Many Data to Absorb Plus Bank of Japan Finally Modifies Yield Curve Control Parameters
July 28, 2023
At this month’s scheduled Board meeting, Bank of Japan policymakers sent a mixed message, on the one hand stressing “the Bank needs to patiently continue with monetary easing under Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control” but also at last tweaking the rules surrounding its long-term interest rate target with the assertion that “, it is appropriate for the Bank to enhance the sustainability of monetary easing under the current framework by conducting yield curve control with greater flexibility and nimbly responding to both upside and downside risks to Japan’s economic activity and prices.” The short and long term rat targets continue at-0.1% and around zero percent but
The Bank will continue to allow 10-year JGB yields to fluctuate in the range of around
plus and minus 0.5 percentage points from the target level, while it will conduct yield
curve control with greater flexibility, regarding the upper and lower bounds of the range
as references, not as rigid limits, in its market operations. The Bank will offer to
purchase 10-year JGBs at 1.0 percent every business day through fixed-rate purchase
operations, unless it is highly likely that no bids will be submitted.
On this day when Tokyo CPI inflation (excluding both fresh food and energy) printed for July at 4.0%, highest since April 1982, the BOJ statement was accompanied by publication of the quarterly Outlook for Activity Growth and Prices with a sharply increased core inflation rate this fiscal year of 2.5% versus forecasts of 1.8% in April and 1.6% made in both January and last October. In response, today’s 10-year JGB yield shot up as high at 0.58 before settling back to 0.54% at the close, up 11 basis points from Thursday’s level. The Japanese Nikkei close down 0.4%, and the yen ranged widely overnight between 138.06/USD and 141.08 but on balance only firmed 0.1%.
Against other currencies today, the dollar has so far dropped 0.6% against sterling, 0.2% vis-a-vis the Chinese renminbi, and 0.3% versus the euro but risen 0.6% relative to the Australian dollar. The 10-year U.S. Treasury yield has fallen five basis points and settled back below the 4.0% threshold. Fiscal stimulus hopes lifted equities by 1.8% in China and 1.4% in Hong Kong. U.S. stock futures are up somewhat, and European stock markets are little changed.
Second-quarter GDP was reported in many economies. German GDP failed to expand four the fourth time in five quarters, remaining flat in 2Q after dips of 0.1% in 1Q and 0.4% in the final quarter of last year. German GDP in the first half of 2023 was 0.2% below the year-earlier level.
French GDP, on the other hand, rose 0.5% versus 1Q, but the year-on-year growth rate remained at just 0.9%. Spanish GDP climbed 0.4% on quarter and 1.8% on year, which was the slowest year-on-year pace in nine quarters.
Swedish GDP plunged 1.5% on quarter, more than twice as fast as was expected, and also posted the biggest on-year contraction (-2.4%) in three years.
Austrian GDP fell 0.4% on quarter and 0.3% on year. Latvian GDP sank 0.6% on quarter and 0.9% on year. Belgian GDP rose 0.2%, half the quarterly pace seen in the first quarter, and just 0.9% compared to the second quarter of 2022.
Among price data reported today,
- Inflation according to the U.S. core personal consumption price deflator dropped half a percentage point in June to 4.1%, breaking a logjam at 4.6-4.7% earlier this year. The overall PCE price deflator printed at a 3.0% 12-month rate of increase, down from 3.8% in May and 5.0% in February.
- German CPI inflation of 6.2% in July matched market expectations and was down from 6.4% in June and 8.8% last October-November. Core CPI inflation slowed 0.3 percentage points to 5.5% this month.
- French CPI inflation slowed to a 17-month low of 4.3% this month, while PPI inflation of 3.0% in June was France’s 28-month low.
- Italian producer prices slid 0.3% on month in June and posted their greatest 12-month decline (5.5%) in 165 months.
- Australian producer price inflation decelerated a full percentage point to 3.9% in 2Q from 4.9% in 1Q and a record high of 6.4% in the final quarter of 2022.
Economic sentiment in the euro area deteriorated to a 9-month low in July, but a 93-month low in inflation expectations was a silver lining. Sentiment dropped to a 35-month low in the industrial sector and an 8-month low in services. The consumer confidence reading of minus 15.1 matched the preliminary estimate.
Retail sales in June compared to a year earlier rose 1.8% in Switzerland, fell 4.4% in Sweden, and rose 2.0% in Denmark. The Swiss leaders indicator improved in July to a 3-month high. Spanish business confidence weakened to a 35-month low this month, but Portuguese consumer confidence improved to a 16-month high.
U.S. personal income grew at a slower 0.3% in June, but personal consumption growth accelerated 0.3 percentage points to 0.5%.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Euroland economic sentiment, German and French CPI, U.S. personal income and spending
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