- In an immediate reaction, GBP/USD rose 1.3030 to 1.3044 before extending gains to 1.3060 over the course of just over 5 minutes
Of note, there is some discrepancy between various newswires around the phrasing regarding the accord being hammered out. With some newswires being more speculative and others being more definitive about the accord.
Not much additional movement or price action in EU bonds, but Bunds and Gilts did slip to fresh lows on Eurex and Liffe, at 159.43 and 121.66 (+9 and +10 ticks vs +29 and +32 ticks at the earlier intraday peaks), as BTPs extended their topside to 121.62 (+77 ticks vs -68 ticks at one stage). However, the latter have subsequently drifted back towards 121.00 awaiting the EU verdict and core 10 year benchmarks have ticked back up in response. Conversely, US Treasuries have rallied quite sharply to post new overnight session peaks and the curve has flattened considerably amidst the downturn in global stocks and risk sentiment, with perhaps an element of pre-2 year issuance positioning also impacting.
- She adds Canada's response will be measured and proportionate
- This follows from earlier reports that the White House is to discuss new Canada penalties, according to Washington Post citing sources
- Rosengren: Inflation likely to increase a bit more than the current median FOMC forecasts, will reach then exceed target gradually
- Rosengren: Labor markets are tight, may tighten more than FOMC forecasts project, wages have been rising gradually
- Rosengren: Unlikely that the economy would perform poorly in near term; monetary and fiscal policy remain accommodative, but accommodation may generate risks in long term
- Rosengren: By using up so much fiscal capacity now, US risks not having sufficient fiscal capacity in the future when it might be needed, would be troubling if monetary policy could not aggressively offset adverse shocks.
- Rosengren notes forecasts are imperfect and not a promise; contingent on trade developments, international monetary policy, OPEC
- Rosengren: Short-term risks include international trade, and an overheating economy
- Rosengren believes it would take a significantly broader set of trade actions than those reported to materially reduce US exports, but spillover effects are possible
- Rosengren: Trend falling import prices due to strong dollar appears to be changing more recently
- Rosengren: Long-term risks include reduced capacity of both fiscal and monetary policy to act against downturns
- Rosengren: Fed has been falling short of inflation goal due to the decline in the relative price of imports from 2014-2016, and the decline in telecommunications prices in early 2017
- Rosengren says spreads between corporate bonds and 10-yr Treasuries has fallen to relatively low levels, notes studies have showing investor confidence that generates low credit spreads often precedes subsequent economic reversals
- Rosengren says FOMC outlook is fairly optimistic, but his outlook is firmer
- Rosengren: Fed's long-term interest rate forecast low by historical standards due to demographics slowing labour force growth and productivity
- Rosengren has previously hinted he is in the four-hike camp; FOMC median projections (March) pencilled in three hikes in 2018
- Rosengren's own economic forecast calls for an even more pronounced decline in the unemployment rate, given his expectation that cyclical strength in labour force participation will provide only a partial offset to solid gains inpayrolls
- Rosengren is optimistic, but warns the Fed must consider risks to the outlook
+ 1 more
PREVIEW: Reserve Bank Of Australia Monetary Policy Decision Preview, Due On Tuesday 6th February 2018 At 03:30 GMT
The Reserve Bank of Australia (RBA) will issue its first monetary policy decision of 2018 on Tuesday following a 2-month hiatus. Consensus looks for the central bank to keep its Cash Rate target unchanged at the record low of 1.50%, where it has stood since mid-2016, with only one of those surveyed by Reuters looking for a hike.
This is reflected in ASX 30-Day interbank cash rate futures which have fully priced in no change this time out, while the OIS curve indicates little chance of any rate adjustments until November at the earliest.
Some analysts have also begun pushing back expectations for when the RBA will start lifting rates, following a bout of softer than expected data. This includes Q4 CPI in which the headline printed at 1.9% Y/Y vs. Exp. 2.0% (Prev. 1.8%), while the RBA's preferred trimmed mean reading stood at 1.8% vs. Exp. 1.9% (Prev. 1.8%), both below the central bank's 2%-3% target range, therefore restricting scope for tighter policy.
Furthermore, the latest building approvals data showed a significant contraction in December and although the employment change surpassed estimates in the labour market report from the same month, which was accompanied by an unexpected rise in the unemployment rate.
In terms of rhetoric, there hasn't been much from the central bank since the most recent meeting.
In his final address of 2017 RBA Governor Philip Lowe noted that “the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy.”
Elsewhere, Board member Harper stated that there was a chance that the unemployment rate needs to fall below 5% before wages and inflation can respond accordingly, while he added that the current economic situation merits rates remaining supportive of the economy.
In addition, notorious RBA watcher McCrann has stated that the RBA will keep rates unchanged this week and indicated that it has no intention of changing rates, while he also pointed to stable inflation adding to the case for steady rates.
With expectations for no change focus will turn to the accompanying statement for clues of future policy as any bias in its tone could impact AUD accordingly. Participants will also be eyeing any significant jawboning of the currency given its strength against the greenback which saw AUD/USD trade above 0.8100 in late January vs. the present 0.7600 at the last rate decision.
Focus will then move to Governor Lowe’s speech on Thursday (09:00 GMT), and then onto the Bank’s quarterly Statement on Monetary Policy on Friday (00:30 GMT).
What the bank desks are saying: -
ANZ: The coming week is very much about the RBA. Not only do we have the monthly Board meeting on Tuesday, but we also get the RBA’s quarterly forecast update and policy statement on Friday, and the Governor is giving a speech on Thursday evening. All of which provides the RBA with plenty of opportunity to update its view. While the cash rate will remain on hold, we think the tone of the RBA commentary will be more upbeat after a positive run of data both domestically and globally. The higher AUD provides a bit of an offset and may see some refinement to the RBA’s commentary around the currency, but its move in trade weighted terms since November is minimal and commodity prices are stronger so we don’t think there will be that much concern about the impact of the higher AUD/USD. In terms of the RBA’s forecasts the one substantive change we are looking for is a lower unemployment forecast. We think it is likely that the Bank will reduce the 2018 year-end forecast from 51⁄2% to 51⁄4% and predict 5% by the end of the forecast period.
CBA: Australian central bankers return from holidays this week with the first Board meeting of the year on Tuesday and the next Statement on Monetary Policy (SMP) on Friday. There is also a speech by RBA Governor Lowe, at the A50 Australian Economic Forum in Sydney on Thursday. A lengthy period of masterly inactivity has characterised interest rate settings. The last rate change was in August 2016. And newish RBA Governor Lowe is the only incumbent not to have changed rates in his first year in office. This track record should remain intact after the first Board meeting for 2018. The cash rate should remain firmly fixed at the record low of 1½%. The Board discussion will no doubt include: the recent upward revision to global growth forecasts by organisations such as the IMF and the World Bank; the stimulus from the Trump tax package; the ongoing resilience of key commodity prices; the surprising strength in the AUD (or should it be surprising weakness in the USD?); the turn towards rate rises in some major central banks (which the RBA was quick to emphasise has no automatic implications for monetary settings in Australia); the tendency for recent Australian data to surprise on the upside; a labour market that has now delivered an equal-record run of continuous job’s growth (15 months); an unemployment rate not far off the 5% level that the RBA has nominated as full employment; improvements in business and consumer sentiment; the cooling housing market; upward revisions by the ABS to the level of household debt; and the absence of any real inflation pressures. Any Board member running their eye down this checklist would probably agree that the next move in interest rates is up. But they would also agree that there was no urgency to act. The Q4 CPI readings reinforced the point. The range of underlying or core measures printed below the bottom end of the RBA’s 2-3% target band (again). The average of the various measures shows that the inflation rate has undershot the target for eight quarters. An analysis of the CPI basket shows prices of some 70% of items were growing at below 2%pa. Until fairly recently, such an outcome would have the debate on rate cuts hotting up and financial markets pricing for those cuts. But the residual case for another rate cut was pretty much gone by the start of 2017. It was apparent that growth prospects were OK, deflation risks were receding and the housing market was not cooling to the extent expected. By the end of 2017 the RBA’s focus had clearly shifted towards a normalising economy. In fact, the RBA spent a fair amount of time in 2017 defining what “normal” meant for a selection of key economic indicators. Benchmarking the current economy against these normal parameters shows activity-type indicators closing in on normal. But inflation indicators still some way off. We expect the gap to close further during 2018 and as the economy normalises the case for normalising policy settings strengthens as well. One indicator to watch will be underemployment. Trends in this measure of labour market slack are important for the direction of wages and, ultimately, prices. The importance of underemployment is evident as well in its correlation with the RBA’s cash rate. The currency also matters. The RBA has been relatively vocal on AUD trends and implications in recent years. Two things stand out about the RBA rhetoric on the AUD: concerns are most prominent when the AUD has diverged from the underlying fundamentals; and concerns are typically dialled down when the AUD moves into a USD0.70-0.75 band. We suspect the RBA is “comfortable” with the Aussie in a USD0.70-0.75 range. Our forecasts have the AUD above the RBA’s comfort zone in 2018. From a policy perspective this should mean that the RBA will prefer to lag any global tightening cycle. The hope would be to take the benefit in a currency that was lower than otherwise would be the case. We expect to see the start of a modest rate rise cycle on Melbourne Cup day. The increased sensitivity of households to changing interest rates will also influence the policy process. It should mean a drawn out rate rise cycle that peaks short of the 3½% neutral rate nominated by the RBA. We put the cash rate peak for this cycle at 2½% and don’t expect to get there until early 2020.
