Bank of Japan Delays Policy Changes, Keeps Rates Negative
Economic news and commentary for June 16, 2023
Bank of Japan Announcement
The Bank of Japan continued its divergence from the rest of the developed world central banks on Friday and left its monetary policy at the ultra-loose levels it has been at for years. In its announcement, the BoJ left its monetary policy rates unchanged and kept its yield curve control policies intact. Japanese inflation has risen since these policies were put in place, but the BoJ members are not convinced that the current price target can be sustained without supportive policy. It offers a very clear guidance: “[The Bank of Japan] will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.” The BoJ also cites “extremely high uncertainties surrounding economies and financial markets at home and abroad” as another reason for maintaining the loose monetary policy. In conjunction with this statement, it says that the Japanese economy is “projected to continue growing at a pace above its potential growth rate.”
For the most part, the market is not expecting any major policy changes in BoJ policy until later on this year. Thus, the statement today was not much of a surprise. However, on the back of hikes by the ECB and Bank of Canada and a “hawkish pause” by the Fed, the downward pressure on the yen is likely to be significant. This pressure just exacerbates the pressures that come from inflation and discounts nominal wage gains. It is likely that the BoJ will have to make some hawkish moves soon because of this, and it should have room to do so with growth slowly coming back and the labor market remaining strong. The Bank of Japan will start to make its path forward more concrete in its July report that includes projections on CPI and GDP through the end of the year.
Still to come…
10:00 am (EST) - US Consumer Sentiment
Morning Reading List
Other Data Releases Today
Euro area inflation was confirmed at 0.0% MoM and 6.1% YoY in May. Core inflation confirmed at 5.3% YoY. Energy inflation (both annual and monthly) and non-energy goods monthly inflation both see slight 0.1 ppts increases.
Italian inflation was confirmed at 0.3% MoM and 7.6% YoY in May. Goods inflation was downgraded slightly from 9.5% YoY to 9.3% YoY on slight downgrades to food and energy price moves.
Italy's trade balance fell to €318 mil in April with exports down -1.7% MoM and imports up 5.3% YoY. In the last three months, exports fell -2.2% and imports fell -6.5%. Consumer goods exports are down a sharp -7.4% YoY.
Euro area labor costs were up 5.0% YoY in Q1 2023, down from 5.7% YoY in Q4 2022. Wages grew 4.6% YoY, down from 5.1% YoY previously. Services hourly labor costs growth fell from 6.2% YoY to 5.5% YoY.
BoJ Announcement
Bank of Japan keeps policy settings unchanged – for now (ING) - The BoJ has unanimously decided to maintain its ultra-easing monetary policy as it is still looking for clearer signs of sustainable inflation growth. We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.
ECB Announcement
ECB hikes policy rates by 25bp (ING) - The European Central Bank continues its hiking cycle and shows no sign of pausing any time soon.
Lagarde pre-announces another ECB rate hike for July (ING) - The European Central Bank President, Christine Lagarde, is keeping the door wide open for more interest rate rises this summer and has been explaining her decision to raise eurozone rates again by 25 basis points today.
Europe | Staying the course to tame inflation (BBVA) - The ECB covered further ground in its fight against inflation as it raised key interest rates by another 25 bps, attributing the move to its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission; nonetheless made clear that its journey is not over.
No Pausing or Skipping or Jumping for the ECB (BMO) - The ECB is still very hawkish, no question. But the doves seem to be pushing back a little. We are maintaining our call for another 25 bp rate hike in July and will leave September open. Although it seems that the ECB will keep going, the data may stop them. After alll, the Governing Council will have three more CPI readings to judge by the September 14th meeting. And aren't they data-dependent?
ECB Policy Rates Not Peaking Yet (PIMCO) - While the ECB raised its deposit facility rate by 25 basis points (bps) to 3.5% at the June meeting, we believe the risks remain skewed towards higher policy rates for longer compared to market expectations. The ECB refrained from communicating unconditional expectations for the future interest rate path, but made clear that it expects to raise rates further, including at its next policy meeting in July. It is aiming to bring policy rates to levels sufficiently restrictive to achieve a timely return of inflation to the 2% price stability target.
Flash: ECB Review - 'Very likely' to hike again in July (Danske Bank) - The ECB meeting today was according to expectations with its 25bp rate hike and a formal decision to end the APP reinvestments from July. The staff projections were revised higher for both underlying and headline inflation across the horizon with importantly the 2025 projection at 2.2%, above the ECB's target.
ECB Watch: Hiking very likely to continue in July (Nordea) - The ECB raised rates by 25bp, is not happy with the inflation outlook and is very likely to raise rates again in July. While we think the July hike could be the last one of the cycle, risks are clearly tilted towards more tightening after the summer.
US
Mixed US data offers little clarity on prospect of July Fed rate hike (ING) - The Federal Reserve’s hawkish hold yesterday suggests an inclination to hike again in July, but today's mixed retail sales and manufacturing data fail to offer a clear steer. The grinding higher in jobless claims is perhaps the bigger story, but it probably won’t be enough to lead to a sizeable slowdown in payrolls growth to deter the Fed just yet.
