April 02 nd FX Market Headlines. United Kingdom. Australia. Japan

Transcription

1 April 02 nd 2013 FX Market Headlines United Kingdom Australia Japan

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3 United Kingdom: The changes to the Monetary Policy Committee (MPC) s remit announced in the Budget are evolutionary rather than revolutionary. But, Citi Analysts believe these changes are more substantial than generally believed. Citi Analysts expect the new remit will encourage the MPC to loosen policy further and provide them with a wider range of instruments with which to loosen. First, while leaving the target as 2% CPI inflation at all times, the Chancellor reduced the extent to which the MPC have to set policy to actually aim for and hit this 2% target. The MPC will no longer be judged on whether they have kept inflation close to 2% on average. They will be judged on whether they have fulfilled their remit. And the new remit requires the MPC to consider tradeoffs between growth and inflation in setting policy, and allows the MPC to tolerate persistent inflation overshoots or undershoots if measures to hit the target would exacerbate imbalances or make it harder to close the output gap. With the new remit, it is far easier for the MPC to loosen when, as now, the economy has persistent above-target inflation but a sizeable output gap and weakness in real and nominal GDP growth. Second, the new remit expands the MPC s tool kit to include a range of instruments credit easing, liquidity provision, official rates other than Bank Rate, whether to buy private sector assets, forward rate guidance. These tools are now clearly assigned to the task of monetary policy. By contrast, previously these instruments were controlled by the Bank of England (BoE) hierarchy without clear criteria for their usage and the BoE has seemed reluctant to use them. There are doubts over the effectiveness of each individual measure, but the MPC can now, if they wish, pull a wide range of policy levers until a sustained recovery is underway. Citi Analysts expect that the MPC will loosen further via various channels, including extra Quantitative Easing (QE), forward guidance, further credit easing focused in particular on smaller firms. Other measures, including a lower Bank Rate or (more likely) a new reserves targeting system with lower interest rates on excess reserves, could also come into play, especially if the EMU crisis worsens and/or sterling rises sharply. Easing would not imply that the UK is losing its commitment to low inflation and economic stability. Real GDP per head is 6.4% below the pre crisis peak, while real and nominal GDP growths are weak. The high CPI inflation rate largely reflects regulatory effects rather than a general inflation problem: the GDP deflator is up by only 1.2% YoY. The timing of further stimulus is unclear and may depend on data and the EMU crisis from month to month but the path to further stimulus is clear in Citi Analysts view.euro zone: Cyprus and Contagion: Developments related to Cyprus were a powerful reminder that Mr. Draghi s whatever it takes approach is limited by the European Central Bank (ECB) s mandate. Furthermore, irrespective of how the situation is resolved, one important lesson that Citi Analysts can already draw is that imposing losses on creditors of oversized banking systems, with the aim of preserving the fiscal sustainability of their governments, has entered mainstream thinking in the eurozone crisis management. AUSTRALIA: The global backdrop doesn t present a case for further near-term policy easing. Activity data for Australia s major trading partners remained largely unchanged relative to expectations since the last Reserve Bank of Australia (RBA) Board meeting and had improved slightly for the US. In contrast, economic data remained weak in the European Monetary Union (EMU), but conditions there were no worse than what was expected by the RBA Board. The only new development was the escalation of the financial crisis on Cyprus. Citi Analysts suspect that since the rescue deal was announced the risks of deposit flight in other fragile European banking sectors has increased; but this is not something that is likely to influence already accommodative Australian monetary policy. The RBA is content with the effectiveness of monetary policy transmission through the domestic economy. Citi Analysts have commented previously about the slow response of parts of the economy to the return of the cash rate to its historical low. To date, consumer sentiment has underperformed when compared against the same point in previous easing cycles, while business sentiment has not responded at all. But in a speech given only last week on the subject of Internal Balance, Structural Change and Monetary Policy, Dr Lowe highlighted that the current policy stance is working through the economy. Citi Analysts note that real household wealth has picked up to be 10% higher than at this time last year. This gain has largely come from a rise in house prices and the share market rally. The potential for some of this wealth gain to trickle into expenditure in the future means the RBA will be willing to provide interest rate sensitive sectors more time to respond to the rate cuts to date. So no change