NAB: While markets were not expecting the RBA to change its cash rate at Tuesday’s board meeting, Wednesday’s unsurprising CPI print, and the unemployment rate remaining elevated in December, has cemented that belief. What will be keenly watched is whether any other developments will change the RBA’s view on the economy and policy going forward. As such, markets will be pouring over changes in the decision statement, Governor Phil Lowe’s speech on Thursday, and the Statement of Monetary Policy (SoMP) on Friday, which include updated forecasts. The Governor’s speech will probably not be market moving given the audience and the SoMP the next day. In its last SoMP, the RBA indicated ongoing uncertainty about the degree of slack in the labour market, inflation and consumption. While recent labour market data confirms strong employment growth over 2017 (+400 jobs!), unemployment has remained stubbornly elevated, at 5.5%. This rate is above the RBA’s estimate of the NAIRIU, and is indicative of ongoing slack in the market. However, should participation rate stabilise, the unemployment rate would begin to fall, something we are looking for to occur in the coming months. The recent core inflation print of 0.4% q/q for the December quarter, brought trimmed mean inflation to 1.8%. While this number remains below the lower edge of the RBA’s target of 2-3%, the RBA’s forecasts show that the print was broadly expected by the Bank, and unlikely to significantly change the RBA’s outlook. Inflation has stabilised and is gradually trending towards the RBA’s target. As further strengthening in the labour market occurs, we expect inflation to rise to be comfortably back within the band over the medium term.
Westpac: The RBA left interest rates unchanged throughout calendar 2017, Governor Lowe noting in his final speech of the year that: "the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy". We expect the RBA to leave rates unchanged at its Feb meeting. Developments over the summer hiatus have been mixed with the Q3 national accounts disappointing but more positive news around global conditions, labour markets and confidence. Inflation remains subdued, with latest figures showing core inflation running at a 1.6% annual pace over the second half of 2017. There is also no new information around the Bank's key areas of uncertainty – the impact of lacklustre consumer demand; the extent to which weak labour income growth continues; and the risks around household debt. We expect consumer weakness to persist in 2018, leading the RBA to again leave rates on hold all year. We expect a 0.4% rise in the private sector Labour Cost Index for the December quarter. Wage growth has been running at the same quarterly pace for the last couple of years, aside from the 0.7% rise last quarter, which included the equal pay settlement for aged and disability care workers. We have no evidence to suggest there was a stirring of wage pressures in the December quarter. Indeed, the latest Westpac–McDermott Miller employment confidence survey found fewer workers reporting a rise in earnings over the last year. The Quarterly Employment Survey (QES) suggests a stronger rate of growth in hourly earnings. However, this measure is affected by changes in the composition of jobs.
Barclays: For the RBA cash rate, after a brief hiatus in January, we expect the central bank to take its cues from the inflation print and ongoing strength in the labour market, amid improving signs of consumption, to emphasise that the economic recovery remains on track
HSBC: The RBA has, so far, been patient about waiting to see clear signs that wages growth is lifting before it considers raising its cash rate. We expect this to continue for the time being. We see the RBA as unlikely to change its domestic forecasts when they are published next week. The tone of the RBA’s approach is likely to be similar to that conveyed by the Governor in a speech in November 2017 when he stated that ‘if the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down ... [but] ... the subdued outlook for inflation means that there is not a strong case for a near-term policy adjustment’. On the positive side, the RBA is expected to point to the ongoing improvement in global economic conditions, which is supporting commodity prices, Australian exports and may filter through to local business investment. On the downside, the RBA is expected to point out that the recent lift in the AUD may be somewhat unhelpful for the growth and inflation outlook, although we do not think it will tangibly affect the RBA’s central forecasts. Importantly, another factor that is likely to support the RBA’s patient approach to lift-off is that the housing market has continued show signs of cooling over recent months On the margin, this may allow the RBA to be even more patient about lifting its cash rate from its current historically low level.
RBC: This is the first board meeting for 2018 following the usual January hiatus. There are three key developments since the board last met in early December. Firstly, global activity data continue to highlight momentum, with G7 central banks continuing to shift toward the removal of policy accommodation. Secondly, domestic employment data and key business surveys have been strong although inflation remains modest. Thirdly, AUD/USD has appreciated by ~6.5% and ~3.5% on a TWI basis. On balance, these developments point to upbeat and positive communication from the RBA next week, in line with the global central bank rhetoric, although there may be some caution around the currency. We expect no substantial changes to the key macro forecasts, which should continue to assume an eventual return to above-trend growth and within target inflation. In itself, however, this is noteworthy given the constant downward revisions to overly optimistic growth forecasts. No change to GDP forecasts would be a positive development.
SocGen: Contained inflation and a relatively strong exchange rate suggest that there is little reason for the RBA to adjust the exceptionally accommodative policy stance in the near future. However, with prospects of solid growth at home and abroad – and an exceptionally strong labour market – the case for maintaining a policy rate that is negative in real terms is becoming progressively weaker. We therefore maintain the view that by the second half of next year the RBA too will begin to normalise its policy stance.
The Bank of Japan’s (BoJ) 2-day policy meeting will conclude on Tuesday, and the central bank is expected to continue the inaction seen throughout the entirety of 2017 by maintaining its QQE with Yield Curve Control policy, and leaving its benchmark interest rate unchanged at -0.10%. The upcoming meeting will also include the release of the latest Outlook Report, containing the board members' median forecasts for real GDP and core CPI. The current BoJ Board Members' median forecasts can be found below:
- Fiscal 2017 forecast at 1.9%.
- Fiscal 2018 forecast at 1.4%.
- Fiscal 2019 forecast at 0.7%
- Fiscal 2017 forecast at 0.8%.
- Fiscal 2018 forecast at 1.4%.
- Fiscal 2019 forecast at 1.8% (excluding effects of sales tax hike).
Not much has changed in terms of central bank rhetoric since the previous meeting, as Governor Kuroda has stuck with the profusely repeated statement that the BoJ will maintain its QQE with YCC for as long as is required to reach 2% inflation in a stable manner, while he also suggested that the economy is experiencing steady growth.
Furthermore, economic data releases since the previous meeting haven't been much of a game changer, despite the latest national CPI (0.6% vs. Exp. 0.5%, Prev. 0.2%) and core CPI (0.9% vs. Exp. 0.8%, Prev. 0.8%) releases beating expectations, although inflation remains well shy of the Bank’s 2.0% target.
As policy tweaks are widely seen to be off the table for quite some time, the near-term focus regarding the BoJ seems to be on whether Governor Kuroda will be reinstated for another 5-year term when his current term expires in April.
Participants will also be looking out for any commentary regarding the recent bout of JPY strength with USD/JPY sitting on the 110 handle vs. the 113 seen at the December meeting. BoJ watchers will also be on the lookout for clues surrounding the BoJ's bond buying intentions after a recent reduction of 10year - 25 year and 25 year maturities in the Bank’s Rinban operations triggered tapering fears and spooked markets earlier this month. Since then, sources close to the BoJ have stated that the market overreacted to the change, noting that the move wasn’t meant to signal a broader policy shift.
As usual, there is no scheduled time for the decision, which usually comes any time after the start of the Tokyo lunch break at 0230GMT/2030CST.
What The Bank Desks Are Saying: -
Barclays: We expect the BoJ to keep policy intact, while revising up its GDP forecasts and retaining its CPI projections. All-industry index: We estimate that the all-industry index rose again in November, with higher readings for both the tertiary index, which accounts for over 70% of the total, and industrial production, which has a weighting of more than 20%.
