BOJ On Higher Alert Against Yen Strength

October 28, 2010

The dollar weakened overnight, with losses of 0.9% against the kiwi, 0.7% versus sterling, 0.6% relative to the euro and Australian dollar, 0.5% against the Swiss franc and yen, and 0.4% versus the Canadian dollar.

The Bank of Japan released new quarterly forecasts, changed its meeting schedule, loosened the credit rating of corporate debt it will accept, and signaled a willingness to run a proactively accommodative monetary policy for as long as it takes to restore price stability.  Resisting yen strength remains central operative near-term goal.

  • The next Policy Board meeting will be on November 4-5, not November 15-16 as scheduled previously.  In this way, a faster response to market action after next week’s FOMC announcements will be possible.
  • Japanese real GDP growth in the current fiscal year is now projected at 2.1%, down from a forecast of 2.6% made three months ago.  Core CPI inflation is projected at negative 0.4% this fiscal year, +0.1% next fiscal year and 0.6% in the financial year to March 2013.  The BOJ report reiterated that most Board members equate price stability with core CPI inflation of around 1.0%, so the forecast does not show a return to price stability occurring for at least two more years.  The report pledged to continue a stance of virtual zero interest rates until price stability is in sight.
  • The report promised to foster lower long-term interest rates through an Asset Purchase Plan.  The 10-year JGB yield dropped 5 basis points today.
  • Various funds-supplying operations will continue to aid stabilization of financial markets.
  • Governor Shirakawa indicated a willingness to extend quantitative easing beyond the 5 trillion yen explicitly mentioned after the prior Board meeting.
  • The central bank will accept corporate bonds with a rating as low as BBB and commercial paper carrying a rating of a-2 or better.

Japanese retail sales rose only 1.2% in the year to September, about a third as much as projected as clothing sales were 8.4% lower than a year earlier.  Large-store sales fell 1.7% on year.

Stocks rose 0.8% in Australia and Taiwan, 0.4% in Indonesia, 0.3% in Sri Lanka, New Zealand and Thailand and 0.2% in Hong Kong.  Equities slid 0.3% in India, 0.6% in Pakistan, and 0.2% in China and South Korea.  In Europe, the Paris Cac and German Dax have so far gained 0.6%, and the British Ftse shows an advance of 0.8%.

British ten-year gilt yields firmed four basis points, whereas German bunds are off two basis points.

Oil and gold prices have firmed 0.3% and 0.4% to $82.20 per barrel and $1327.60 per ounce.

The Reserve Bank of New Zealand left its Official Cash Rate at 3.0% as it had done at the prior policy meeting.  Previously, it had implemented hikes of 25 bps each in June and July.  New Zealand M3 fell 2.0% on year in September.  M2 posted a drop of 5.6%, while M1 went up 2.3%.

Australia’s index of leading economic indicators rose only 0.2% in August, much less than gains of 0.6% in June and 0.8% in July.  South African on-year PPI inflation of 6.8% in September was lower than anticipated.

Euro area sentiment indices for October were released.  Overall economic sentiment printed at 104.1, up from 103.2 in September, 102.3 in August, 101.1 in July and 98.9 in June.  Industrial sentiment went up two points to zero.  Consumer confidence, service sector sentiment, and retail sentiment remained steady at minus 11, +8, and minus 1, respectively.  Construction ticked up a point but remained depressed at minus 25.  The business climate index climbed to 0.98 from 0.76 in September, 0.72 in August, 0.64 in July and 0.40 in June.

Retail purchasing manager indices in October for the euro area were also published today, with mixed results.  The French index of 45.0 was 4.9 points worse than in September and the lower score since January, while Italy’s reading climbed by 2.9 points to 48.9, best since January.  Germany’s retail PMI increased 0.9 to 50.4 after back-to-back sub-50 readings.  Euroland as a whole posted a score of 48.0, down from 48.7 in September and a recent peak of 52.4 in July.  The data point to slower growth in consumer spending this quarter than in 3Q.

German labor statistics for October were not as good as assumed.  Unemployment only slid 3K after a 37K decline in September.  The jobless rate stayed at 7.5% and ticked up a tenth to 11.7% in the old East Germany states.  Jobs went up 0.3% in the third quarter and were 0.8% higher than in 3Q09.  Such ad declined 0.2% between 3Q08 and 3Q09.

Real wholesale sales in Germany were 7.1% higher than a year earlier in the third quarter.  So far this year, such show an advance of 6.7%.

The British Nationwide house price index declined 0.7% in October, the second monthly drop since August.  On-year house price inflation fell to 1.4% from 3.1% in September, 3.9% in August, 6.6% in July and a recent high of 10.5% in the year to April.  Results from the Confederation of British Industries’ retail survey showed a fall-back to +36 in October after scores of +49 in September, +35 in August, and +33 in July.

Swedish retail sales rose 0.8% last month in volume terms and were 5.5% greater than in September 2009.  Finnish retail sales were 5.8% above their year-earlier level.

French producer prices advanced 0.3% on month and 3.9% on year in September, up from 3.1%.  The domestic component of the index also went up 0.3% on month and was 4.2% greater than in September 2009. Belgian consumer prices ticked 0.1% higher in October and recorded a 3.0% 12-month rate of rise.

Italian wages firmed 0.3% last month but posted a smaller 1.7% on-year rise than the 2.2% advance in the year to August.

Investors await weekly U.S. jobless insurance claims data, the K.C. Fed manufacturing index, and Canadian wage earnings figures.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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