Morning comment: No BoJ surprises, but trade data disappoint

Chris Scicluna
Emily Nicol
Mantas Vanagas

While yesterday’s equity markets in Europe and the US saw losses across the board (the S&P500 closing down 1.4%) and major government bonds including USTs make gains (with the 10Y Treasury yield back below 2.75%), Asian markets today were relatively mixed. Perhaps supported by comments from Larry Kudlow denying reports that talks with Chinese officials had been cancelled ahead of next week’s visit to the US by Vice Premier Liu He, as well as the injection of PBoC liquidity via the first operation of a new medium-term lending facility, the main Chinese and Hong Kong equity indices closed little changed while the CNY firmed. In contrast, while the yen depreciated and JGBs were little changed, Japanese stocks weakened somewhat (the TOPIX closed down 0.6%) as the latest trade data disappointed expectations while the BoJ predictably revised down its forecasts for growth and inflation while remaining broadly sanguine about the outlook (details below). Ahead of this afternoon’s euro area consumer confidence report and tomorrow’s ECB announcements, meanwhile, European equity markets have opened lower this morning while core euro area govvies are little changed.

There were no surprises from today’s BoJ announcements, not least with the key elements of the monetary policy framework predictably left unchanged. So, the -0.1% marginal interest rate on excess bank reserves was untouched, as was the commitment to purchase JGBs so that 10Y yields remain at around zero percent. And the BoJ again pledged to conduct its JGB purchases in ‘a flexible manner’ so that its holdings will increase at an annual pace of about ¥80tn, a little more than double the rate actually achieved last year. The usual two out of nine Board members – Kataoka and Harada – dissented from those decisions. The Policy Board was not entirely passive at this meeting, however, deciding (unanimously in this respect) to extend by one year the deadlines for new applications to its range of special liquidity facilities.

Much attention, inevitably, was on the BoJ’s latest Outlook Report, including its updated economic forecasts, although there was little in the way of surprises here either. In particular, the BoJ tried to remain upbeat, insisting that Japan’s economy is likely to continue ‘on an expanding trend’ over the coming couple of years – supported not least by its accommodative monetary policy and extra public spending – and reasserting that inflation is ‘likely to increase gradually toward 2 percent’.

Having had its collective hand forced by recent weak figures for Q3 and unfavourable data revisions to earlier quarters, the Policy Board’s median GDP growth forecast for FY18 was appropriately revised down by 0.5ppt to 0.9%Y/Y. But the BoJ remained relatively sanguine about the growth outlook for the coming couple of years, judging that October’s consumption tax hike will have only a limited impact on demand and having the (questionable) audacity to nudge up its forecasts for FY19 and FY20 by 0.1ppt and 0.2ppt to 0.9%Y/Y and 1.0%Y/Y respectively. Those growth rates, however, are no stronger than the BoJ’s estimate of potential growth.

In terms of inflation, meanwhile, the forecasts of Policy Board members were nudged down across the horizon, with the median forecast for FY19 most notably cut by 0.5ppt to 1.1%Y/Y (and 0.9%Y/Y excluding the consumption tax) principally due to the recent downwards shift in oil prices. But the government’s policy of free education is also estimated to knock 0.3ppt and 0.4ppt off inflation in FY19 and FY20 while policymakers’ efforts are also expected to place further downwards pressure on mobile phone tariffs. Yet, with the output gap expected to remain in positive territory and the BoJ counting on firms changing their wage- and price-setting behavior, the BoJ maintained the charade of optimism about the inflation outlook for FY20, with the median Policy Board forecast nudged lower by just 0.1ppt to 1.5%Y/Y (1.4%Y/Y excluding the consumption tax). That rate looks far too high to us, although the Policy Board did, at least, repeat its assessment that the risks to the outlooks for both growth and inflation are skewed to the downside.

Looking ahead, there was no new steer on the outlook for monetary policy from the policy statement or Kuroda’s press conference. The BoJ committed to plough on with its yield curve control policy and continue expanding the monetary base to achieve its 2% inflation target and maintain inflation at that level in a stable manner. And it still intends to maintain the current extremely low levels of short- and long-term interest rates ‘for an extended period of time’. While it remains watchful of any adverse impact of its monetary policy settings on the financial sector, the BoJ’s monetary policymakers (as opposed to its banking supervisors) see no great cause for concern yet. And the BoJ’s latest bank lending survey, also released today, added credence to that view, with no tightening of credit standards reported and few banks suggesting plans to increase spreads on new loans going forward.

