in each case just 0.1% of GDP larger than forecast previously. Net debt is forecast to decline from 18.4% of GDP in FY18/19 to 14.3% of GDP in FY21/22 – the latter 0.4% of GDP lower than forecast in the Budget. These forecasts are based on projected real GDP growth of about 3%Y/Y across the forecast period, with nominal GDP forecast to grow by a little over 4%Y/Y on average.

Looking ahead to the remainder of this week’s diary, tomorrow’s minutes from this month’s RBA Board meeting should again pass with little fanfare given that the post-meeting statement indicated no real change in the Board’s economic and policy outlook. On Wednesday the DEWR internet vacancy series will cast for light on the labour market, with further insight to be provided by Thursday’s Labour Force survey for November. According to Bloomberg the market expects the latter to reveal a solid 20k gain in employment and a steady unemployment rate at the present cyclical low of 5.0%.

New Zealand:
Following a slightly weaker showing in Friday’s manufacturing PMI, today’s service sector PMI pointed to somewhat weaker business conditions in the service sector too. The headline index fell 2.3pts to a 3-month low high of 53.5 in November. Within the detail the activity index fell a steep 4.0pts to 53.6, whereas the new orders index fell a relatively modest 0.9pt to 57.3. However, the employment index rose a further 1.0pt to 54.7 – the firmest reading since July 2017 and suggesting a greater degree of underlying confidence than perhaps suggested by the headline reading.

Looking ahead to the remainder of the week, tomorrow we will receive the final ANZ Business Outlook survey this year, followed a day later by the quarterly Westpac consumer confidence survey for Q4. On Wednesday will also receive the Balance of Payments for Q3, provide some final pointers on how traded services have performed ahead of this week’s key release – the Q3 national accounts, published on Thursday. Bloomberg’s survey indicates that the market estimates that GDP expanded 0.6%Q/Q in Q3, lowering annual growth by 0.1ppt to 2.7%Y/Y. If realised this outcome is 0.1ppt below that estimated by the RBNZ in the November Monetary Policy Statement. The November merchandise trade report will also be released on Thursday, while the week concludes on Friday with the release of the ANZ-Roy Morgan consumer confidence reading for December.


Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at