BAML: After a quiet 2017, interest in the BoJ is rising once again. On 9 January, the BoJ's announcement of a ¥10bn reduction in its "rinban" purchase of JGBs in the 10-25yr and 25-40yr segment caused a strong reaction in the markets and reignited headlines of early BoJ normalization. As we noted last week, we think the markets (in particular FX) over-reacted to the announcement. Our view is that the modest trimming of purchases is not, in and of itself, a signal of a new policy bias. Questions at 23 January's post-MPM press conference will nonetheless focus on the BoJ's "stealth tapering" of JGB purchases and the recent market reaction. We expect the governor to reiterate the central banks' stance that the quantity of JGB purchases is an endogenous variable under YCC and could slow or reaccelerate depending on trends in the economy and financial markets. That said, we think the governor will strike an overall dovish tone at the conference to minimize risks that speculation over a pre-mature BoJ exit would trigger unwanted yen appreciation. The risk of rate hikes in 2018 has ranked top in our client conversations this week. We remain confident that this won't happen in spite of early change to communication. Inflation dynamics will matter for rate moves. FX enters in these considerations. Consequently, we stick to our view that the depo rate will be raised in 2Q19 and 4Q19 (20bp each). Last week's ECB speak, even among hawks, supports this view. Markets suggested we were (unusually) hawkish until recently. Pricing has now moved our way.
Daiwa: Given the upbeat econmic sentiment reflected in today’s Reuters Tankan, and what might well have been another quarter of above-trend growth at the end of 2017, Kuroda will be able to remain pretty bullish about the economic outlook. Nevertheless, with core CPI inflation still less than half the BoJ’s 2% target, we (like the consensus) expect the Bank to retain its existing main policy settings, i.e. the -0.1% interest rate on banks’ marginal excess reserves and the pledge to keep 10Y JGB yields ‘at around zero per cent’. However, in light of the slight reduction in the size of the Bank’s longer-term JGB purchases at its operations so far this month, unless we suddenly see significant upward pressure on yields (which, given the large share of the market already held by the BoJ, as well as its highly credible and rarely used unlimited fixed-rate purchase facility, might seem unlikely), we think it is clear that the BoJ has no intention to meet the ¥80trn annual rate of increase in its holdings still specified in its recent policy statements. After all, the moves this month follow a year in which actual purchases amounted to just ¥58trn. So, while the Bank will likely re-commit to maintaining purchases ‘at more or less the current pace’, this might just be the month that it explicitly acknowledges that this will result in net purchases closer to last year’s total than ¥80trn, or, better still, formally de-link achievement of the yield curve control target to a specific level of JGB purchases. While it’s not expected, the BoJ might also finally wish to tweak its programme of ETF purchases. We continue to think that there is little sense in the Bank continuing to support an equity market that has risen to levels not seen since the early 1990s. While it seems unlikely that the Policy Board would decide to bring such purchases to an abrupt halt, a reduction in the annual pace – which was doubled to ¥6trn in mid-2016 – would be neither a large surprise nor unwelcome. That said, the BoJ may be reluctant to make too many tweaks to policy settings at a single meeting, especially in light of recent yen strengthening. However, we do expect it to extend by one year its special fund-supply facilities. More prosaically, revisions to the projections issued in the Outlook Report will likely be minor. Given stronger-than-expected GDP growth in Q3, positive signs for Q4 and benign trends abroad, it would not be surprising to see a modest upward revision to the Board’s collective sense of growth prospects in FY17 and perhaps FY18 (the median forecasts in October were 1.9%Y/Y and 1.4%Y/Y respectively). Until it has seen the outcome of the spring wage round, it seems unlikely to revise up significantly its forecasts of inflation (the median Board member forecasts of core inflation in October were 0.8%Y/Y, 1.4%Y/Y and 1.8%Y/Y for FY17, FY18 and FY19 respectively, the latter excluding the impact of the scheduled hike in consumption tax). Nevertheless, it will continue to suggest that it expects the 2% target to be met around FY19.
HSBC: Underlying inflation pressures have been absent so far, despite positive q-o-q growth for seven consecutive quarters. Strong economic activity is not translating into higher prices, with wage growth showing limited signs of acceleration due to various structural factors. Consequently, the BoJ is likely to maintain its extremely easy monetary policy in the foreseeable future, as a premature pullback will dampen medium-term inflation expectations and also result in a notable correction in financial market instruments including the value of the yen. Meanwhile, this is likely to push the Bank’s real GDP forecast for FY2018 slightly higher from the current 1.4%. Market participants will be closely watch whether the Bank keeps its optimistic core CPI forecast of 1.4% for FY2018, while we see risks that this could be marked marginally lower.
Nomura: We expect the BOJ to leave monetary policy unchanged at the meeting. The economy has been solid and, although core inflation (inflation based on all items in the CPI index less fresh food) has been rising, it is far from the 2% target, indicating there is little justification for making any changes to monetary policy. In the Outlook for the Economy and Prices (Outlook Report) that will be released at the time of the meeting, we expect GDP growth forecasts for FY17 and FY18 to be raised. Since the Outlook Report was last released in October 2017, growth in the global economy has gathered pace, and we expect this to be reflected in the upcoming release of the report. Annual revisions to GDP data might also affect FY17 forecasts. We think the forecast for core inflation will be left unchanged. Recent increases in crude oil prices are likely to boost inflation, but yen strengthening against the dollar is likely to counter this boost and we do not expect changes to the core inflation forecast resulting from changes to import prices to be carried out this time. At the BOJ governor's press conference after the meeting, the governor might be asked about the decision to reduce the amount of longer-term bonds it purchases and his view of the market's reaction, as JPY strengthened after the purchase amount was scaled back on 9 January. We expect Governor Kuroda to reiterate the position that intentions with regard to changes to monetary policy are not reflected in daily market operations and that, regardless of the market's reaction, tenacious easing efforts will continue.
CIBC: Today's rate hike was a rear-view mirror move, but the Bank of Canada hints that the view out the front window isn't quite as sunny. Canada did so well in 2017 that it left little slack in labour markets or capacity in its wake, easily justifying a quarter-point hike today. The output gap is now slightly positive, so quarterly growth rates from here have to average below 2% (the Bank has 1.8% for the average of the next four quarters) to avoid an inflationary overheating. We share the Bank of Canada's view that higher rates will be needed over time to stay on that path, but they won’t come quite as fast and furious as the market was starting to think. For one, the Bank's statement put NAFTA uncertainties right up front, and has started to build in a drag on investment and exports into its forecast. While the Bank isn’t ready to assume that NAFTA will be completely cancelled, doubts on that front can impact business sentiment, and they’ve included a 0.5% hit to the level of GDP through the next two years to account for that effect. That creates a little less room for the additional drag of higher interest rates on the domestic economy, and a reason to avoid additional trade woes from having an excessive pace for rate hikes send the loonie still stronger. Interestingly, the Monetary Policy Report highlights a fact that the Bank chose to downplay a bit in the way it worded its Business Outlook Survey. Respondents “are increasingly concerned” about rising protectionism and NAFTA prospects. We can sympathize with those doubts. Our own outlook assumes that, at a minimum, the US puts Canada on notice of its intention to pull out of NAFTA in the months ahead. In a move we believe was aimed at calming market expectations for follow-up hikes a bit, the Bank also left room in its statement to explain that "monetary accommodation" (ie. rates at stimulative levels) will be needed to reach their growth and inflation forecasts, reasserting the need to be cautious in how fast they hike ahead, even to have growth run at roughly potential by 2019. That could be confusing for those who define neutral as the rate needed to grow at potential. But the Bank of Canada is differentiating between some higher long term neutral rate, and the rate that might be neutral in the next year or two given other headwinds, including the extra sensitivity of a household sector carrying a lot of debt. Changes in the forecast were trivial, but that’s to be expected since the Bank of Canada is committed to finding the rate path that steers the economy right to a 2% inflation pace and output running right at potential. It’s not whether growth will slow in the next two years, it’s just how many rate hikes that will take. Overall, this was a dovish statement relative to the minimum degree of optimism needed to justify a rate hike today, and could put some downward pressure on 2-year yields and the value of the C$. We’re looking for one further hike this year, likely early in Q3, and a further 50 bps in 2019. Yes, we’re facing higher rates, but not SO fast given other risks to growth ahead.
