BoJ and BoE policy meetings in focus

Chris Scicluna
Emily Nicol

Despite some upbeat Fed-speak from Chicago and Richmond chiefs Evans and Barkin, the market tone in Asia today was somewhat cautious following the confirmation by the House of Representatives of the (nevertheless inevitable) impeachment of Donald Trump. So, by and large, Asian equity markets posted modest losses, with e.g. Japan’s TOPIX and China’s CSI300 closing down just 0.1% on the day. Likewise, on the whole, government bonds were also relatively little changed, albeit having to adjust to yesterday’s shift in the UST market, which has been followed by a further updrift in yields in European time this morning (10Y UST yields are currently up to 1.936%).

So, for example, JGBs opened lower to catch up with yesterday’s move in USTs, but then remained largely impassive as the BoJ predictably left its main policy parameters and forward guidance unchanged, made few significant amendments to its overall economic assessment, but judged the downside risks to the outlook from developments abroad still to be significant. Among other things, in his press conference, Kuroda stated that the BoJ had no major issue with the current shape of the JGB curve and also had no intention to target short-dated yields. Nevertheless, he thought that super-long yields should be higher, and he expected the curve to steepen further in due course. (10Y yields are currently up about 1½bp from this time yesterday at close to -0.015% but super-long yields are little changed). The BoJ was not completely idle policy-wise, however, as it announced details of its new ETF lending facility and also amended the terms of one of its special lending facilities (see below).

Beyond Japan, the other main news in the Asia-Pacific came from Australia, where a somewhat better than expected labour market report prompted more significant losses in ACGBs (yields up about 6-7bps across the curve) as markets pushed out to Q220 their expected timing of the next cut in the RBA’s cash rate.

In Europe, meanwhile, as it had previously signalled, Sweden’s Riksbank raised its repo rate by 25bps to zero per cent, bringing to an end its five-year experiment with negative rates. The decision was not entirely without controversy, however, as Deputy Governors Breman and Jansson entered reservations against it. And Swedish rates are now expected to remain unchanged for the foreseeable future.

In the euro area, government bonds opened a touch weaker and equities slightly firmer, while a French survey suggested that overall business conditions have been stable this month despite the disruption caused by the protests against Macron’s pension reform proposals. (Please see details on the French and Aussie data below).

Looking ahead, after the release later this morning of the UK’s November retail sales figures, the lunchtime conclusion of the BoE’s MPC meeting is highly likely to see Bank Rate left unchanged. But given recent weak data but diminished near-term Brexit uncertainty, the MPC’s assessment of the economic outlook will be closely watched.

There were no major surprises from the conclusion of the BoJ’s latest Policy Board meeting, as the main policy parameters in terms of interest rates, yield target, asset purchases and forward guidance were left unchanged. In particular, the short-term policy rate was left at -0.1%, while the commitment to purchase bonds (an annual JGB purchase target of ¥80trn) so that 10Y JGB yields will remain at around 0% was also maintained. Furthermore, the BoJ reiterated that it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost”.

The BoJ’s assessment of economic conditions appeared little changed too, with the Board judging the economy to have remained on a moderate expanding trend despite fluctuations associated with the consumption tax hike (which were judged by Kuroda to be more moderate than those around the previous tax hikes in 1997 and 2014), some ongoing weakness in exports, and the additional recent disruption to manufacturing caused by October’s super-typhoon. And notwithstanding the expectation that softer global demand would continue to impact the economy, the BoJ expects a moderate expansion trend to continue, with domestic demand supported not least by “active government spending” in light of the recently announced fiscal support package. However, while the Fed and ECB recently assessed downside risks to the outlook to be not quite as acute as they were previously, the BoJ seems somewhat less complacent, maintaining its view that downside risks concerning overseas economies in particular remain significant, while also reiterating that sentiment among Japanese households and firms should be closely watched too.