Turning to the latest deluge of Japanese economic data, while the BoJ remained broadly upbeat about the outlook for external demand, December’s trade report made for disappointing reading today, with the value of exports down for the second successive month (1.3%M/M) to leave it almost 4% lower compared with a year earlier, the largest drop for more than two years. And when adjusting for prices, export volumes reported the steepest annual decline (5.7%Y/Y) since the start of 2015, with a near-14%Y/Y drop in shipments to China in part offset by continued steady growth in exports to the US (3.9%Y/Y)and EU (5.7%Y/Y). Nevertheless, with the value of imports down more than 5%M/M in December, principally reflecting the lower oil price, the seasonally adjusted trade deficit narrowed to ¥184bn, the lowest for five months.

When adjusting for both seasonal and price effects, the BoJ’s latest trade figures were somewhat more positive, with export volumes rising 0.9%M/M in December, to leave them up more than 1% over the fourth quarter as a whole. But despite a second successive near-2%M/M drop, the volume of imports was up a stronger 3½%Q/Q in Q4, the firmest quarterly rise since Q212. Overall, therefore, today’s figures suggest that net goods exports continued to provide a drag on GDP in Q4. So, while the pickup in spending by overseas visitors in Q4 provided a boost to net services exports, overall we anticipate net trade to subtract from growth for the third consecutive quarter.

With respect to domestic economic developments, there were no major surprises in today’s all-industry activity report, which showed some modest payback in November following the post-disaster bounce in October. In particular, total output fell 0.3%M/M in November following an upwardly revised increase of 2.1%M/M, to leave it on average in the first two months of the quarter 1.3% higher than the average in Q3 and therefore consistent with our (and the BoJ’s) expectation of solid GDP growth in Q418. Turning to the sector breakdown, in contrast to the declines seen in tertiary (-0.3%M/M) and manufacturing (-1.0%M/M) output in November, construction activity rose for the first month in three and by 1.9%M/M, principally reflecting a 4½%M/M increase in public sector works.

Finally, revised labour earnings figures for November – which saw the series rebased – came in softer than originally estimated, with total average wage growth revised lower by 0.3ppt to 1.7%Y/Y, admittedly still the best reading since June. And while the increase in scheduled earnings was also weaker than previously estimated, the rise of 1.3%Y/Y still represented the strongest rate for more than two decades. Perhaps unsurprising, in his press conference, Kuroda noted that the BoJ would be watching the forthcoming spring wage negotiations closely, and no doubt keeping its fingers crossed that the uptrend in wage growth will be maintained over the coming year. Unfortunately, however, today’s figures suggested that recent developments in full-time regular employment were much weaker than originally thought, with no growth seen in November compared with a year earlier. Nevertheless, with part-time regular employment growth still solid at 2.2%Y/Y, total regular employment on this measure was still up 0.7%Y/Y, broadly in line with the average increase through the second half of last year.

Euro area:
Following a disappointing German ZEW investor survey yesterday – which saw the current conditions balance slump to a four-year low – January sentiment surveys will continue to dominate the euro area data flow today, with the flash Commission consumer confidence indicator most notable. Having maintained a firm downward trend throughout 2018, consumer confidence took a notable step down in December to a 22-month low and a further modest deterioration is expected in January.

Nevertheless, having deteriorated significantly at the end of the last year, this morning’s INSEE survey suggests that French business confidence has stabilised this month. The survey’s headline sentiment indicator came in unchanged from December at 102, still the lowest level in more than two years but above its long-term average. So, in contrast to many other French economic sentiment indicators seen recently, this survey remains consistent with positive GDP growth.

Looking at the details, results were mixed among the major sectors, with the construction and wholesale trade indices weaker, but manufacturing confidence stable and services sentiment slightly firmer. The survey respondents assessed that the employment climate index was also stable in January. With the Gilet Jaunes protests continuing and the outlook for other large member states seemingly having taken a turn for the worse, the French economy undeniably still faces significant challenges. GDP growth probably eased slightly in Q4 from the 0.3%Q/Q pace seen in Q3. But the outlook for this year is more uncertain. Despite Macron’s panicked fiscal stimulus measures, we expect GDP growth to be about ½ppt lower this year compared to 2018, when (like in Germany) GDP likely increased by around 1½%Y/Y.

In the UK, today brings only the quarterly CBI Industrial Trends Survey, which will probably suggest that business sentiment remains subdued against the backdrop of looming Brexit risks. On the monetary policy front, BoE Deputy Governor Broadbent is scheduled to speak in London.

In the US, following a soft existing home sales report yesterday, focus today will be on the FHFA home price index for November, while the Richmond Fed Manufacturing Index for January is also due.

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