RBC: The Bank of Canada ratified market expectations by hiking rates 25bp today, to leave the overnight target rate at 1.25% (OIS markets had priced in the move by ~85%). In its rate statement, the central bank maintained a similar tone seen late last year, reiterating some degree of caution in being “guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.” However, whereas they stated that higher interest rates “will likely be required over time” in the past, they now suggest “the economic outlook is expected to warrant higher interest rates over time” – perhaps a little clearer indication – even if subtle – that we are now in the process of removing accommodation, though some of that accommodation “will likely be needed to keep the economy operating close to potential and inflation on target”. Other aspects of the rate statement and MPR forecasts/discussions were also about as expected. The Bank’s GDP growth forecasts for 2017 and 2018 were unchanged on balance (revised down 0.1pp in 2017 to 3.0% and up 01pp to 2.2% in 2018, with 2019 growth boosted by 0.1pp to 1.6% to match the Bank’s revised estimate of potential growth – previously 1.5%). Given the blockbuster jobs reports to end 2017, it is also not surprising that “… recent data show that labour market slack is being absorbed more quickly than anticipated”. The mid-point of the Bank’s output gap range was nudged up into an excess demand position in 2017Q4 with a range of- 0.25% to +0.75% of potential GDP and an expectation that inflation – currently close to 2 per cent – is expected to remain there over the projection horizon. Any caution from the central bank remains most closely tied to NAFTA risks, even though Canadian businesses have overcome some of their worries in terms of firm capital spending intentions. Within the MPR, the central bank notes that respondents to the latest Business Outlook Survey expressed trade concerns nevertheless and that “greenfield foreign direct investment into Canada has declined since mid-2016, especially from Europe but also from the United States”. The Bank estimates the net impact of trade policy uncertainty on business investment at 2% by the end of 2019. Overall, the “cautious” catchword from the BoC remains in place even with today’s hike and this may be how additional moves later this year pan out (we expect three more to leave the overnight target at 2.00% by the end of 2018). We concur with the Bank’s assessment that “some accommodation will likely be needed to keep the economy operating close to potential and inflation on target” and we believe that the Bank will need to slow the pace of rate hikes in 2019 (we currently have the overnight rate holding at 2.25%, below the 3.00% mid-point of the Bank’s estimated neutral rate range, largely reflecting the impact of higher rates on high household debt).
Scotiabank: As expected the BoC hiked its policy rate by 25bps to 1.25% and that’s the right thing to have done in my opinion. My read of the overall bias in the full suite of communications including the statement, MPR and press conference is mildly hawkish as the BoC lowered the bar for further rate hikes on balance. OIS markets are pricing most of another hike by April/May which is in keeping with our forecast for timing the next policy move, and two more in total this year which is also in keeping with our forecast. CAD is about a half cent stronger versus the USD than it was earlier this morning after netting out position covering on moves immediately prior to the statement and after digesting all of the information provided by the BoC in its full communciations. A stronger currency in the aftermath makes sense to me. There is nothing in the broad set of communications that stands in the way of further hikes in the relatively near-term. This is a more hawkish statement than markets were anticipating over recent days and it stands to repeat that the overall communications incrementally lowered the bar for further hikes. With the following comment, the door is wide open to further rate hikes: “While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.” That just says they’re open to more hikes but not zipping toward neutral faster than we forecast. This merits elaboration. Do not misinterpret “continued monetary policy accommodation.” Continued monetary accommodation speaks to the spread between the pace of future hikes and a neutral policy rate estimate and should not be interpreted as a dovish signal against the “warrant higher interest rates over time” remark. The BoC can still keep hiking and maintain monetary policy accommodation by remaining below a neutral rate this year and that’s all that this comment implies. The BoC upgraded its assessment of slack to note that the “economy is operating roughly at capacity” whereas in December it was still emphasizing the “continued absorption of economic slack.” This is hawkish. The BoC upgraded its perspective on labour slack and now says “labour slack is being absorbed more quickly than anticipated.” This is hawkish. Global forecasts were revised up and pretty significantly in several cases and this provides an incrementally more hawkish backdrop to then back into implications for the Canadian economy. The US outlook was revised up to 2.6% growth this year (2.2% previously) and by a tick to 2.3% next year. The Eurozone’s growth outlook was revised up four tenths this year to 2.2%. Japan was also revised up and China was kept flat at 6.4% and 6.3% projected growth this year and next. Therefore the global outlook strengthened in this MPR which is a hawkish signal. The BoC upgraded its language on inflation by stating that “looking through these temporary factors, inflation is expected to remain close to 2 percent over the projection horizon.” It did not previously advise it was ‘looking through’ as clearly as it did today and so this is incrementally hawkish. There are nevertheless four ways in which the BoC retained some caution but they are not impediments to the broader messages above that support further tightening and they are not always consistent. They are as follows. 1. On NAFTA, I found the BoC’s communications to be marginally coherent at best. The statement appeared to upgrade NAFTA uncertainties. 2. Potential GDP growth estimates were revised up a tick to 1.6% this year and next but that simply offsets the upward revision to actual GDP growth in each year. The level of potential GDP was revised up by only 0.2% as at 2017Q3 which is fairly trivial and still leaves capacity swinging into net excess demand this year as actual growth outstrips potential growth by about six-tenths in 2018. Further, it’s a bit questionable that the BoC revised up its potential growth estimate by a tick but didn’t change the range accordingly which sits unchanged at 1.1–1.7% this year and 1.1–1.9% next year. The BoC’s discussion on potential growth uncertainties and how improving capital investment and productivity trends might raise the economy’s non-inflationary speed limit is on the minds of many, but a) they may have simply undershot potential growth estimates in the past, and b) at this point they are indicating the bias is toward less slack in terms of how it all nets out. 3. The BoC retained reference to how it will remain ‘cautious’ toward future policy moves as expected and retained data dependent guidance when it said it will be “guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.” 4. On wages, the BoC issued this paper that indicates an altered preference for the most relevant wage metric. The BoC used to always say wage gains for permanent employees was the preferred measure in the past, but now guides that a common trend measure is preferred. That measure—at 2.2% y/y versus the permanent employees’ measure of 2.9% y/y—is why Poloz now argues that real wage gains are small to absent thus far instead of rising. Regardless, our view is that either measure of wage growth is likely to continue rising this year given reduced labour slack, the further shaking out of the negative drag from the commodity income shock, productivity gains over time and full knock-on effects of minimum wage hikes. The wage cycle in a forward looking sense should reinforce broader inflationary pressures regardless of the measure that is used. The next BoC statement will be on March 7th and we expect no rate move at that meeting. The next BoC communications will include a speech by Senior Deputy Governor Wilkins on February 8th and a speech by Deputy Governor Schembri on February 15th.
BMO: The Business Outlook Survey marks the last critical piece of information before the Bank of Canada’s January 17th policy decision. This Q4 version covers the mid-November to early-December period, and follows a more moderate overall picture in the prior reading -recall that future employment, sales growth and M&E investment all pulled back in Q3 after rising strongly through 2016 and early2017. While consumer confidence was surging late in 2017, business confidence was potentially held back by derailing NAFTA talks and looming minimum wage increases in a few provinces. Two key issues on the Bank’s mind are the dynamics of wage growth and inflation, and the evolution of economic capacity - the BOS provides insight into both. On the former, the incidence of labour shortages was steady in Q3 at historically-normal levels, but the intensity of those shortages, where they do exist, rose to the highest since 2006. If that pressure becomes more widespread, the Bank will read it as a hawkish cue on top of two blowout job reports to end the year. On the latter, stronger M&E investment is potentially adding to economic capacity, and therefore holding off capacity pressures. That said, the increase in reported capacity pressure edged up again in Q3, and if it continues to rise, flagging inflation-inducing capacity utilization rates (Q3 was the highest since 2007), that would provide another hawkish reading. Strength in these two indicators could push the Bank to raise rates in January.
CIBC: If the November-December employment surge was real, it should mean that businesses were confident about what lies ahead. That should make for a generally positive Business Outlook Survey on Monday. But watch for colour commentary on what companies are assuming on NAFTA and its risks to capital spending plans, an issue that could see the Bank of Canada pause for longer than the market expects after a January hike.
RBC: The BOS is the last key indicator ahead of the BoC’s January 17th rate meeting and MPR release and should be closely followed, with current pricing ~40% for a hike at the meeting. Although it was a partial retracement from the historically strong Q2 report, the last BOS saw solid readings for the balance of opinion on future sales (+19), M&E Investment (+17), and employment intentions (+34). Moreover, more intense labour shortages and an elevated proportion of firms having difficulty meeting demand, as well as higher inflation expectations, suggested that capacity pressures may be biting. As always, commentary from firm interviews and the overall tone from the BoC should be at least as important as the statistical results.
Scotiabank: The main thing to watch will be what the Business Outlook Survey says regarding the level of confidence or concern in the nation’s c-suites. After the outlook for future sales growth over the coming year slipped somewhat in the October edition of the survey, the main sensitivity will be toward whether respondents are more or less concerned about developments such as NAFTA talks that skidded into the ditch from October onward. Alternatively, are they more focused upon domestic capacity pressures and labour shortages? Recognition of the NAFTA risks was not captured in the October survey since it sampled opinions between August 24th and September 19th. October is when the US negotiating team aggressively laid down hard lines in the sand that have been objectionable to Canada basically since the years leading up to the original Canada-US Free Trade Agreement that was signed into existence twenty-nine years ago almost to the day. Even before NAFTA negotiations stumbled, survey responses regarding hiring and investment plans were coming off the boil albeit from elevated levels. The BoC is aware of the limits to this survey, but may be sensitive to information contained within by way of business expectations as well as plans to invest and hire plus how they view the outlook for price pressures. I would think it would have to be a fairly disastrous overall report to overwhelm the broad tone of other evidence.