Finally, today’s meeting was not completely uneventful policy-wise, with the BoJ providing new information on some of its unorthodox easing measures. In particular, the Board finally agreed some details of its ETF lending programme. While this scheme had originally been announced in April, it still requires final sign off from the government and so a start date will only be determined in due course. But with the BoJ now holding more than two thirds of the ETF market, the policymakers hope that the initiative – whereby its holdings might be lent for up to one year at an interest rate to be determined by auction or by the BoJ itself – will boost liquidity. Nevertheless, having already reduced the frequency of its ETF purchases significantly since early October – its holdings are now on track to rise by at least ¥1trn less than the full-year target of ¥6trn – this programme might also give the BoJ greater confidence to further scale back its ETF purchases next year too. (In addition to its action on the ETF lending facility, the BoJ also announced an extension to its ‘Stimulating Bank lending’ facility, specifically allowing banks to roll over, for a further four years, loans issued under the programme set to mature on or after 1 April 2020.)

Today’s BoE policy announcement seems likely to be fairly uneventful, with Bank Rate unchanged at 0.75%. But the two Committee members (Haskel and Saunders) that voted for a 25bps rate cut in November – the first split decision since June 2018 – might well vote for monetary easing at this meeting too. The policy statement will, however, certainly be closely watched for the Bank’s judgement on recent developments. Near-term political uncertainties – both domestic and external – have diminished somewhat. But GDP has failed to rise in any month since August, and sentiment indicators remain consistent with contraction in Q4, compared to the BoE’s previous expectation of growth of 0.2%Q/Q.

In terms of data, today will bring the ONS official retail sales release for November. But the figures are likely to be somewhat misleading, with the annual rate likely to be negatively impacted by the timing of the Black Friday sales – the ONS will incorporate this discounting period this year in the data for December rather than November. This release will also be accompanied by the CBI’s distributive trades survey for December, which might shed more light on conditions in the retail sector over the fourth quarter as a whole.

Euro area:
Broadly in line with the findings of the flash PMIs released at the start of the week, this morning’s INSEE survey results suggested that French business conditions have been broadly stable so far in December. Most striking perhaps, the survey pointed to a notable improvement in retail sector conditions to the best so far this year – jarring with anecdotes of a possible hit to spending from the pension-reform protests – with firms reporting improved sales and improved orders. Like the flash PMIs, the survey also suggested an improvement in services, while conditions in manufacturing and construction were also judged to be stable. Less positively, however, the survey suggested a deterioration in the employment climate, although it still pointed to ongoing jobs growth. Given today’s survey, we maintain our forecast for French GDP growth in Q4 of 0.3%Q/Q, the same pace as in each of the three previous quarters but 0.1ppt firmer than the rate implied by the Bank of France’s own business survey.

Elsewhere, ECB Chief Economist Philip Lane will chair a panel at an ECB conference on fiscal policy and EMU governance.

The latest Aussie labour market report published by the ABS today came in ahead of expectations to impact market expectations of the timing of the next rate cut. In particular, the number of people in employment rose a stronger-than-expected 39.9k in November, the biggest monthly increase since August 2018. But this in part reflected payback for the weakness seen in October (-24.8k). Moreover, it was principally driven by part-timers (35.7k), while the increase in full-time employees (4.2k) reversed less than half the decline seen previously and was much softer than the average over the past six months. Indeed, overall, total employment growth continued to slow, with the year-on-year increase (2.0%Y/Y) the joint-lowest since April 2017.

With labour force participation having moved sideways, the pickup in employment saw the unemployment rate fall 0.1ppt to 5.2% in November. Nevertheless, this was still higher than a year earlier. Moreover, it remains well above the RBA’s estimate of the NAIRU (close to 4.5%). So, coming on the back of yesterday’s vacancy figures that flagged downside risks to jobs growth ahead, today’s report suggested that wages are unlikely to accelerate significantly, something that will be required if the RBA is going to steer inflation back to target on a sustained basis.

In the US, today will bring the Philly Fed index for December, Conference Board’s Leading index for November, existing home sales figures for the same month and the latest balance of payments data for Q3. In the markets, the US Treasury will sell 5Y TIPS.

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