Morning comment: BoJ chatter, Aussie construction & Kiwi trade

Chris Scicluna
Emily Nicol
Mantas Vanagas

Wall Street oscillated around breakeven throughout yesterday’s session, with the S&P500 and DJI both eventually closing down 0.1%. This was despite the fact that the US dataflow was in some ways stronger than the market had expected, with significant weakness in housing starts in December – but not permits – countered by a sharp rebound in both the Conference Board’s consumer confidence index and Richmond Fed manufacturing index in February. As had seemed likely Fed Chair Powell stuck to the script in the first leg of his congressional testimony, reiterating the Fed’s ‘patient’ mantra that it will assess the need for further monetary policy tightening in light of tighter financial conditions, slower global growth and unresolved political uncertainties. Powell’s comments underpinned a slight decline in Treasury yields – the 10Y nudging down to 2.64% – and a slightly weaker US dollar.

Other than a couple of downbeat reports in the Antipodes (summarised below), the dataflow was again light in the Asia-Pacific region today. And with Wall Street having provided no real direction, equity markets across the Asian region have been mixed. In China, a morning rally of more than 1% was reversed to leave the CSI300 down 0.2% at the close. In Japan, the TOPIX rose 0.2% and yields on JGBs briefly edged slightly higher with some market participants expecting tomorrow’s BoJ Rinban guidelines for March to reduce the planned purchase amounts for 5-10Y JGBs despite ongoing talk from BoJ officials about the need for continued ultra-accommodative policy.

Once again, there were no new macroeconomic data out of Japan today. But speaking in Kagawa, BoJ Board member Goushi Kataoka renewed his call for additional policy easing. He argued that stronger action now would achieve the Bank’s inflation target more rapidly, and so reduce the risks of possible negative side-effects that would be associated with maintaining the current level of stimulus for a very long period. Kataoka is a clear outlier on the Policy Board. But with the outlook for growth and inflation having recently deteriorated, BoJ Governor Kuroda himself restated in a weekend interview his willingness to ease policy further if necessary to help eventually meet the inflation target, noting the options from further cuts in the interest rate on excess reserves or 10Y JGB yield target to increased asset purchases. And that followed his remarks to Parliament last week suggesting that extra monetary action might be required if adverse moves in the yen hit the outlook for growth and inflation. Of course, we don't expect to see any meaningful new easing shift in BoJ policy for a while to come, at least unless and until we see a marked deterioration in the economic outlook.

Today, for a second successive day, Kuroda was again responding to questions in Parliament with attention once more on the BoJ’s ETF purchase programme amid concerns that they are distorting the market and posing a risk to the future health of the central bank's balance sheet. Among other things, Kuroda restated the arguments in favour of the purchases, and noted that, with the BoJ’s inflation target unlikely to be met by FY20, the Bank would need to maintain the current ETF programme despite the risk that it might ultimately suffer losses on its holdings in the event of sharp declines in the market. In this respect, he noted that a decline in the Topix to below 1350 – about 17% below its current level – could see the BoJ’s ETF holdings fall below book value, suggesting that some Board members could become uneasy if the index fell towards that level at some point in the future.

Euro area:
Today will bring the European Commission’s business and consumer confidence survey results for the present month. While last week’s flash consumer confidence indicator for the euro area registered a larger-than-expected increase of 0.5pt to-7.4 – an improvement that likely principally reflected developments in France – that still left it below the Q4 average. And, consistent with the findings of the German Ifo indices if not the flash euro area PMIs, the Commission’s euro area business climate indicator is expected to decline to a two-year low to leave the headline economic sentiment index little changed from January’s 25-month low. ECB bank lending data for January are also due today. In the bond markets, Germany will sell 10Y Bunds while Italy will sell BTPs due 2023 and 2029 as well as floating-rate notes due 2025.