- The House Rules Committee meets on Monday evening to discuss the plan, the House is expected to vote on Tuesday and the Senate will have its final say on either Tuesday or Wednesday.
- Senator John McCain is not planning on casting his vote on the Republican tax overhaul. He is returning home for Christmas after having spent a few days in hospital due to side-effects caused by his brain cancer treatment. His wife confirmed that McCain will be back if his vote is needed, although according to John Cornyn his absence does not seem to threaten the tax bill.
- Republican Thad Cochran is also ill and Senator Susan Collins has not made a final decision on the tax overhaul.
- Republican aides have suggested that Senators Lee, Collins and Flake will be a yes, while Senator Corker has moved to the yes camp after voting no in the previous stage. The over-riding feeling seems to be that the Republicans have the votes to get the bill onto President Trump's desk later this week, even if it has to be forced through via the tie-breaking vote of Vice President Mike Pence.
To summarise (via CNN):
- If Senator McCain is absent and the above three senators vote yes, Republicans will have 51 "yes" votes. The bill passes.
- If Senator Cochran, who has also been ill, joins McCain in missing the vote, and the above three senators vote for the bill, Republicans have 50 votes and the bill passes.
- If McCain is absent, Cochran is in attendance, and say, Collins votes "no," Republicans have 50 votes and the bill passes.
- If McCain and Cochran are absent, and one of the above three senators vote "no," Republicans would be in a 49-49 situation - in which Vice President Mike Pence would cast the tie-breaking vote and the bill passes.
We expect the overall tone of the Introductory Statement and ECB President Draghi's comments at his press conference to be broadly unchanged from the October meeting. Looking ahead, we continue to expect the APP to run until end-2018 (with a 3-month extension to be announced in June/July). Recent comments suggest risks are skewed towards no extension. We expect the ECB to maintain its expected policy sequencing and not raise rates until "well past" the end of net asset purchases and to use forward guidance as its marginal policy tool in the coming quarters. We expect the ECB's forward guidance at some point to change towards linking the future rate path more directly to inflation developments. We forecast the first policy rate hike in the second half of 2019.
BMO: The BoC appears very patient at this juncture, with little appetite to move in January despite the near-record low jobless rate. They will be minding NAFTA progress (or otherwise), any early impacts from the OSFI rule change at the start of 2018, and how Q4 growth, wages and prices shape up. We continue to have the March meeting circled for the next rate hike (with two more in H2 next year), but will be like the Bank in watching NAFTA and housing in particular.
CIBC: It was always going to be a wait-and-see decision, but today's Bank of Canada statement also didn't offer a clarion call on just how long they will be waiting and seeing before raising rates again. Further rate hikes are still coming, but even if they move ahead of our April target, that needn't mean that we'll see more than 50 basis points in total next year, given the Bank's emphasis on being cautious on that front. The statement acknowledged recent upside surprises on employment and the rebound in exports, and added the phrase citing "diminishing" labour market slack, but still said that, overall, the picture is "in line" with their last published outlook. The only real dovish note was that they hinted that potential GDP might be faster than earlier estimated. Hawks may be slightly disappointed by the lack of a clear signal of a January hike, but that really isn't their style, and instead, we like others, will have to watch upcoming data on October GDP and December employment to fine tune forecasts for when the next hike comes.
RBC: The Bank of Canada delivered a fairly neutral statement today in a widely expected decision to maintain the overnight target rate at 1.00%. The central bank maintained a tightening bias overall (i.e., “higher interest rates will likely be required over time”), but also reiterated that they will be cautious on the timing of any hikes due to uncertainties around “the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.” Ahead of today’s statement, there was interest in how the Bank might interpret the strong November jobs report (which included a 0.4pp drop in the unemployment rate as well as firmer average hourly earnings growth of 2.7% beyond a headline job gain of 79.5k). In the event, they took a balanced stance on the monthly report. They acknowledged that “employment growth has been very strong and wages have shown some improvement” but they also noted that “…despite rising employment and participation rates, other indicators point to ongoing – albeit diminishing – slack in the labour market.” More importantly, with Q3 GDP growth close to the Bank’s MPR forecast (1.7% versus 1.8% projected), the Bank could legitimately say that “…recent Canadian data are in line with October’s outlook”. Recently completed interviews for the Bank’s Business Outlook Survey – which will be released on January 8th – may colour Governor Poloz’s remarks in his speech next Thursday, in particular how some of the uncertainties outlined in today’s statement, including “geopolitical developments and trade policies” may be weighing on capital spending and hiring plans by Canadian businesses. The odds of a January rate hike had been close to 50% before today’s statement and they have receded to about 32% now – which seems about right to us. Our base case remains for the next move to come in April.
Scotiabank: Overall, the BoC remains in data dependent mode, unconvinced to change its bias by the broad tone of recent data relative to its October MPR forecasts and more mindful of ongoing uncertainties like NAFTA negotiations than backward looking data in any event. Scotia’s BoC forecast remains for a policy hold until April. In fact, think the BoC’s focus is more upon the risk of hiking in response to (mixed) backward looking data that over-hypes future inflation risk only to then get a ‘dear john’ letter from the Trump administration that would make it look rather foolish for having tightened policy in the face of a rising risk to one-third of the economy that is driven by exports. There is obviously a limit to the point to which monetary policy can be put on hold by never ending uncertainties, but I simply don’t buy that the data is screaming out that this limit is being breached now or that the BoC’s inflation target range of 1–3% is at risk of being materially overshot in the projection horizon. Governor Poloz is well aware of years of model-based forecasts for a return to 2% inflation that haven’t worked out and I think his bias is to wait for much clearer evidence the projections will be right this time and being patient in the meantime. One key is that the statement takes a broadly neutral stance on the evolution of data relative to its expectations and forecasts. The BoC stated “Recent Canadian data are in line with October’s outlook…” That pretty clearly—and rightly in my opinion—says that the BoC is looking at more than just the latest and greatest jobs report. Please see the morning note for a run down on the other high frequency data since the October statement. Other data references traded off against each other by noting “very strong” jobs and “some improvement” to wage growth while driving “robust” consumption but acknowledging that exports “declined by more than expected” in Q3 while expecting the resumption of export growth. There are, however, two data observations that struck me as somewhat odd which might imply that if future data doesn’t reinforce a possible data filter bias then references to them may be at risk of revision. One is that the BoC says that “measures of core inflation have edged up in recent months” which would have been a fairer depiction in the September or even the October report but less so now that the average of the core measures has been stuck at 1.6% for each of the past three months. Will the BoC have to soften such a reference if core inflation doesn’t average out higher over the next one or more months? Can you still say that if core inflation is stuck unchanged for 4, 5, 6 or more months? We’ll see, conditioned by data that no one in consensus tries to credibly forecast for monthly core inflation readings. Secondly, the BoC didn’t flag any concern about business investment given gains in Q3 but it could well have done so given three months of declining imports of machinery and equipment given Canada imports most of its capital goods. Again, the evolution of data will inform how strongly they stand by this remark in January onward. On headline inflation, the BoC noted that “temporary factors, particularly gasoline prices” are boosting headline inflation which implies at least a partial bias to look through some of the rise. The BoC targets headline with core as the operational guide and they’re saying headline isn’t a big worry near-term. Last, the BoC continues to see slack “albeit diminishing” in the labour market regardless of very strong job gains. Some measures they and others have tended to cite have included the labour force participation rate that is still hovering around cycle lows, people working part-time who would prefer full-time work, shrinking average weekly hours worked over the years etc. Indeed, if wage growth accelerates as we think, then in theory that should attract more contestants into the work force to contest higher pay.
1) Long USD/CAD - Widening interest rate differentials and debt worries in Canada.
2) Long EUR/NOK - Evolving away from selling oil to the world, and moderating housing market.
3) Short CHF/JPY - An accommodative SNB and widening inflation differentials with Japan.
4) Short USD/JPY - BoJ shifting its yield curve control and Japanese repatriation.
5) Long EUR vs. AUD, NZD basket - High leverage and weakening housing markets vs. strong growth in EMU.
6) Long CLP/MXN - Mexican election and NAFTA uncertainty are likely to weigh on MXN.
7) Long PLN/HUF - Monetary policy divergence plus growth dynamics suggest PLN outperformance.
8) Short USD/MYR - Pick-up in growth, cheap valuations, higher oil prices and policy normalization.
