Fed eases policy, BoJ hints at tweaks ahead

Emily Nicol
Chris Scicluna

Overview:
Fully in line with expectations, the Fed cut its target range for the fed funds rate by 25bps yesterday. But the FOMC’s updated dot plot and economic projections suggested that amendments to policy over coming quarters might be few and far between. Significant differences of opinion on the Committee persist, however, and policy will unsurprisingly be data dependent. Meanwhile, in light of this week’s events in funding markets, the Fed Governors lowered the IOER by 30bps to 1.80% and pledged further special overnight repo operations, while Powell raised the possibility of a near-term decision “to resume the organic growth of the balance sheet”.

The markets’ take of the Fed’s announcements was relatively underwhelming. The S&P500 closed effectively unchanged on the day, while yields on 10Y USTs are currently close to 1.78%, just where they were this time yesterday. Yields at the shorter end of the curve, however, are higher – e.g. 2Y yields are close to 1.76%, up about 4bps from 24 hours ago and almost 10bps higher than their low just ahead of the FOMC announcement.

Today in Asian time it has been the turn of the BoJ to announce the outcome of its latest policy review. Unsurprisingly there was no change to its main policy parameters. But the Policy Board made a commitment to review such matters at the next meeting, once the impact of the consumption tax hike might be a little clearer (see below for more detail). While Kuroda’s press conference is now underway, it’s so far been relatively unenlightening. In the context of the BoJ’s yield curve control framework, however, he has again acknowledged that a steeper yield curve would be desirable and the BoJ would make necessary adjustments in its market operations to try to achieve that aim. And while he continued to downplay the likely economic impact of the tax hike, and stated that he didn’t see the need for a major revamp of the policy framework, he also admitted that the BoJ was more inclined towards easing now than at the last meeting.

The market response to the BoJ’s announcement was to strengthen the yen through ¥108/$. But JGB yields moved lower too (10Y yields are about 3bps lower close to -0.23%). Meanwhile, the Topix reversed yesterday’s decline, closing up 0.6%. Elsewhere in the region, Chinese markets are also firmer (CSI300 closed up 0.3%). And Aussie stocks rose about ½% while ACGBs rallied (10Y yields down almost 8bps to below 1.06%) as the latest local labour market data supported the case for further RBA easing ahead (see more on these figures below too).

Later today, the BoE will announce the outcome of its latest policy meeting. But changes to policy today are unthinkable, and the MPC’s commentary on the outlook will remain of relatively little import for as long as Brexit uncertainty remains so elevated. Today also brings some notable UK economic data (retail sales), while the outcome of the Supreme Court hearing into the legality of Johnson’s decision to shut down Parliament will be closely watched too, given that it could affect his ability to push for a no-deal Brexit at end-October.

Japan:
There were no major surprises from the conclusion of the BoJ’s policy-setting meeting, with the main yield curve control parameters unchanged, i.e. the short-term policy rate was left at -0.1% while the commitment to purchase JGBs so that 10Y JGB yields will remain at around 0% was also maintained. Having scaled back its purchases over recent weeks to try to push 10Y yields to back within the BoJ’s loose +/- 20bps target range, and Kuroda subsequently stating that the Bank would continue to adjust its market operations to try to achieve a steeper curve, the BoJ again pledged to conduct its JGB purchases in “a flexible manner”, albeit so that its holdings will rise at an annual pace of about ¥80trn. In the first eight months of 2019, however, the BoJ’s JGB holdings were on track to increase by just ¥27trn. 

Perhaps predictably, the BoJ also maintained its broadly upbeat assessment of the economic backdrop, restating that Japan’s economy was likely to continue on a moderate expanding trend. Nevertheless, it did acknowledge some recent “fluctuations” in private consumption growth even ahead of next month’s consumption tax hike. And the policy statement also noted that downside risks associated with overseas economies seem to be increasing. With respect to inflation, while the Policy Board upheld its optimism that CPI was likely to increase gradually towards 2%, it also noted that it was currently around ½%Y/Y, with inflation expectations more or less unchanged.

