BOJ Turbocharges JPY

October 31, 2024
6 min read

BOJ Turbocharges JPY

  • Bank of Japan stands pat and sticks to cautious tightening bias. Governor Ueda struck a hawkish tone. JPY outperforms.
  • China’s October PMIs improve but remain indicative of sluggish economic growth.
  • U.S. macro backdrop is not too hot nor too cold, it’s just right.

USD is lower largely due to broad JPY strength. Still, we expect USD and Treasury yields to edge higher. The Goldilocks U.S. macro backdrop of solid growth and modest disinflation suggests the Fed is unlikely to cut the funds rate as much as is currently priced-in. Fed funds futures imply almost two cuts (42bps) by December 2024 and a total of 110bps of easing over the next 12 months.

U.S. real GDP growth slowed more than expected in Q3 to an annualized pace of 2.8% (consensus: 2.9%) vs. 3.0% in Q2. However, the economy is still growing above long-run annual trend growth of 1.8% and the details showed domestic demand remains strong. Consumer spending was the biggest growth tailwind contributing 2.46pts (the most since Q1 2023) and non-residential private investment added 0.46pts. Inventory destocking and net exports subtracted -0.17pts and -0.56pts to growth, respectively.

U.S. September PCE report and Q3 employment cost index (ECI) are today’s highlights (12:30pm London). Headline PCE is expected to rise 0.2% m/m and print at 2.1% y/y vs. 2.2% in August. Core PCE is projected to rise 0.3% m/m and print at 2.6% y/y vs. 2.7% in August. This is in line with the Cleveland Fed’s inflation Nowcast model. Risks are skewed to the upside because CPI inflation in September ran hot.

Meanwhile, personal income and spending are expected to remain indicative of robust domestic demand activity. Personal income is projected to rise 0.3% m/m vs. 0.2% in August, personal spending is expected to increase 0.4% m/m vs. 0.2% in August, and real personal spending is forecast to pick-up 0.3% m/m vs. 0.1% in August.

ECI is expected to rise 0.9% q/q, same rate as in Q2. This is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment. On an annual basis, ECI wages & salaries eased from a high of 5.3% in Q2 2022 to 4.2% in Q2 and will likely remain sticky above 4% in Q3. Average hourly earnings and the Atlanta Fed wage growth tracker both increased in September by 0.1pts to 4% y/y and 4.7% y/y, respectively.

The U.S. October Challenger job cuts report (11:30am London) and weekly initial jobless claims (12:30pm London) will also be worth watching today for a timely update on the state of the labor market. Yesterday, the ADP private sector jobs estimate was stronger than expected rising 233k (consensus: 111k) vs. 159k in September.

USD/JPY slumped 1% to near 152.00. As was widely expected, the Bank of Japan (BOJ) decided by a unanimous vote to leave the policy rate unchanged “at around 0.25%”. The BOJ reiterated its cautious tightening bias that if the “outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.”

Moreover, BOJ Governor Ueda suggested that the bar for the BOJ to resuming normalizing policy is low. Ueda acknowledge that markets have slowly regained stability and risks related to the U.S. economy is lower than before. Previously, Ueda warned of ongoing financial instability in the market.

Nonetheless, we doubt the BOJ will be in a rush to remove policy accommodation. The BOJ still projects the year-on-year rate of increase in CPI (all items less fresh food and energy) at 1.9% in 2025, which is below the 2% inflation target. Bottom line: U.S.-Japan 10-year bond yield spreads can continue to support the uptrend in USD/JPY.

EUR/USD is holding on to yesterday’s gains triggered by stronger than anticipated Eurozone real GDP growth in Q3. Today’s Eurozone October CPI data can offer EUR additional intra-day support (10:00am London). Headline CPI is expected at 0.2% m/m vs. -0.1% in September. On an annual basis, headline CPI inflation is projected to rise 0.2pts to 1.9% and core CPI inflation is forecast to fall 0.1pts to 2.6%. Beyond

GBP and Gilts got whipsawed yesterday following the release of the U.K.’s government Autumn Budget. In our view, the Budget is supportive of GBP and should ease the recent upside pressure on the term premium for long-term Gilts.

The U.K. government plans to sell more Gilts to fund an increase in investment spending but there’s no sign of fiscal profligacy. 2024/2025 gilt issuance will increase by £19.2bn to £296.9bn vs. £239.1bn the previous fiscal year. This is roughly in line with consensus expectations for a £15bn increase.

Meanwhile, the U.K. fiscal stance is unlikely to force the Bank of England (BOE) to ease more aggressively than is currently priced-in. The fiscal drag (as measured by the change in the cyclically adjusted primary budget) for fiscal years 2025 to 2027 is only a touch higher than implied in the Spring Budget. But for the current fiscal year (2024-2025), the fiscal stance is now forecast to shift from a drag to a tailwind to growth. In fact, U.K. interest rate futures pared back bets of BOE rate cuts by year-end to 30bps from 40bps before the Budget.

USD/CAD remains under upside pressure above 1.3900. Canada’s August GDP report is up next (12:30pm London). Statistics Canada estimates real GDP to be essentially unchanged in August after rising 0.2% m/m in July. Soggy economic activity, slower inflation, and growing slack in the labor market leave plenty of room for the Bank of Canada to keep cutting the policy rate. The market is pricing-in 50% odds of a follow-up 50bps cut in December.

AUD is consolidating near recent lows. Australia’s retail sales report does not shift the dial on RBA rate expectations. Nominal retail sales rose 0.1% m/m (consensus: 0.3%) vs. 0.7% in August. In volumes terms, retail turnover matched consensus and increased 0.5% q/q after falling -0.3% in Q2. Going forward, the CBA Household Spending Indicator points to subdued spending growth. RBA cash rate futures implies just 15% odds of a 25bps cut by December while a rate cut in February is less than 50% priced-in.

NZD/USD is range bound near recent lows supported by more upbeat New Zealand businesses sentiment in October. Business confidence rose 5 points to a ten-year high at 65.7. The activity outlook index ticked up 1 point to 45.9, the highest since May 2014. Reported past activity, which has the best correlation to GDP, improved 8 points to a five-month high at -11. Nevertheless, the RBNZ has plenty of room to crank-up easing because policy is too tight, heightening the risk a deeper economic downturn. At 4.75%, the RBNZ policy rate is still well above the RBNZ estimate for the nominal neutral rate range of 2% to 4%.

China’s PMIs improved in October but remain indicative of sluggish economic growth. The composite PMI rose 0.4pts to a five-month high at 50.8, the manufacturing PMI increased 0.3pts to a six-month high at 50.1 (consensus: 49.9), and the non-manufacturing PMI ticked up 0.2pts to a two-month high at 50.2 (consensus: 50.3). Chinese policymakers are expected to unveil the details of their fiscal stimulus pledge following the National People’s Congress Standing Committee meeting scheduled for November 4 to 8.

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