9) Short AUD vs. KRW, TWD basket - Policy divergence and strong exports helping TWD and KRW.
10) Long IDR/PHP - IDR valuation and carry is attractive. PHP stays weak, given its twin deficit.
In line with our expectations, Standard & Poor’s downgraded South Africa’s local-currency rating to BB+(Stable Outlook) from BBB-(Negative Outlook) on 24 November, citing fiscal concerns, especially what it refers to as “a high and rising stock of government debt.” The agency also lowered South Africa’s foreign-currency credit rating to BB (Stable Outlook) from BB+ (Negative Outlook). We do not expect any further rating action from S&P in the near term, given it now regards the country’s outlook as stable. To the contrary, we expect a downgrade from Moody’s, which maintained the country’s sovereign rating at Baa3 (Negative Outlook), but placed it on review for downgrade – a move that now suggests the agency will wait until after the ruling party’s December 2017 elective conference and the February 2018 budget before taking any action. A downgrade could occur as early as the first week of March 2018, in our view.
USDZAR is trading almost 1.5% higher from its Friday afternoon lows of 13.82, and SA local market assets are likely to underperform their high-yielding EM counterparts after a mostly expected decision by S&P to downgrade the South Africa’s sovereign local-currency rating one notch, to BB+, sub-investment grade, and the less-expected decision by Moody’s to place the sovereign on Negative Watch. A Bloomberg survey of analysts prior to the decision showed most (9 out of 16) expected a downgrade by S&P but just 4 out of 16 expected a downgrade from Moody’s. SAGBs are no longer eligible for the Bloomberg Barclays Global Aggregate Bond Index, and the associated passive selling, which could be as much as USD4bn, is likely happen when the index is re-weighted on Friday, 1 December. If Moody's also downgrades the local-currency sovereign rating, as we expect, SAGBs would no longer be eligible for Citigroup’s World Government Bond Index. Focus will now centre on the likelihood of this action along with the size of potential SAGB selling; and into year-end, we expect a continuation of the ZAR and SAGB underperformance that we have witnessed since September.
Recently, several policymakers that are on the voting rotation for 2018 (Bostic, Mester and Williams, notably) have suggested that they are open to a re-thinking of the central bank’s operating framework.
Possible options that have been touted include a reassessment of the inflation target, and some exotic options, like price-level targeting. Analysts at Deutsche Bank point out that Former Fed Chair Bernanke has endorsed temporary price-level targeting if the Federal Funds Rate were to hit the lower bound in the future.
“While Chair Yellen’s appearance on Tuesday evening at NYU Stern Business School is being billed as a conversation with Mervyn King, the debate around inflation targeting, which has been the mantra of most central banks for the last several decades, could be a notable feature of the discussion,” Deutsche Bank writes.
A WSJ piece suggesting that US Special Counsel Mueller has issued a Subpoena for Russia-related documents from Trump campaign officials triggered an initial, mild USD dip against the JPY, with the pair crossing below 113 the figure. It took the other major currencies a while to cotton on, but the dollar did eventually sell off across the board, with the GBP and EUR leading the AUD and NZD, as the USDJPY moved towards 112.50. Elsewhere, the KRW continued to appreciate despite further verbal intervention from the Korean authorities.
China’s central bank injected the most cash (on a weekly basis) into the system since January, with many pointing to the shoring up of the bond market as the reason behind the injection, with 10-year yields hovering around 4%.
The Nikkei 225 also took its time to catch up to the Mueller story, although reports pointing to North Korea conducting 'aggressive' work on the construction of a ballistic missile submarine probably helped the selloff. The Japanese blue-chip index rose as much as 1.8% in early dealing, but the broad based dollar retreat led to the index unwinding the bulk of its gains; the index finished the morning session up 0.2%, as tech stocks outperformed.
Australia’s ASX 200 has added 0.2% so far with IT, industrials and healthcare leading the way, as utilities lagged. Mainland
Chinese stocks fell, with the Shanghai Comp down circa 0.7% as the PBoC’s injection has done little to underscore risk appetite, while the Hang Seng rallied 0.7%.
WTI Crude was more resilient to the risk aversion than its Brent counterpart, while gold topped USD 1,280/oz. Treasuries and JGBs also garnered support, as risk off flow outweighed the BoJ trimming the size of its shorter end Rinban operations.
ANZ: We expect a more moderate rise of 10k jobs in October after the 20K rise in September. Business conditions remain elevated and ongoing strength in job ads suggest that the labour market should continue to improve. The recent strength in employment, however, has brought growth out of line with some leading indicators, so we anticipate the next few months will see more moderate gains. We expect the unemployment rate to remain stable at 5.5%.
CBA: The Australian labour market should continue to show strength with 23,000 jobs forecast to be added in November. Leading indicators including ANZ Job Ads and ABS Job vacancies, as well as the employment index within the NAB Business survey continue to suggest reasonable jobs growth.
NAB: The underlying story remains of positive forward indicators that suggest the recent run of strong employment growth should continue. Trend employment growth of 24k a month will continue to put downward pressure on the unemployment rate and NAB thinks the unemployment rate is likely to reach 51/4% by mid-2018. However, for this month NAB sees some downside risks to employment growth due to unfavorable sample rotation effects in the survey that underpins the employment numbers. Each month 1/8th of the sample gets replaced with a new sub-sample and if their characteristics differ this can impact on printed employment growth in the month. This month the outgoing sample that will be replaced has a higher tendency to be employed compared to the sample as a whole (employment to population ratio of 62.8% compared to the sample as a whole of 61.6%). If the outgoing sub-sample is replaced with a sample that is more similar to the rest of the 7/8th of the survey, it could drag on employment growth in the month. NAB estimates that this potential drag could be worth around 12-34k. NAB consequently forecasts a below consensus print of 12k for employment this month (consensus +20k). That said we continue to assess employment growth as relatively strong. As for the unemployment rate, this is typically less affected by sample rotation and we expect the unemployment rate to be unchanged at 5.5%.
Westpac: Total employment increased by 19.8k in September, broadly in line with the market median forecast of +15.0k and Westpac’s forecast of +25.0k. Part-time employment grew 13.7k, while full-time rose 6.1k, though importantly hours worked posted a solid 0.7% gain. September’s result was consistent with the positive momentum seen over 2017. After the Australian labour market went through a soft patch in 2016, employment gathered steam as we moved through 2017 rising 371k or 3.1% through the year to September. Westpac's forecast of a 20k rise will be a record breaking 13th consecutive monthly gain in employment. It may be tempting to look for a statistical correction but the strength of the labour market indicators in both consumer and business surveys suggest the underlying momentum remains very robust. The unemployment rate fell to 5.5% with the participation rate holding at 65.2% though August’s number was revised lower from 65.3%. In the month the labour force increased just 7.9k. Note that at two decimal places, participation fell slightly to 65.21% from 65.25%, with male participation falling to 70.7% from 70.8% and female participation falling to 59.8% from 59.9%. We are expecting the continuing robust growth in employment to draw more people into the labour force, particularly females. This is behind our forecast for a small rise in participation to 65.3% which will hold the unemployment rate flat at 5.5%.
Barclays: We expect employment conditions to remain robust and the unemployment rate to decline marginally in October.
Societe Generale: Although lead indicators such as vacancies and the like point to continued strength in Australia’s labour market, we expect a fairly clear deceleration in the October report. For one, quarterly annualised employment growth was 4.2% and 3.4% in 2Q and 3Q, respectively. That’s far higher than GDP growth in 2Q, and about the same as we currently predict for 3Q – which is clearly unsustainable, all the more so as this employment growth was largely generated in full-time jobs. Hence, we expect a more modest gain of 15k in October, equivalent to an annualised rate of 1.5%. Note however that year-on-year employment growth would remain at its near-ten year peak of 3.1%. There is also a statistical reason for expecting a weaker reading: the outgoing rotation group has a substantially higher employment to population ratio than the sample as a whole (by 1.2pp), and so if the new rotation group is more in line with the overall sample, the employment gain would be depressed.
We expect the unemployment rate to slip 0.1pp lower, given that at the current rate of participation, the monthly gain in the labour force is 17k, most of which will be absorbed by the 15k gain in employment. In addition, the steep increase in the participation rate over the past 11 months (by 0.8pp) is in our view unlikely to be fully sustained, and we expect a marginal decline (though not large enough to push over the rounding point to 65.1%). That said, sample rotation points to a risk of increase.
TD Securities: We expect another outsized employment report as Oct and Nov tend to be seasonally robust employment months (chart) and we assume a similar impact this year, looking for +30k for both months. This leaves annual growth close to 3% and keeps the u-rate at 5.5% (if the participation rate ticks up as we expect to 65.3%).