4 to the Official Cash Rate (OCR) in April and the accompanying policy statement should remain mostly neutral. For the policy statement, Citi Analysts suspect the tone will remain open to a further cut to stimulate demand for as long as sentiment towards business investment remains soft. The jury is still out on whether future non-mining investment will be able to offset the coming peak in mining investment. Therefore, the RBA may not formally shift away from its mild easing bias until this last piece of the domestic growth puzzle shows signs of improving. In addition, any near-term hint of a shift in policy bias may risk unsettling the nascent improvement in consumer sentiment and could also add upside pressure to the exchange rate, which remains elevated. Inflation outlook still leaves the door open to one more interest rate cut Citi Analysts early call for Q1 underlying inflation is 0.5%. Annualizing at the bottom of the RBA s target band, the emergence of a more favourable productivity trend, below trend economic growth and moderation in wages growth provides scope for the underlying CPI to remain historically low over the next eighteen months, giving the RBA a window to cut once more to ensure domestic demand growth returns to a trend rate. but the window is closing. Over the past 6 months the unemployment rate has been fairly steady, defying forecasts it could rise to around 6%. If unemployment is close to peaking and house prices show signs of rising faster than income, then the window for the further rate cut Citi Analysts are forecasting in May or June will close. JAPAN: The Bank of Japan s new leadership emphasized the important role of expectation : The new central bank Governor Haruhiko Kuroda and the new Deputy Governor Kikuo Iwata emphasized the important role of expectation in their inaugural press conference last Thursday. As a downshift of the Phillips curve suggests, there is no doubt that expectation is a vital element to understand the current conditions of the Japan s economy and economic policies to pursue. That said, it seems very uncertain and also difficult if or to what extent such an approach could push up the expected inflation in a short time frame, in Citi Analysts view. Despite Deputy Governor Iwata s claim, monetary base growth and the expected inflation do not seem to have had a stable relationship given that deflation has persisted even as the monetary base expanded sharply. In a longer perspective, Citi Analysts believe the expected inflation rate is influenced by a broader set of economic policies including fiscal steps and growth strategy, even if Citi Analysts assume monetary policy helps form the expectations. In this regard, the scheduled consumption tax hikes in April 2014 and October 2015 will likely play a meaningful role, in Citi Analysts view. USD: The Week Ahead April 1, March ISM Manufacturing Activity Index: Citi. 54.0, Feb. 54.2, Jan. 53.1, Dec. 50.2, Nov. 49.9, Oct Citi Analysts don t expect much change in the ISM manufacturing index in March. Citi Analysts think the sudden pickup in the index at the start of the year reflected a rebound in inventories. As such, Citi Analysts anticipate a fade in the ISM index once the inventory cycle has run its course. Note: Inventory accumulation was cut back severely in the fourth quarter due to both the caution that businesses felt in advance of the fiscal cliff and the disruptions from the hurricane. The bounce back in stocking early this year has been evident in most manufacturing indicators, including industrial production, manufacturing payrolls and hours, and business surveys. April 3, March ISM Non-Manufacturing Activity Index: Citi. 55.0, Feb. 56.0, Jan. 55.2, Dec. 55.7, Nov The ISM nonmanufacturing activity gauge probably remained in the range that it has held for the past three years. These readings signal steady moderate overall economic growth. Note: Citi Analysts will be focused on the ISM employment index in this report. This index jumped toward the end of last year and has remained at elevated levels since then. In fact, the gauge is hovering in a range near the highest readings on record, dating back to The employment index stands in direct contrast to other survey-based employment gauges, which have been considerably more subdued.

