ON DECK FOR FRIDAY, SEPTEMBER 19
KEY POINTS:
- BoJ and UK finances send ripples through markets
- BoJ: dissenters indicate pressure to hike, ETF selling to begin
- UK budget deficit pressures continue to mount ahead of autumn budget
- UK consumers keep spending
- Canadian retail sales to inform momentum in Q3
- Miran to give the government’s dissenting voice at the Fed today
BoJ actions, UK budget pressures and Canadian consumer data are the focal points this morning.
WHAT THE BOJ DID
Actions by the Bank of Japan sent a little ripple through the carry trade overnight. JGBs cheapened by 3–5bps across the curve except the long end, the Nikkei slipped by about ½% and the yen is the strongest of the majors. Pricing for the October BoJ meeting increased by about 4bps to being roughly on the fence between a hold or a 25bps hike that is largely priced by the January meeting.
So what did they do? The 7–2 vote in favour of holding the policy rate this time brought out two dissenters who wanted to hike now which indicates growing support for doing so. The BoJ also announced plans to begin selling its ETF holdings at a glacial speed of about ¥620B/year (about US$4B/yr). Barring a change in pace, that would take around a century to sell off the whole portfolio of ETFs. Despite the modest step, markets are presumably aware of the fact that central banks can expedite or taper such plans along the way and so there is a signalling effect as well.
Is a hike the right thing to do should they proceed in the relatively near term? The next forecast update arrives on October 30th after the last one in July and so let’s see what the BoJ thinks will happen to inflation over the longer term. Gauges of core inflation are somewhat conflicting; the Tokyo core CPI m/m SAAR reading has ebbed in recent months, but last night’s national core CPI readings remain warm (chart 1). Yen appreciation since January stumbled over the period since Spring and further time may be needed in order to evaluate import price pressures, tariff effects, and oil prices as key drivers of inflation. The BoJ may also wish to have clearer indications about the next Shunto spring wage negotiations after a string of gains that are having minimal effect on average workers’ inflation-adjusted earnings. It may also be prudent to give some distance from Prime Minister Ishiba’s resignation to evaluate future potential policy measures from government.
UK DEFICIT PRESSURES MOUNT, WHILE CONSUMERS KEEP SPENDING
UK public sector net borrowing in August crushed expectations at £18B (£12.8B consensus). The year-to-date deficit stands at about £84B, which is about £11B above the Office for Budget Responsibility’s forecast and the second widest after the pandemic hit in 2020 (chart 2). Sterling softened and gilts initially cheapened but subsequently unwound much of that. Pressure is on the Starmer government to rein things in when it releases an Autumn budget on November 26th that is likely to include tax hikes. No Nobel prize for smelling trouble ahead…
UK consumers continue to spend. Retail sales volumes were up by 0.5% m/m SA in August (0.4% consensus) and 0.5% the prior month (down from 0.6%). Sales ex-autos climbed 0.8% (0.7% consensus) with a minor downward revision (0.4% from 0.5%).
CANADIAN RETAIL SALES TO INFORM CONSUMER MOMENTUM
Canadian retail sales are expected to be weak after the prior month’s surge, but with minimal effect on July GDP due out next week along with the August GDP flash (8:30amET). Statcan had guided back on August 22nd that July sales fell -0.8% in nominal terms and today could bring revisions and details like volumes versus price effects. The first read on August is likely to be more important.
MIRAN’S WARPED EXPLANATION
The US government's rep on the Fed Board speaks twice today, although few will treat his -150bps view this year as credible (11amET, 4pmET). Maybe Governor Miran will issue a statement explaining his stance like Waller did after his July dissent.
San Fran Fed President Daly also speaks (2:30pmET).
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