- Repeals Affordable Care Act’s individual mandate tax, according to release from committee
- Increases child tax credit from the current $1,000 to $2,000
- Reduces middle income tax rates from 22.5% to 22%; 25% to 24%; and 32.5% to 32%
House Ways & Means Committee Chair Brady stated that the House will not accept total elimination of state and local tax deductions.
Spanish PM Rajoy called on Spanish companies not to leave Catalonia. He stated that "together we must protect the ties that unite us.” (Newswires)
DBRS Confirms Greece at CCC (high), Trend Changed to Positive
DBRS Confirms Kingdom of Sweden at AAA, Stable Trend
Brexit Secretary Davis stated that he still believes that a trade deal with the EU can be negotiated within the given timeframe. (Newswires)
Chief EU Brexit Negotiator Barnier noted that the EU is preparing for possible collapse of Brexit talks. (Newswires)
Sources suggest that 40 Conservative MP’s are calling for UK PM May to step down. (Newswires)
Sources suggest that UK PM May is facing a rebellion from pro-European Tory MPs who have vowed to vote against her "crass" plans to enshrine the date the Britain leaves the European Union in law. (Newswires)
Sources suggest that a menacing secret memo from Boris Johnson & Michael Gove to UK PM May dictating terms for a hard Brexit has triggered a new Cabinet rift. (Newswires)
Britain must not cave in to EU demands for a bigger Brexit divorce bill after Brussels set a two-week deadline for the UK to concede, allies of Boris Johnson have warned. (Newswires)
Germany's EU bill to rise by 16% post-Brexit, says new report. (Newswires)
Reports suggest that US banks are preparing 'stop gap' Brexit plans to avoid moving London jobs. (Newswires)
UK Chancellor Hammond targets VAT shake-up which would raise up to GBP 2bln per year. (Newswires)
Over the weekend US President Trump tweeted that “President Xi of China has stated that he is upping the sanctions against North Korea. Said he wants them to denuclearize. Progress is being made.”
North Korea noted that US President Trump’s rhetoric will never stop North Korea from pursuing nuclear programme. (Newswires)
Reports suggest that US President Trump has offered to mediate over the South China sea dispute. (Newswires)
Chinese President Xi & Japanese PM Abe agree to more collaboration. (Newswires)
US President Trump & Russian President Putin have agreed to continue joint efforts in order to defeat Islamic State, and agreed that there is no military solution for the Syrian conflict. Reports suggested that the two did not discuss north Korea. (Newswires)
On Friday the Canadian trade minister noted that TPP nations have made good progress on reaching a deal. (Newswires)
Reports suggest that the Saudi King is not going to be stepping down. (Newswires)
The Arab league is set to hold an urgent meeting on Iran at Saudi Arabia's request. (Newswires)
Lebanon’s PM is withdrawing resignation conditional on Hezbollah committing to remaining neutral, but reports have suggested that he is to resign in Beirut. (Newswires)
A 7.2 magnitude earthquake has hit Iraq, oil facilities are un damaged according to initial statements. (Newswires)
A pipeline explosion led to Saudi Arabia ceasing oil pumping to Bahrain briefly over the weekend, although flows have now resumed. (Newswires)
Yemen Houthis have threatened to attack warships & oil tankers if ports stay closed. (Newswires)
It seems possible that the conflict could drag on for the coming days, weeks and even months. If Article 155 is triggered in the near term, which appears more likely than not at this point, a key factor will be whether a hard or a soft version is implemented as the Article itself is very general and gives leeway to the central government to choose. Also critically, the severity and speed of the legal process against some of the separatist members of the government will play a role, in our view – ie, actions against those in breach of the constitutional legal framework. These factors evidently could be a catalyst for a response by the more radical supporters of independence, with the potential to trigger demonstrations, clashes with the police and further escalation.
We remain of the view that, in any event, regional elections seem a very likely outcome within the next few months.An important test will be whether or not a majority of the voters choose pro-independence parties. But even if the underlying demand for independence by a significant part of the Catalonian society remains (currently at c. 41% according to CEO July 2017), we believe independence remains highly unlikely as it would require important constitutional changes, which currently seem very remote. PP, PSOE and Ciudadanos represent more than two-thirds of the Spanish Parliament (254 over 350-seat Parliament). While constitutional changes to the current regional architecture are plausible, those changes seem unlikely to insert independence as an option as none of those three parties is in favour of it.
In terms of the central government, we do not anticipate a government crisis in the near term that could lead to general elections. Given electoral and fiscal considerations, a majority of the other regions are likely to be generally supportive of a firm legal response against independence. Therefore, PSOE and C’s are, in our view, unlikely to support a vote of no confidence against PP under the current constitutional crisis. We retain the view that general elections in Spain are unlikely in the near term. At the earliest, we see them taking place in Q4 18 or in 2019.
Spain’s IBEX underperformed in Europe, while Spanish bonds widened vs. core paper in the wake of the Catalan referendum held yesterday. Markets largely ignored the Las Vegas gun attack and ramping up of Washington-Pyongyang rhetoric that was evident over the weekend.
Fedspeak dominated the headlines this afternoon. 2017 voter, and dove, Neel Kashkari noted that he “favours not raising rates until core inflation is at 2%” and that the “Fed should proceed with caution before tightening further.” He also noted that “Fed hikes are likely driving down inflation expectations.” On inflation, Kashkari posited that “the only explanation that would potentially call for further policy tightening is the transitory factor explanation. But the longer low inflation persists (here and around the world), the more tenuous that story becomes.”
Fellow 2017 voter Robert Kaplan offered little new, as he reiterated that that the recent hurricanes will cause weakness in Q3 US GDP growth. He also noted that “there is not a lot of slack left in the US labour market,” and expects that slack will continue to be taken out of the labour market. Looking forwards he suggested that the Fed has “room to raise rates but not as much as people might think,” and that the Fed “are going to have to look hard to decide if we should raise rates in December.” He also stressed that any removal of accommodation should be “gradual.” This argument seemingly centred on inflation, as the President of the Dallas Fed opined that “cyclical inflation pressures are building, but structurally there are headwinds,” and as a result he noted that it “would not be surprising to see muted inflation.”
On the US economic front a strong ISM manufacturing PMI print garnered the headlines, with a particularly strong prices paid sub-index present (although this was attributed to the recent Hurricanes that have hit the US, and ISM expect the impact to be felt for 3-6 months). Elsewhere the latest US construction spending data printed pretty much in line with consensus, although the prior reading experienced a notable downward revision.
The ECB's chief economist Peter Praet took to the wires this afternoon, stating that the “ECB will re-calibrate its instruments accordingly in the Autumn, with a view to delivering the monetary policy impulse that is still necessary to secure a sustained adjustment in the path of inflation.” Praet also noted that “the economy has yet to make sufficient progress towards a sustained adjustment in the path of inflation to levels that are consistent with the Governing Council’s aim.” However, Praet was keen to stress that “when the normalisation of monetary policy comes it has to be prudent.” He also highlighted that “inflation is very slow in eurozone, but it is coming.”
The US dollar begun the week on the front foot against the major currencies ex-JPY, with EUR, GBP and CHF underperforming. The commodity currencies managed to reverse their early losses against the greenback as oil recovered from lows and in front of the RBA decision overnight. The JPY was the best performer amongst the majors.
US stock indices printed fresh intraday highs, but the NASDAQ closed off best levels. Materials and healthcare were the strongest sectors, while consumer staples lost out. The S&P 500 closed up 0.39% at 2,529.20, the NASDAQ 100 closed up 0.04% at 5,981.92, and the Dow closed up 0.69% at 22,558.97.
Treasuries finished just off best levels, in a low volume US afternoon. High yield issuance was noted today, although the more noted activity came from Mexico, Abu Dhabi and Jordan, with all 3 nations issuing USD denominated 30-year paper. US Dec’17 10y T-note futures settled at 125.08, down 2 ticks, with CME Fed Fund futures now pricing a circa 75% chance of a 25bps FOMC hike by year end.
Oil traded lower as we broke through some moving averages across the energy complex, while the IEA suggested that “OECD industry stocks will fall substantially this year, their forecasts point to stock builds in 2018.” The early run higher for the USD also weighed on the space. These factors outweighed supportive fundamentals including an expected short-term outage at Libya’s (largest) Sharara oil field and Russian oil output remaining steady in September, which represents 2017 ytd lows. Oil finished off of worst levels, as WTI crude futures settled at USD 50.58/bbl, down USD 1.09, while Brent crude futures settled at USD 56.12/bbl, down USD 0.67.