5 April 5, March Employment Situation (Thousands Unless Indicated): Total Employment Citi. 175, Feb. 236, Jan. 119, Dec. 219; Unemployment Rate (Percent) Citi. 7.7, Feb. 7.7, Jan. 7.9, Dec Citi Analysts ve seen some big swings in payrolls in recent months, with the February rise surpassing most forecasts. But the data do not indicate a break from the modest growth trend of the past year. Leading signals of employment have been mixed over the past month: Initial claims have been falling steadily, with the latest report showing the four-week average dipping to 340,000 (the lowest in five years). Meanwhile, employment surveys have been disappointing. Note 1: Some industries have posted huge gains in recent months, but Citi Analysts wonder whether those gains will continue into the spring when seasonal factors become unsupportive. Citi Analysts re inclined to think the rise in construction jobs reflects underlying improvement in the housing market. But the steep increase in retail trade jobs has far surpassed any measure of retail activity, so Citi Analysts wouldn t be surprised by a pull back in retail payroll gains. Note 2: The unemployment rate has trended down gradually for the past three years. However, in light of the 0.2 percentage point decline in February, accompanied by a drop in the labor force, the downtrend may have taken a break in March. There is even a risk that the jobless rate retraced some of that decline. April 5, February International Trade in Goods and Services (Billions of Dollars): Citi , Jan , Dec , Nov , Oct , Sept Citi Analysts anticipate little change in the trade balance in February. Both exports and imports have gyrated, ever since the hurricane and the West Coast port strikes. Citi Analysts think the turmoil those two events caused has finally worked its way through the trade numbers, so Citi Analysts should get cleaner readings now. Citi Analysts estimate includes a small decline in oil imports (mainly lower volumes) offset by a rise in other imports. Note: Citi Analysts projections suggest that first quarter net exports is on track to completely reverse the big declines in both exports and imports in the fourth quarter. The net effect of these changes would be a small subtraction from first quarter GDP. CAD: Apr 5, LFS Employment (Mar): Net Change in Employment (Mar) - Citi Forecast 10.0K, Median 8.0K, Last 50.7K; Unemployment Rate (Mar) - Citi Forecast 7.1%, Median 7.0%, Last 7.0%: Relatively Modest Job Gains Headline Labor Force Survey employment likely increased by a relatively modest 10,000 workers in March, following an outsized 50,700 net additions in February. However, there is a risk of another sizeable number of additions perhaps as much as 45,000 given a second month of seasonal factor idiosyncrasies, but also because firms have consistently maintained lofty hiring plans, even when other expectations metrics were less rosy. If job gains are more reserved, as Citi Analysts anticipate, then the unemployment rate edged up to 7.1% from its post-crisis low of 7.0%. The participation rate probably was unchanged at 66.7% Income Watch Citi Analysts will continue to pay very close attention to the wage and hours data for indications of income growth in the first quarter. Wage inflation for permanent workers remains subdued, consistent with benign consumer inflation and persistent labor market slack, despite outsized employment gains since the end of the recession. Hours worked also continue to lag jobs growth. So while many more people are working, income growth and subsequently real consumer spending are leveling off as wages stagnate and workweeks are capped. Citi Analysts anticipate that increased deleveraging among distended households and calming housing market activity will also limit household expenditures going forward. Apr 5, Ivey PMI (Mar): Citi Forecast 51.5, Median 52.4, Last 51.1: In An Expansionary Mood The Ivey PMI likely continued to show that public and private businesses remained in an expansionary mood in March. Unfortunately, due to the broad and volatile nature of the series, Citi Analysts don t place too much stock in this measure. Alternatively, Citi Analysts look to the CFIB s Business Barometer, which probably will show continued improvement in small- and medium-sized firm confidence Wednesday, and the Bank of Canada s quarterly Business Outlook Survey, to be posted in on April 8. EUR: Apr 2, Euro Area Manufacturing PMI, Mar Final Forecast: 46.6 Prior: Citi Analysts expect a confirmation of the flash estimate showing a second consecutive decline on a monthly basis, which brings the reading to the lowest level since December With more uncertainty in the periphery countries (e.g. Italy after the inconclusive election) there are risks of a small downward revision of the flash estimate. Apr 2, Euro area Unemployment Rate, Feb Forecast: 11.9% Prior: 11.9% - Seasonally adjusted unemployment is likely to increase further in February. After a small increase of only 33K MM in December, there was a large increase of 201K in January and Citi Analysts expect a figure of at least 150K in February. The unemployment rate probably will remain unchanged at the historical high of 11.9%. Apr 3, Euro area HICP, Mar Flash Forecast: 1.6% YY Prior: 1.8% YY - Falling energy prices partly explain the expected fall in inflation in March. In addition, the underlying economic weakness is likely to lead to a further reduction in core inflation in March. This would be the lowest reading since August Apr 4, Euro area Services PMI, Mar Final Forecast: 46.4 Prior: 47.9; Composite PMI, Mar Final Forecast: 46.4 Prior: Citi Analysts expect a small downward revision of the services and composite PMI flash estimates. However, even if the flash estimate readings were to be