In the US, Fed Chair Powell will repeat his semi-annual testimony on monetary policy before the House Financial Services Committee. Data-wise, the advance goods trade report for December is due along with factory orders figures for the same month and pending home sales for January. The trade report is expected to see a widening of the goods deficit, with exports weighed notably by soft global demand.

After Theresa May yesterday cleared the way to an extension of the Article 50 deadline, offering another parliamentary meaningful vote on her (likely minimally tweaked) Brexit deal by 12 March and additional votes on ‘no deal’ and Article 50 extension if necessary on 13 and 14 March, that timetable seems bound to be rubber-stamped today in the latest round of Brexit votes in the House of Commons. A new proposal, to be tabled by Labour’s Yvette Cooper, will also seek to prevent May from being able to wriggle out of those commitments. Other ‘amendments’ from the Labour Party on its preferred Brexit deal, and members of the new Independent Group, LibDems and Scots and Welsh nationalists on arrangements to prepare for a second referendum, seem bound to be defeated. Another by the Conservative MP Alberto Costa on protecting citizens’ rights in the event of a no-deal Brexit, on which there is significant cross-party support, might fare better.

Data-wise, the BRC Shop Price index, released this morning, suggested that price pressures in the UK economy might be intensifying. The survey reported that retail prices were up 0.7%Y/Y this month, which remarkably represented the strongest increase on this measure since March 2013. Food price inflation inched up only slightly to 1.6%Y/Y and remained within the recent range. But following January discounting, non-food price inflation rose to 0.2%Y/Y, the first positive reading in six years, suggesting that retailers are looking to pass on to shoppers some of the cost pressures from sterling depreciation, higher wages and past increases in energy prices. Of course, it remains to be seen if demand will be sufficiently strong to absorb further such price increases, in particular given Brexit risks and subdued consumer confidence. We expect that, before too long, retailers will have to resort to heavy discounting once again in order to lure customers into the shops.

The domestic focus in Australia today was on the release of the ABS construction report for Q4, which continued the countdown to next week’s release of Australia’s full national accounts. Unfortunately the news was not encouraging, with the volume of total construction work done falling 3.1%Q/Q – a far cry from the 0.5%Q/Q increase that the market had expected – following a revised 3.6%Q/Q decline in Q3 (the latter 0.8ppt weaker than estimated previously). In the detail, building work fell 1.7%Q/Q (but was still up 1.6%Y/Y), with a 1.9%Q/Q lift in non-residential building activity – driven by the public sector – more than offset by a 3.6%Q/Q decline in residential building activity (the latter still up 2.1%Y/Y, however). Meanwhile, the volatile engineering work component of construction fell a further 5.0%Q/Q and was down 7.8%Y/Y. Coming on top of the weaker-than-expected 0.1%Q/Q lift in retail volumes reported earlier this month, the early GDP partials have clearly disappointed. A more comprehensive picture of business investment in Q4 – together with prospects for the coming year or so – will be provided by tomorrow’s CAPEX survey.

New Zealand:
New Zealand reported a merchandise trade deficit of NZD914m in January – a deficit that was more than three times larger than the market had expected. Moreover, this followed a December surplus that was revised down to just NZD12m from an initially estimated NZD264mn. After allowing for usual seasonal effects, the January outcome equated to an underlying deficit of NZD791m, marking the biggest shortfall since 2008. There were big surprises on both sides of the ledger this month. Exports slumped a seasonally-adjusted 7.8%M/M, although in annual terms still grew 3.0%Y/Y. While exports of dairy produce rose 12.3%Y/Y – driving continued strong growth in exports to China – meat exports fell 9.6%Y/Y. Imports edged up 0.4%M/M so that annual growth remained surprisingly robust at 7.7%Y/Y. Compared with a year earlier stronger-than-average growth was recorded for imports of consumer and intermediate goods, whereas imports of machinery and plant grew only modestly and imports of capital transport items – which are especially volatile – fell almost a third from a year earlier.

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