BoJ Backs Down, While China’s Child Policy Supports NZD

After the Fed highlighted this week that December could be the most likely meeting for their first rate liftoff in nearly a decade, the Bank of Japan (BoJ) Governor Kuroda decided to stand down from further easing and keep their annual monetary base expansion at ¥80T. It was last Halloween that the BoJ sideswiped the market with an unannounced increase to its stimulus program as the economy failed to grow according to PM’s Abe’s plans. With inflation running well below the targeted +2%, they were certainly a strong possibility that the BoJ’s QE numbers would be bumped higher this month.

Today’s no action decision is not that much of a surprise, but it’s certainly counter indicative to more underperforming economic data out of Japan in the overnight session. Japanese household spending fell again in September (-0.4% vs. +1.1%e y/y), while core-CPI registered another month of negative prints (-0.1% vs. -0.2%, y/y). Kuroda defended the decision to keep policy unchanged, saying that the central bank isn’t losing credibility and that their actions so far are having the intended effects. Similar to other central bankers, the Governor indicated that the timing of reaching their inflation target depends on the price of oil.

No surprises in semi-annual report

As expected, in the BoJ’s semi-annual outlook report Japanese officials have delayed their time frame for achieving +2% inflation target by another six-months towards the latter part of 2016. In January, the BoJ’s expectation was for the goal to be realized in the fiscal year through March 2016. The new CPI baseline scenario is subject to further downside risks and it was noted that inflation could drift below projected levels if companies are reluctant to raise wages. Also noted, policy makers will maintain an easing stance until their inflation target was “well anchored” and will conduct monetary policy as appropriate. In the post press conference, Governor Kuroda repeated his view that the domestic economy was recovering “modestly” and that easing was having the intended effects but would not hesitate to take necessary actions.

With softer data and a somewhat confident BoJ it’s not a surprise that yen (¥120.47) displayed some volatility overnight. Unlike the ‘big’ dollar, which has been consolidating some of its recent gains following the “hawkish” FOMC statement mid-week. Fixed income dealers now project a +50% chance that the Fed will tighten by year-end. USD/JPY printed intraday lows (¥121.33) on speculation that that Japanese government was considering a ¥3T supplementary budget if the next GDP reading was weak. With nothing yet materialize from that rumor; yen has since managed to trade near its overnight highs on the back of the BoJ keeping its policy steady.

CNY registered its largest daily gain in a decade

China has unveiled a blueprint for its five-year plan after concluding its 13th plenum overnight. There are no specific objectives for growth; however, officials are looking for the Chinese economy to double GDP per capita by 2020 from 2010. A target like this would require economic growth in +6.5-7.0% range. Obviously, the biggest news was Chinese officials scrapping their one child policy to allow two children for all families in response to a demographic risk of an aging population. With the possibility of an additional +2m births each year, this announcement has sent dairy prices higher, which is supporting the NZD (N$0.6747), as well as baby goods companies.

……finally, stateside

Will today’s PCE indicator support the Fed’s tightening plans? The market is looking for the September core rate to rise by +0.15-0.2%. This would imply a modest downward revision to core-inflation in the combined July/August readings. A headline print there or thereabouts would keep the year over year rate steady at +1.3%. Despite the variables of the core-CPI that feed into the core-PCE being somewhat solid last month, data from the PPI were relatively weaker and is expected to be a drag on the core-PCE rate.

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