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#Post#: 173--------------------------------------------------
Focus on Fed, but New Inputs for BOJ and ECB
By: fxvictory Date: October 29, 2014, 10:27 am
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[glow=red,2,300]Focus on Fed, but New Inputs for BOJ and
ECB[/glow]
he market is generally expecting a dovish FOMC statement. We
have argued that it will most likely be little changed, except
for modification relating to the asset purchases. Keen interest
will be on its references to inflation.
While the breakeven rates have fallen, the 5-year/5-year forward
which the Fed seems to prefer as a measures of inflation
expectations is little changed. This may be largely explained by
looking at relative liquidity. The preferred inflation measure
core PCE deflator may remain firm due to housing costs, even if
the headline measures of inflation ease due to the sharp drop in
energy prices (recall TIPS are tied to headline CPI).
The BOJ is still to meet this week. Here too the market expects
a dovish stance, and we are less sanguine. In testimony to
parliament yesterday, Kuroda showed no sign of losing
confidence. Data over the last couple of days lifts hopes that
the hit from the retail sales tax is waning. September retail
sales jumped 2.7%. This was three-times more than the Bloomberg
consensus. Earlier today, Japan reported September industrial
production rose 2.7% compared with the consensus forecast of
2.2%. It completely recoups August's 1.9% decline.
There is still more data to be reported this week, including
unemployment, overall household spending, and CPI. Yet the
reports are unlikely to change the BOJ's enthusiasm to expand
QQE. If JPY70 trillion expansion in base money supply does not
do the trick, will JPY80, or 90 or even JPY100 work? While
reasonable people can differ, it seems that the bar to that
decision is higher than many market participants seem to
believe.
What brought Japan off course, most recently, was not monetary
policy but fiscal policy--the retail sales tax hike. Fiscal
policy will be the first line of defense. This will likely take
the form of a supplemental budget. So, while the BOJ may
downgrade its growth forecasts, it is unlikely to hint through
its forecasts, or more directly with words, that is poised to
increase QQE. Instead, officials seem to suggest that they can
simply extend the duration of QQE. Some wags would claim the
Fed's third round of asset purchases was QE-Infinity. Maybe QQE
is a better candidate.
The ECB meets next week. It got more to chew on with today's Q3
Bank Lending Survey. The key take away is that the conditions of
both supply and demand for credit by households and business
continued the improvement seen in Q2. However, the improvement
was less than expected, and other details were disappointing.
For example,the slightly greater demand for credit from
businesses was not for new investment but for M&A activity.
More importantly, the geographic breakdown suggests two things.
First, that the core is doing better than the periphery. Second,
that France is part of the core. Banks for more willing to lend
in Germany and France. There was no change in Spain and Italy.
Businesses in Italy showed less demand for credit, while demand
increased in Germany and France.
There has been several reports in the press recently describing
a strained relationship between Draghi and Weidmann.
Representing all EMU members, Draghi has to navigate the ECB
between the interests of the creditors and debtors. Weidmann
thinks only of the creditors. However, one thing that they both
could share a beer over is their shared disappointment with the
EC failing to take advantage of an opportunity to increase the
incentives for France and Italy to (finally) institute real and
significant structural reforms.
Instead, the EC allowed France to adjust its initial budget
proposal by 3.6 bln euros. This savings is said to be achieved
by 1) lowering the projected debt servicing costs, 2) a lower EU
budget contribution, which reflects the dismal growth of its
national income, and 3) raising 900 mln euros by cracking down
on tax evasion.
What does this mean? In the accounting of the EU, France's
structural deficit is reduced by 0.5% rather than 0.2% of the
original proposal. It had previously agreed to a 0.8% cut.
Italy was to deliver a 0.7% cut in its structural deficit next
year. Its initial budget proposal projected only 0.1%
improvement. What it has done is to take 3.3 bln from funds set
aside for tax cuts to reduce its deficit. This largely accounts
for Italy's improved proposals allowing for a 0.3% reduction in
the structural deficit.
At the end of the week, the ECB will see the preliminary October
CPI. The headline is expected to tick up from 0.3% to 0.4%,
while the core rate is projected to be unchanged at 0.8%. The
ECB may also be relieved by the results of the Reuters poll that
found the consensus expects 175 bln euros to be borrowed in the
December offering of the TLTRO (Sept was almost 83 bln). The 1.7
bln euros of covered bonds bought last week was in line with
leaks, but was also twice as much as the pre-leak projections.
The ECB, like the BOJ, are on a path, and newest inputs are
unlikely to sway them.
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