January 17, 2023

MT: Big questions for BoJ and BoE, with no easy answers

US out for MLK day holiday. S&P futures little changed

Today’s podcast


  • US out for MLK day holiday. S&P futures little changed
  • European stocks modestly higher as is USD, led by partial reversal of USD/JPY falls
  • BoE Governor Bailey warns of ongoing inflation/wages risk from declining pool of labour…
  • …ahead of December UK labour market data today
  • China GDP, Dec, activity should be ignored for the most part given U-turn on zero-covid
  • Australia consumer confidence, Canada CPI, Goldman and Morgan Stanley report

US has been out MLK day, making for relatively quiet overnight markets, which in any event are awaiting the next onslaught of US quarterly earnings – Goldman and Morgan Stanley both report this evening – and arguably the week’s main event, the Bank of Japan on Wednesday. The US dollar is a little firmer in what is a mostly USD/JPY (up) driven move, but which has played a small part in AUD/USD failing to hold on to the 0.70 handle it captured mid-way through Monday’s Australia trading day – back to nearer 0.6950 now.

Economic news has been very thin on the ground so far this week, in our time zone yesterday just further evidence of (mild) new home price deflation in China, and in Japan more upside inflation surprises, this time courtesy of producer prices which returned to above 10% in year-on-year terms (10.2% from an upward revised 9.7% in November). The Bank of Japan is slated to upgrade its inflation forecast out of Wednesday’s policy meeting, the question being whether they will now show Core CPI inflation falling back below 2% on a year-plus view, as previously, or otherwise.

Canada published its latest quarterly Business Survey, and which showed the Business Outlook headline reading down to 0.1 from 1.7, its fourth successive quarterly decline, and the ‘Future Sales Growth’ reading reversing a minor pick-up in Q3 to be not far off its Q2 2020 and GFC lows.  CPI is tonight, expected to ease back, and if so making the debate for next week’s BoC meeting about whether they will raise rates by 25bps or possibly stand pat (market has some 19bps of tightening priced in).

Bank of England Governor Andrew Bailey has been testifying to a parliamentary committee where he highlighted ongoing wage inflation risk to its inflation mandate from a ‘declining poll of labour’ (as well as the war in Ukraine) and downside economic risks from China. Policy makers (pace the IMF head last week) aren’t yet buying the sunny uplands of China growth in a living-with-covid state, unlike markets. Bailey also opined that the ‘Truss premium’ in UK asset prices has now come out, citing the recent successful – demand driven – sale of £19bn of gilts.  UK labour market data is tonight and will need to be significantly weaker than expected for market conviction in 50bps of BoE tightening in February to be jolted (see Coming Up below).

Equity and bond markets have been subdued by the absence of the US markets. 10-year Note futures are off about a quarter of a point, Eurozone 10-year yields up less than 1bps, gilts +2bps. The Eurostoxx 50 finished +0.15%, UK FTSE +0.2% while S&P500 futures are 0.2% lower.

FX has been a little more interesting, no more so than because AUD/USD punched above the psychological 70 cents mark mid-way through our local session yesterday, for the first time since 26 august 2021, though we were back below before the day was out (high around 0.7020, subsequent low around 0.6940 and trading just above 0.6950 at the start of the APAC day).

We continue to point to the ongoing strengthening in the CNY as a key driver of AUD G10 FX outperformance year to date, and which spent a little time sub-6.70 yesterday morning in billing – which coincided with AUD’s push above 0.7000.  USD/CNY has subsequent moved back up closer to 06.74, and this looks to account for AUD/USD losing its grip on the 0.70 handle.  Softer iron ore prices (-2% on the Dalian exchange) also look to have a hand, this after Beijing flagged ‘tight supervision’ of the market following the late 2022 surge, and warned against publishing ‘false information’, whatever that means.

Minor slippage in EUR/USD and GBP/USD has contributed to the modest gains for the DXY USD index (+0.2%) but the bigger contribution was USD/JPY, which has retraced about 0.5% of last week’s sharp falls. This amid the publication Monday of surveys compiled at the end of last week which show most observers not expecting anything new policy-wise from the Bank of Japan on Wednesday, beyond the aforesaid upward revision to inflation forecasts.

Coming Up

  • China Q4 GDP and December activity readings are out at 13:00 AEDT Tuesday and while headline grabbing, are unlikely to change views on China given the aggressive pivot towards a ‘living with Covid’ that began in December. The next few months are likely to see disruptions, but thereafter activity should rebound sharply, plus the government is committed to supporting growth and stabilising the property sector. Consensus for GDP sits at -1.1% q/q for 2.7% on the year. Monthly activity indicators are expected to show weakness across the board (industrial production down to just 0.1% y/y from 2.2% in November, Retail Sales -9.0% y/y from -5.9% and Fixed Asset Investment 5.0% from 5.2% in November).
  • Australia has the Westpac-MI January Consumer Confidence reading, which in December showed a small bounce to 80.3 from 78.0 but which was still close to March 2020 and GFC lows.
  • Offshore this evening, UK labour market data could have some bearing on current market confidence in the BOE delivering another 50bps tightening on 2 February (together with CPI on Wednesday).  If earnings hold at 6.1% 3m y/y as expected (and ex-bonuses 6.3% up from 6.1%) BoE tightening expectations aren’t going to shift lower.
  • Germany has the ZEW survey of financial analysts, with expectations and the current situation readings both seen modestly up on November.
  • Canada has CPI (core measures seen down 1/10% 5.15% on average from 5.15%, headline 6.4% from 6.8%). US has the first of the regional PMIs (Empire/NY State – seen -57.0 from -61.4 but it’s a small survey sample.
  • Goldman Sachs and Morgan Stanley report earnings before the bell

Market Prices

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