So, while it maintained the wording on its arguably meaningless forward guidance that it “intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through spring 2020”, the Policy Board again reiterated its commitment to further easing if required, noting that it would not hesitate to take additional easing measures if greater downside risks to achieving its price stability target materialise. And perhaps in a further strengthening of this commitment, the BoJ suggested that the end-October meeting might be a decisive event, stating that, given the increasing downside risks to the economic outlook and the uncertainty surrounding the impact of the consumption tax hike, it will “re-examine economic and price developments at the next [monetary policy meeting]”.

Today’s all industry activity figures for July failed to offer convincing evidence that Japan’s economy is expanding moderately at the start of Q3, with total output rising just 0.2%M/M following a 0.7%M/M decline in June. This principally reflected the rebound in IP that month (+1.3%M/M), while tertiary activity also posted modest growth (+0.1%M/M). Today’s release showed further weakness in the construction sector, with output down for the second successive month and by 1.4%M/M. Indeed, private sector construction fell to its lowest level since April 2017, with building work down for the third consecutive month and civil engineering work posting another sizeable decrease (6.0%M/M), to leave private consumption almost 2½% below the average in Q2. And with the level of IP also lower than the average in Q2, while tertiary activity moved sideways, all industry output was 0.2% below the average level in Q2.

UK:
Today’s other monetary policy announcement will come from the BoE, although Bank Rate is universally expected to be left unchanged at 0.75%. While GDP in Q2 was weaker than the BoE’s expectation, last week’s monthly GDP figures for July were firmer and seemed to rule out the chances of another contraction in Q3. And while yesterday’s CPI release fell short of expectations, wage growth recently rose to the highest rate in eleven years suggesting a possible increase in domestically generated pressure in the pipeline. This week’s jump in the oil price might also add a positive impulse to inflation. Overall, therefore, we expect no substantive change to the MPC’s forward guidance that “assuming a smooth Brexit and some recovery in global growth…the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate”. That said, Carney will no doubt acknowledge that a smooth Brexit can hardly be taken for granted.

Indeed, likely in part reflecting the ongoing uncertainty regarding Brexit, today’s retail sales figures for August are expected to report a decline in spending for the first month in three, in line with the downbeat tone from recent surveys. And the BoE’s latest Agents’ Summary of business conditions in Q319 will likely also emphasise the downside risks associated with Brexit.

On the political front, today might well bring the outcome from the UK Supreme Court hearing on whether Boris Johnson’s suspension of Parliament was unlawful. Should it rule in favour of the judgement of Scotland’s most senior court that Johnson indeed acted unlawfully, Parliament might be recalled, providing further time for scrutiny of the government’s opaque Brexit policy and no-deal planning. It could also make it more difficult for the PM to prorogue Parliament once again next month if he was tempted to do so in an attempt to force through a no-deal Brexit despite the recent legislation seeking to prevent such an outcome.

Australia:
Today’s Aussie labour market report on the whole offered further support to the case for further monetary easing later this year. Admittedly, at face value, the employment figures were more positive, with the total number of people employed rising a stronger-than-expected 34.7k in August, resulting in a rise of more than 310k compared with a year earlier. But this was more than accounted for by higher part-time employment (50.2k). In contrast, full-time employment fell 15.5k in August to leave the annual increase falling to 187k, one of the lowest of recent years. But with the participation rate having risen to a new record high (66.2%) and the number of people in unemployment having risen in five of the past six months, the unemployment rate rose 0.1ppt to 5.3%, a twelve-month high, well above the RBA’s estimate of the equilibrium rate (4½%) and consistent with still large amounts of slack in the labour market. As such, we still maintain our view that the RBA will cut its target cash rate by a further 25bps in November when it publishes updated economic forecasts.

Euro area:
It should be a quieter day for economic news from the euro area today, with just the ECB’s balance of payments for July due for release. In the markets, France and Spain will sell bonds with various maturities. In addition, the ECB will publish the allotment results of its first (of seven) TLTRO-III longer-term refinancing operations. Last week saw the Governing Council make the conditions more attractive, reducing the premium interest rate on the loans by 10bps and increasing the loan maturity to three years (with the option of repayment after two).

US:
In the US, today will bring a number of new data releases including existing home sales figures for August, the Conference Board’s leading indicators for the same month, and current account data for Q2, while the usual weekly jobless claims figures are also due. In the markets, the Treasury will sell 10Y TIPS.

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