confirmed, they would reach the lowest level for the services PMI since October 2012 and for the composite reading since December. Apr 4, ECB Board Meeting: ECB: Rate Cut in 2Q, April Possible - Citi Analysts expect that the ECB will leave interest rates unchanged in April, but the likelihood for a rate cut in April is the highest for months. In Citi Analysts view, the renewed fall in sentiment indicators, falling inflation rates and wage growth moderation suggest that the ECB will cut rates in 2Q. But it will probably take some more time to get a majority for a rate cut in the Governing Council. Citi Analysts continue to expect a second refi rate cut to 0.25% before yearend. The ECB probably will stress that it is ready to take action with additional non-standard measures if the liquidity situation of euro area banks deteriorates. But, in the absence of indications of funding stress for banks (apart from the increase in ELA last week), the ECB is unlikely to announce substantial new measures in April. However, in order to overcome the fragmentation in the monetary transmission mechanism, the ECB might introduce extra measures to support funding to SMEs, probably by a change in the collateral rules for loans to SMEs as early as April

6 Apr 4, Euro area Industrial Producer Prices, Feb Forecast: 0.2% MM, 1.4% YY Prior: 0.6% MM, 1.9% YY - A mixture of seasonal factors and higher energy prices are leading the increase in producer prices on a monthly comparison. However, with benign base effects and underlying economic weakness, the downward trend in producer price inflation is likely to continue. Citi Analysts expect the lowest YY rate since March Apr 5, Euro area Retail Sales, Feb Forecast: -1.0% MM Prior:+1.2% MM - After the large gain in January, which was in part caused by an extraordinarily strong gain in Germany, Citi Analysts expect a downward correction in February. The retail PMI also points to a fall in retail sales in February. If Citi Analysts forecast was correct, the January/February average of retail sales volumes would be 0.2% above the 4Q 2012 average. GBP: Apr 2, Manufacturing PMI, Mar Forecast: 48.5 Prior: The services PMI fell sharply in February (dropping by 2.6 points from the January level) and while Citi Analysts expect the index will remain weak, Citi Analysts anticipate a small retrenchment from that weak February reading. Even so, such a figure would imply that the PMI has worsened over 1Q as a whole, hence casting further doubt on the MPC s forecasts of economic recovery. Apr 4, Services PMI, Mar Forecast: 50.5 Prior: The services PMI unexpectedly improved in February to the highest level for five months, and Citi Analysts look for a modest pull back this month. Apr 4, BoE Board Meeting No changes expected to either rates or QE for now (refer below for a more in depth look) AUD: April 2, RBA Board Meeting Citi. 3.00%, Consensus 3.00%, Previous 3.00% (Please see below for preview) JPY: 1-Apr, March Tankan preview: Pickup in manufacturers business confidence may prove unexpectedly modest: Citi Analysts expect a 5-point improvement in manufacturers business confidence DI The Bank of Japan s March Tankan survey (due out on April 1) will likely reveal improving business confidence as the overseas economy picks up, the yen depreciates and stock prices rise. At the same time, however, Citi Analysts expect a substantial variation among different sectors. The business confidence DI for large manufacturers is expected to rise to -7 in March from -12 in December. While the processing sectors, which benefits from the cheaper yen in the form of better competitiveness and profitability, will see a higher DI, sentiment in the material sectors will probably deteriorate as the yen s fall is causing heavier import costs, in Citi Analysts view. Meanwhile, large non manufacturers DI will likely climb to +8 in March from +4 in December, reflecting better readings in wholesaling and retailing, and services firms. Citi Analysts expect a cautious start on capex plans for FY2013 at -2.0% YoY In light of the first quarter business outlook survey, capex plans for FY2013 are expected to remain rather cautious, falling 2.0% YoY compared with a 1.3% YoY reduction in the initial FY2012 plan. By company size, Citi Analysts expect a 1.5% YoY expansion for large firms and a 16.1% YoY cut for small ones. A new survey item, inflation outlook of firms, will be another point of interest Market participants will likely keep a close eye on a new survey item, inflation outlook of firms. Citi Analysts will also focus on large firms recurring profits projections for FY2013 as well as the DIs regarding employment conditions and production capacity. The former will serve as a useful guide to foresee profits in major companies while the latter will provide an insight into strength of a private demand recovery. 3 4 Apr, BoJ Board meeting: The Nikkei news reported last week that the BoJ is likely to bring forward its unlimited Asset Purchase program from 2014 to current and integrate its Asset Purchase Program and the Rinban operation both buying JGBs at its first meeting scheduled on April 3/4. With a monthly purchase totalling JPY 1.8tn at present, the RINBAN facility now holds JPY 67tn of JGBs while the Asset Purchase Program (APP) currently holds JPY 27tn of JGBs which under Shirikawa had a goal to increase its JGB holdings to JPY 44tn by year end. With the bringing forward of its unlimited (open ended) JGB purchases to the current however, the BoJ would be looking to exceed that JPY44trn by a significant margin by year end. More importantly, the direct implication of its unlimited asset purchases program would be the likely abandoning of the bank note rule. This would be a strong indication of a BoJ regime change.