Retail sales post second consecutive gain in May, surprising markets (TD Bank) - Retail sales rose by 0.3% month-on-month (m/m) in May, adding to the unchanged 0.4% increase posted in April and coming in ahead of the median consensus forecast for a 0.2% decline.
Retail Sales Rose 0.3% in May (First Trust Portfolios) - Retail sales beat expectations in May, rising 0.3% for the month versus a consensus expected decline of 0.2% and with ten of the thirteen major categories moving upward. The increase in May was led by surprising gains in autos and building materials. The largest decline again was at gas stations, where, due to lower seasonal prices, sales are down 20.5% from a year ago.
Don't Let a Surprise Gain in Retail Sales Make You Lose Control (Wells Fargo) - Retail sales rose 0.3% in May, powered by big gains at building material stores and at auto dealers, resulting in the first back-to-back gains of more than 0.1% since April 2022. Critically though, control group sales slowed to just 0.2%, revealing a loss of momentum in spending.
U.S. Retail Sales (May) — Consumers Still Hanging In (BMO) - U.S. retail sales rose 0.3% in May, better than expectations of a flat reading (prior month unrevised). That leaves sales up a tepid 1.6% from a year ago, but a firmer 4.0% excluding gas stations. So while spending momentum (on goods) has clearly slowed in recent months, and even more so when stacked up against 2% y/y core goods inflation, it’s not completely breaking.
US Retail sales cool in May (CIBC) - Today's release leaves control group sales up by 1.1% annualized on a three-month average basis. A slowdown in the labor market ahead should work to cool retail sales further from here, in combination with the depletion of pandemic-accumulated excess savings. That will be a key to stalling growth in the quarters ahead in order to get inflation back to target.
Building Materials Prices Fall for Second Month Straight (NAHB) - According to the latest Producer Price Index report, the prices of inputs to residential construction less energy (i.e., building materials) decreased 0.1% in May 2023 (not seasonally adjusted), following a 0.2% drop in April. The index has gained 0.3%, year-to-date, a stark contrast from the 10.2% and 4.9% YTD increases seen in 2021 and 2022, respectively.
Consumers are holding up, but the pressure is building (EY Parthenon) - Retail sales grew more than expected in May, rising 0.3% month over month (m/m) as consumers splurged on select goods such as cars and building materials and spent more at restaurants. The volume of sales rose 0.2% when accounting for the 0.1% increase in consumer prices, suggesting that consumers remain willing to spend despite higher borrowing costs and elevated prices.
Industrial Production Declined 0.2% in May (First Trust Portfolios) - Industrial production came in weaker than expected in May, posting the first decline of 2023. The biggest source of weakness in May came from utilities which fell 1.8%, but which are volatile and largely dependent on weather. Meanwhile, the mining sector was another negative contributor, posting a decline of 0.4%.
Modest Gain at Factories Offset by Production Cuts at Utilities & Mines (Wells Fargo) - Industrial production fell 0.2% in May owing to a sharp drop in utilities output and a more modest dip in mining activity which swamped a scant 0.1% gain in production in the much larger manufacturing category. Meanwhile, mixed signals from regional Fed surveys muddy the outlook.
FOMC Skips June, But Signals Hikes Not Done Yet (Wells Fargo) - As widely expected, the FOMC decided unanimously to refrain from raising rates at today's meeting. However, the Committee continued to say that "additional policy firming" may be appropriate. Furthermore, the median dot for 2023 shifted up by 50 bps. That is, most FOMC members believe that another 50 bps of tightening may be appropriate by the end of 2023. Prior to the meeting, the bond market was priced for only 25 bps of additional tightening.
US Economic Update – 16 June 2023 (NAB) - The Fed paused in June but member forecasts suggest rates will likely move higher. We now expect a 25bp hike at the July meeting, taking the Fed Funds target range to 5.25-5.50%. We expect this will be the peak although risks around this forecast remain tilted to the upside.
Europe
Why the Bank of England is unlikely to push back against lofty interest rate expectations (ING) - Markets are pricing almost six more rate hikes from here, and while we doubt the Bank of England would endorse that, we don't think it will want to push back heavily either given the recent tendency for inflation data to come in above expectations. Expect a 25 basis-point rate hike next week and only vague guidance on what's likely to come next.
Poland’s CPI is declining, but core inflation remains persistently high (ING) - Consumer price inflation in Poland eased to 13.0% year-on-year in May, but the mid-term prospects are still uncertain amid the expected economic rebound, fiscal expansion and robust growth of wages due to the tight labour market and a sizable increase in the minimum wage.
Europe | European banking: differential resilience (BBVA) - In the latest report on financial stability in the eurozone, the European Central Bank (ECB) analyzes the main vulnerabilities and risks, warns about the uncertainty in the macroeconomic and financial environment and its impact on the different economic agents.