The recent bounce in the US dollar should continue. Although Hurricanes Harvey, Irma, and Maria will likely weigh on some upcoming data (including payrolls on Friday), the US economy otherwise looks in good shape: our current activity indicator has averaged growth of 3% over the last three months. Moreover, while there is still plenty of uncertainty, our US economics team sees firmer inflation reports in the coming months, and thinks investor concerns about the “Amazon effect” on goods prices are overdone. Separately, the prevailing market view that President Trump plans to nominate a relatively dovish successor to Janet Yellen as Fed Chair no longer looks clear: recent press reports indicate the White House has interviewed candidates from across the spectrum of monetary policy views. Markets are discounting fairly high odds that the FOMC will raise rates in December (a 65-70% chance). However, conditional on a December rate increase, markets are not even pricing a full 25bp rate hike for all of 2018. This seems much too conservative, especially in light of recent progress in Congress on tax reform.
Some drivers of EUR appreciation are also reversing and, as a result, EURUSD downside is our preferred expression of USD strength in the near-term. First, European equity markets have underperformed in recent months: our systematic equity-based positioning rule has been sending neutral or short signals for EUR for some time. Second, perceptions about the European political landscape—arguably too rosy since the French election—seem to be resetting lower. The German election looks likely to result in a “Jamaica coalition”—a first at the federal level—which has dimmed hopes for EU governance reform, along the lines advocated by French President Macron and EU Commission President Juncker. With political risk front of mind again, markets may begin to focus a bit more on the recent turmoil in Catalonia, next week’s legislative election in Austria, and the Italian election due by May of next year. Third, subdued inflation trends should mean the ECB lays out a relatively dovish taper timeline, continuing bond purchases throughout 2018. Lastly, the much-discussed bid for EUR from FX reserve managers did not in fact materialize in Q2: according the IMF’s latest COFER report, released Friday, reserve managers sold a small amount of EUR during the quarter. For each of these reasons, we continue to forecast that EURUSD will fall back to 1.15 by the end of the year.
USDJPY has closely tracked real rates, but may have more idiosyncratic risk in the weeks ahead. Through most of the recent bounce in the USD, the JPY has depreciated like an ‘EM high-yielder’, proving an effective hedge for a core rates selloff. And we continue to think that it makes sense to diversify the mix of funders for any EM long position, and to include JPY in the current environment. However, idiosyncratic risk may return as a result of the snap election called by PM Abe. The political situation remains fluid, but early indications are that the LDP will not sail to an easy victory. In brief, the popular governor of Tokyo, Yuriko Koike, has created a new national party, Kibo no To (Party of Hope), to contend the election. To make things interesting, late last week the largest opposition party, the DP, effectively disbanded and threw its support behind Hope. Combined, Hope and DP poll at around 20-25%, compared to roughly 30% for the LDP. While an Abe/LDP victory still seems the most likely outcome, with gains over the coming weeks, Hope may yet have a fighting chance of making substantial inroads (over the next week focus will be on fielding candidates, with formal campaigning starting around October 10; Koike herself must also decide whether to run as a candidate in the national election, at the end of the current session for the Tokyo assembly on October 5). Neither Koike nor other Hope leaders have expressed detailed views on monetary (or fiscal) policy, but given their change/reset campaign message, we believe a victory would call into question the sustainability of the BOJ’s easy stance, and open the field of candidates for Governor Kuroda’s replacement. So even though some aspects of Hope's agenda may be pro-growth, the bottom line for FX markets is that USDJPY should tend to be negatively correlated with polling results for Hope, at least until the party’s views on monetary policy become clearer.
Policy (BOE) and politics (Brexit negotiations) pulling the Pound in opposite directions. The BOE is set to hike in November despite lacklustre data—Governor Carney said Friday a rate rise was likely coming in the “relatively near term”. When central banks change direction they tend to express some degree of conviction about their decision—likely in an effort to head off outside criticism. So while our UK economics team does not forecast another rate rise until late 2018, we would be surprised if policymakers signalled “one and done” immediately after the first move. At the same time, we continue to see a very bumpy path ahead for Brexit negotiations and UK politics. Put simply, the best outcome for financial markets—a lengthy status quo transition deal—is not compatible with the views of a segment of the Conservative party, which includes Foreign Secretary Johnson (in particular his second “red line” regarding EU and ECJ rules). At the Tory party conference this week PM May will probably walk a fine line in the keynote speech on Wednesday, in which case markets could focus on BOE policy for the near-term; this would imply downside risk to our EURGBP forecast. But until the political fissures are resolved we will have a hard time seeing sustained sterling strength.
- This is Poloz’s first public address since the BoC delivered back to back 25bps hikes in July & September.
- BoC officials spoke en masse in the run up to the Jul decision to indicate that a hike was on the table. BoC deputy Lane pushed back against the recent CAD strength in an address made last week so this is one particular area generating focus heading in to the address.
- Markets currently price a circa 40% chance of a hike at the BoC’s October meeting, and a circa 90% chance of further tightening is priced by year end.
The title of the speech is “The Meaning of ‘Data Dependence’: An Economic Progress Report.”
Focus will be placed on the BoC governor’s speech as it is his first address since the Bank delivered a second consecutive 25bps hike at the start of the month.
A swift and very deliberate swing in rhetoric indicated that the BoC was willing to hike back in July. While markets priced a virtually even chance of a September hike heading in to the most recent decision (following strong economic data), the BoC ultimately delivered further tightening. In the wake of the move the Bank came under widespread criticism over its closed doors policy (i.e. no communication) between the two hikes.
Last week in an address centring on trade BoC deputy governor Tim Lane managed to partly arrest the CAD strength experienced in recent weeks. Lane warned that the BoC was watching the currency, stating that the central bank is “paying attention to how the economy responds to higher rates and a stronger CAD.”
The deputy governor remained upbeat on the data front. He noted that growth was becoming “broad and self-sustaining.” Lane went on to note that in his view “each meeting is live,” while he stressed importance of data-dependence. He didn’t touch on inflation in any great depth, and the subsequent CPI release showed a small miss on the headline figures, although the average of the three core measures saw some upside surprise.
In the wake of Lane’s comments Scotiabank posited that “this is the kind of central bank speak that usually signals a fairly high degree of discomfort in market moves. We do not think the comments from Lane can be measured by quite the same metric, but there is clearly an agenda of some sort here, and it may be to simply nudge market expectations away from an additional rate increase coming in October and more towards December. We do not think the Lane remarks should be seen as a push back against broader expectations that additional rate increases are likely.”
Following the early summer swing in rhetoric and broad based recent criticism, markets await Poloz’s upcoming comments 1) because he is the governor and has not made any public addresses for so long, and 2) to see if he sides with Deputy governor Lane on any of the matters he addressed last week, which could in turn point towards the central bank being uncomfortable with the recent CAD strength.
Yesterday, Canadian Finance Minister Morneau stated that he sees “higher interest rates ahead” and he noted that that “the Canadian economy can do well with the currency at current levels.” This pushed back against recent chatter which had suggested that government officials were unhappy with the recent BoC tightening as it has led to notable CAD appreciation.
Market Views On The BoC: -
Markets currently price a circa 40% chance of a hike at the BoC’s October meeting, and a circa 90% chance of a hike is priced by year end.
Some Of The Large Canadian Banks Views On Poloz’s Upcoming Address: -
CIBC: The Deputy Governor tried to get markets back into the slow ‘Lane’ in terms of rate hike expectations and their impact on the C$. Governor Poloz could take an even clearer stance on that this week. By downplaying those expectations for further BoC hikes this year, at the same time that the Fed has left a December hike firmly on the table, two-year yield spreads will move back in favour of the US and pull the loonie down from recent lofty levels.
RBC: BoC Governor Poloz speaks publicly for the first time since the July 12th MPR on Wednesday. It should be closely watched for discussion on both the recent rate hike on September 6th and BoC views on a possible hike at the October 25th rate meeting and MPR release. Poloz should have seen preliminary results of the next Business Outlook Survey (released on October 16th) by the time of the speech, with the summer BOS release seeming to be instrumental in the BoC’s hawkish shift in June. No topic has been released yet for the speech, but there will be a press conference that follows nonetheless.
Scotiabank: Bear in mind that the audience will be drawn from an area of the country that is among the most directly affected by soft commodity prices. Newfoundland’s economy is forecast to contract by 1.7% this year and 0.4% next year even while Alberta’s economy (also energy dependent) is registering improved growth this year and next. If the know-your audience rule of thumb applies, then—while it’s almost pure conjecture in the absence of a speech topic—it may be reasonable to think that a cautious message will be delivered. Don’t expect fist-pumping and pompoms in celebration of how wonderfully the economies are performing in, say, Ontario, Quebec and BC. With the next hike forecast for December by Scotia Economics and markets and the September 6th BoC statement having left the door open for further hikes conditional upon the evolution of data, a stronger emphasis upon the conditionality of hiking again after material data has been gathered may be applied next week.