Markets
Bank of Japan Deputy Governor Uchida left little room for doubt in a brief speech at a financial conference in Tokyo. He said that “if the outlook for economic activity and prices is realized, the Bank of Japan will continue to raise the policy interest rate and adjust the degree of monetary accommodation”. Uchida commented on yesterday’s quarterly Tankan survey which indicated that business sentiment is at a favorable level. Large firms across all industries plan a capex increase of 12.5% on average in the fiscal year from April. Businesses also indicated that they expect inflation to be 2.4% Y/Y in 5 years’ time, more than the 2.3% in the Q2 survey and above the BoJ’s 2% inflation target. The Japanese central bank labelled this metric as a key one in interpreting longer term inflation expectations. Uchida furthermore mentioned that uncertainty regarding the outlook has eased following the US-Japanese trade deal. The market implied probability of a BoJ rate hike (0.5% to 0.75%; first since January) end this month remained broadly stable at around 2/3 after the Uchida comments. The likelihood has been rising steadily over the past month since two out of nine BoJ members already supported such action in September. A shift by dovish BoJ Noguchi and the Tankan survey added to that sentiment. Overnight, BoJ governor Ueda can seal the deal in a speech in Osaka. We think that markets don’t completely align with BoJ rhetoric yet because of this weekend’s leadership elections at the Liberal Democratic Party (LDP). Two frontrunners have different views on fiscal and monetary policy. Shinjiro Koizumi favors fiscal discipline and gradual monetary tightening. Sanae Takaichi on the other hand is an adept of Abenomics, combining continuous monetary and fiscal support. Especially if Takaichi wins, there’s a possibility that the BoJ opts for more domestic political clarity as snap elections before the end of the month can’t be ruled out. A 5-day JPY rally comes to an end today with USD/JPY steady at 147 and EUR/JPY at 172.50. Bullish risk sentiment tempers JPY-strength. The overall climate of low volatility, amplified by the stable ECB outlook and by the US government shutdown and absence of eco release, proved fertile ground for stock markets at the start of the new quarter. The EuroStoxx 50 gains 1.5% today, more than confirming yesterday’s technical break above the previous YtD/all-time top at 5568. US stock markets open a modest 0.15% higher.
News & Views
UK firms assessed that in the three months to September their annual realized price growth rose slightly, by 0.1% to 3.8%, according to the monthly Decision Making Survey of the Bank of England. Firms expect their year-ahead own-price inflation to be 3.7%, unchanged from the three months to July. Expectations for year-ahead CPI inflation rose by 0.1 percentage points to 3.4%. The corresponding measure for three-year ahead CPI inflation expectations was unchanged at 2.9%. All indicators thus stay well above the 2% BoE inflation target. Aside from the assessment on inflation, firms reported annual wage growth at 4.6% in the three months to September (unchanged). Expected year-ahead wage growth remained at 3.6%. Realized employment growth remained at a negative -0.5%. while expectations for employment growth over the next year weakened to 0.0% (from 0.2%). With respect to recruitment, 9% reported recruitment to be more difficult (idem average Feb/Apr). The average proportion of firms reporting that it was easier than normal to recruit staff was 19%, 1 ppt below the Feb/Apr average. 58% of firms reported that uncertainty facing their business was high or very high, a 1 ppt increase.
Swiss inflation remained low in September. CPI declined 0.2% M/M resulting in unchanged 0.2% Y/Y inflation. The market consensus expected a slight rise to 0.3% Y/Y. According to the Swiss Federal Statistical office, the 0.2% M/M decrease is due to several factors including lower prices for supplementary accommodation and hotels, along with those for international package holidays and air transport. Prices for domestic products printed at -0.3% M/M and +0.6% Y/Y. Prices of imported products declined 0.1% M/M to be 0.9% lower compared to the same month last year. Core inflation also declined 0.2 M/M with the Y/Y measure holding stable at 0.7%. The Swiss National Bank (SNB) in its September monetary policy assessment indicated that it expected inflation to be slightly higher short-term. This at least isn’t confirmed by today’s data. The bar for the SNB to return to a negative policy rate is quite high (but not excluded). At the same time, the SNB earlier this week published that it intervened in the FX market for an amount of CHF 5.1bn in Q2. Also this tool remains available if the SNB wants to avoid further deflationary impact from a strong franc. The franc today declined marginally against the euro after the CPI release (EUR/CHF 0.935).