Flash Comment Denmark - DN follows ECB and hikes 25bp (Danske Bank) - Danmarks Nationalbank followed ECB and hiked its key policy rate 25bp to 3.10%. Hence, it kept the spread to ECB's policy rate unchanged at -40bp. We look for DN to follow future rate increase from ECB 1:1 and hike its key policy rate to 3.60% in September.
Automotive industry unplugged? Accelerating car registrations and Chinese competition (Allianz) - New car registrations in Europe are accelerating but remain in the slow lane as the market consolidates. New car registrations for May were up by +17% y/y to 780,000 units. However, year-to-date registrations are still -26% below their 2019 levels. The passenger-car market share of the top three carmakers has increased to 53% this year (up from 45% in 2015) amid higher concentration (with the Herfindahl-Hirschman Index climbing by 20%). We anticipate registrations in Europe’s top five markets to bounce back by +8% in 2023.
Swedish Labour Market: New records (Nordea) - Unemployment declined further in May according to the Swedish Public Employment Services. The open unemployment rate dropped to 2.9 percent, the lowest reading on record. New vacancies broke a new all-time high, while layoffs also increased.
Swedish inflation expectations: Stability (Nordea) - Longer-term inflation expectations fell further in June, which is good news for the Riksbank.
China
China's Sluggish—Short & Long-Term—Growth Outlook (Wells Fargo) - China's post-COVID rebound has now fully matured as the latest batch of activity data reinforced a slowdown is under way across the Chinese economy. As a result, we have revised our 2023 GDP forecast lower, and now believe China's economy will grow 5.7% this year. Waning economic momentum has prompted easier monetary policy from the People's Bank of China (PBoC), and we believe further easing is imminent as authorities are likely to lower bank Reserve Requirement Ratios in Q3-2023.
China’s Economy at a Glance – June 2023 (NAB) - Overall, most of the key economic data fell short of market expectations in May – highlighting continued softness in China’s economy. In particular, subdued retail sales (when looking though the volatility) and inflation data point to ongoing weakness in domestic demand. While there has been fresh talk of stimulus via easing monetary policy and greater support for real estate, it is not clear that such measures would have a material impact on growth in the near-term. Our economic forecasts are unchanged this month – with China’s economy expanding by 5.6% in 2023, 4.5% in 2024 and 4.8% in 2025 – however the current softness highlights some downside risk in the short-term.
Canada
Canadian housing starts decline in May (TD Bank) - Canadian housing starts plunged to 202.5k annualized units in May, representing a 23% month-on-month (m/m) decline from April's elevated level. With the drop, the six-month moving average fell by 10.1k to 230.2k units.
Canadian home sales increased for fourth straight month in May (TD Bank) - Canadian existing home sales increased 5.1% month-on-month (m/m) in May, building on April's 11% m/m surge.
Cdn. Existing Home Sales, Housing Starts (May) — Spring Fling (BMO) - Housing market conditions were very firm as of May, and prices in many markets were moving notably higher. Regionally, the momentum is broad based. Existing home sales rose 5.1% in seasonally-adjusted terms in May, the fourth consecutive monthly increase. That leaves activity up 1.4% from a year ago, the first positive reading since mid-2021.
Taiwan
Taiwan economy continues to be hit by slumping exports (S&P Global) - Taiwan's export-driven economy has continued to be hit by slumping exports, which fell by 16.9% year-on-year (y/y) in the first five months of 2023. Reflecting the significant downturn in exports, Taiwan's GDP contracted by 3.0% y/y in the first quarter of 2023, following negative growth in the fourth quarter of 2022.
Commodities
Commodity prices edge slightly higher (S&P Global) - The Materials Price Index (MPI) by S&P Global Market Intelligence turned up 0.6% last week, after nine consecutive weekly declines. The increase was mixed with exactly half of the ten subcomponents rising. Despite last week's price rise the story so far in 2023 remains one of falling commodity prices with the MPI decreasing in 17 out of the last 22 weeks. The index also sits 36% below its year-ago level.
Outlook
Flash PMI for June, Fed testimony and BOE meeting in view (S&P Global) - Flash PMI for June will offer a first look into economic conditions across major developed economies while central bank meetings continue in Europe and APAC. This includes the Bank of England, Swiss National Bank, Norges Bank, Bank Indonesia and Bangko Sentral ng Pilipinas.
Central banks: How your views compare to ours (ING) - We ran a series of live polls at our recent Economics Live webinar earlier this week, and this is how the views of our listeners compare to our own.
Green
Fires show the limits of climate adaptation (DWS Group) - The economic impact of climate change is demonstrated by seeing, feeling and smelling wildfire smoke. Measuring and forecasting all their costs is a lot harder.
Crypto
Bitcoin Ordinals: An existential but valuable crisis (Saxo Bank) - Bitcoin has at no time enjoyed a thriving ecosystem of non-fungible tokens and decentralized applications, as the blockchain does not natively support such usage. That may change slowly seeing that a developer managed to support NFTs on Bitcoin in January. The latter quickly realized great traction but has pushed Bitcoin into an existential crisis, as some of its loudest supporters are against NFTs on Bitcoin.
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.