Fed on pause for now, BoJ pledges rates at current or lower levels

Emily Nicol

There was somewhat mixed reaction to the conclusion of yesterday evening’s FOMC meeting, where the FFR target range was cut for the third time this year by 25bps to 1.50-1.75% as had been expected, but the policy statement and Chair Powell’s press conference implied that the Committee is not ‘contemplating’ a further change in the path of policy over the near term (please see our US Chief Economist Mike Moran’s take on the FOMC decision for more details). Indeed, the 0.1% decline in China’s CSI300 was perhaps smaller than might have been expected given the downbeat tone of the latest Chinese PMIs, with the manufacturing index (49.3) the lowest since February and the non-manufacturing index (down 0.9pt at 52.8) the weakest since February 2016. Meanwhile, Japan’s TOPIX eked out a modest increase (0.1%) as some positive IP figures perhaps offset any disappointment from the conclusion of the BoJ’s meeting, which saw it merely amend its forward guidance but leave the main parameters of its yield curve control unchanged, despite downwardly revising its GDP and CPI forecasts across the horizon (see more details on the BoJ and Japanese data below).

In bond markets, while JGB yields initially moved higher in response to the BoJ’s announcement, 10Y yields followed the global trend lower closing 2bps lower at -0.15%. European govvies have also followed this trend, with 10Y Bund yields currently 4bps lower at -0.40% after some soft German retail sales figures. And following the disappointing European Commission sentiment survey yesterday, which signalled a further deterioration in conditions at the start of Q4, today’s euro area GDP estimate is expected to confirm that growth slowed to 0.1%Q/Q, the weakest since Q113.

As had been widely expected, the conclusion of the BoJ’s Policy Board meeting, where members ‘re-examined’ economic and price developments in the face of global headwinds and following this month’s consumption tax hike, brought no comprehensive overhaul of the BoJ’s yield curve control framework. In particular, the main parameters were left unchanged, with the short-term policy rate left at -0.1%, while the commitment to purchase bonds so that 10Y JGB yields will remain at around 0% was also maintained. Of course, the BoJ reiterated that its purchases would be conducted in a “flexible manner”, but still stuck with its targeted annual increase in its JGB holdings of ¥80trn – a target that hasn’t been met since 2016, while the BoJ is currently on track to increase its holdings by just ¥20trn in 2019.

The BoJ did at least amend its forward guidance, noting that “the Bank 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”. And Kuroda again reiterated in his press conference that the Bank still had “various options” for additional easing if required. But for now at least, the BoJ’s ‘assessment’ (arguably dubiously) judged that there had been no further increase in the loss of momentum to achieving its 2% price stability target, noting in particular that inflation expectations are expected to follow an increasing trend, with the output gap remaining positive.

Admittedly, the BoJ acknowledged that there are significant uncertainties with regards to the outlook for the output gap and inflation expectations, not least given that downside risks to the growth outlook – largely reflecting overseas developments – appear to be increasing. And the more downbeat global environment saw the BoJ nudge down slightly its expectations from three months ago for GDP growth across the forecast horizon, with growth expected to be no stronger than potential in FY19 (down 0.1ppt to 0.6%Y/Y) and FY20 (down 0.2ppt to 0.7%Y/Y) and only marginally stronger in FY21 (down 0.1ppt to 1.0%Y/Y).

Against this backdrop, the BoJ appropriately offered a more pessimistic view about the near-term inflation outlook, revising down its median forecast for core CPI (excluding fresh foods) in FY19 by 0.3ppt to 0.7%Y/Y (0.5%Y/Y when adjusting for the effects of the consumption tax hike and the government’s free education policies), while also knocking off 0.2ppt from its FY20 projection to 1.1%Y/Y (1.0%Y/Y). But with the output gap judged to remain positive, the BoJ continues to expect some further improvement in FY21, with its forecast of 1.5%Y/Y just 0.1ppt lower than its previous expectation. Of course, this means that core CPI will remain persistently sub-target across the forecast horizon. Moreover, the BoJ admits that the risks to both the growth and inflation outlooks are skewed to the downside.

While the challenging external environment has weighed on Japanese manufacturers over the past year or so, today’s IP report, at face value, suggested some temporary relief in September. In particular, manufacturing production rose a stronger-than-expected 1.4%M/M, to leave output up more than 1%Y/Y compared with a 4 ½%Y/Y decline previously. Within the detail, output was up more than 11%M/M in the general machinery sector, almost 8%M/M higher in production machinery and a 5½%M/M increase in electrical machinery. In contrast, autos production fell for the third month out of the past four and by more than 3%M/M. As such, over the third quarter as a whole, autos output was down more than 5%Q/Q. So, despite an increase in production of general machinery and electronic parts and devices in Q3, total output fell 0.6%Q/Q. And despite a notable decline in the inventory-shipment ratio in September, this still implied ongoing contraction in the sector over coming months, echoing the message from various sentiment surveys too.

The latest consumer confidence survey also exceeded expectations in October, with the headline index rising for the first time in almost two years. But the 0.6pt increase still left the index (36.2) at its second-lowest reading since mid-2011. And survey suggested a further deterioration in households’ expectations for employment, with the relevant index declining to its weakest since 2012.

Euro area:
It will be a busy day for top-tier economic releases from the euro area today, with most notably the flash estimates of Q3 GDP and October inflation. In particular, Q3 GDP in the euro area is expected to show that growth slowed to 0.1%Q/Q, half the pace seen in Q2 and the softest since Q113. While Spain’s economy continued to outperform other major member states, with growth unchanged at the 0.4%Q/Q pace in Q2, Italy’s economy is set to have moved sideways (at best). While the first reading of German GDP won’t be published until 14 November, this morning’s retail sales figures for September suggested only modest support from household spending at the end of the third quarter. In particular, retail sales rose just 0.1%M/M in September, merely reversing the decline in August, to leave them up 0.6%Q/Q in Q3.

Today will also bring the flash estimates of October inflation from the euro area, France and Italy. Having surprised on the downside in September, euro area headline CPI is expected to have edged even lower in October by 0.2ppt to 0.7%Y/Y on the back of lower energy inflation, while core inflation likely moved sideways at 1.0%Y/Y. While yesterday’s German and Spanish figures came in a touch above expectations, with the harmonised rates unchanged on the month at 0.9%Y/Y and 0.2%Y/Y respectively, French figures published this morning came in weaker than expected, with the equivalent headline CPI rate down 0.2ppt to 0.9%Y/Y, the weakest since July 2017.

In addition, euro area labour market figures for September are expected to show that the unemployment rate was unchanged at 7.4%, the lowest since May 2008.

Against the backdrop of ongoing political uncertainty, UK consumers remained predictably downbeat about conditions at the start of Q4, with the headline GfK consumer confidence index declining 2pts in October to -14, reversing the increase seen in September and matching the weakest reading since mid-2013. And the latest car production figures also emphasised the negative economic impact from persistent Brexit uncertainty, with output declining 3.8%Y/Y in September, to leave output over the first nine months of the year down a whopping 15½% compared with the equivalent period in 2018.

In the US, today will bring personal spending and income figures for September, including the closely watched monthly deflators, as well as the employment cost index for Q3. And ahead of tomorrow’s comprehensive labour market report, today will see the release of October’s Challenger job cuts data and weekly jobless claims figures.



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