Macroeconomics: The Day Ahead for 20 December

A busier day for statistics has German PPI to digest ahead of Canadian Retail Sales, US Housing Starts and Eurozone Consumer Confidence. But with the BoJ unexpectedly widening the trading band for the 10-yr yield target from +/25 bps to 50 bps, any other news is likely to be little more than roadkill. There are the expected no change to China’s LPR rates and the December RBA minutes to digest (notable for the fact that the RBA considered pausing rate hikes), while two of the ECB’s more hawkish national central bank governors (Kazimir and Muller) speak, with Hungary’s MNB expected to hold its key policy rate, but Morocco’s Bank Al-Maghrib is likely to play catch-up with the ECB and hike rates 50 bps. The US earnings run is modest in numerical terms, but features three bellwether stocks for their respective sectors in FedEx, General Mills and Nike. Risk sentiment remains poor, and even if the BoJ move was technical, markets would do well to consider whether fighting the Fed, ECB and BoJ at the same time is a battle worth fighting going into year-end. That is not to say that the major central banks are on the right page of the book, but rather a case of setting investing priorities to the central bank mood music, even if it sounds and looks ‘off key’.

** Japan BoJ policy meeting **

The BoJ decision to widen the YCC trading band for the 10-yr yield target is being called a ‘policy tweak’, and above all aimed at improving market functionality, which remains appalling, given the fact on many trading days benchmark (let alone off the run) JGBs have not traded, but will inevitably be seen as the thin end of the wedge. The BoJ statement stressed that it was concerned about the risk that the lack of a functioning JGB market may “have a negative impact on financial conditions”, i.e. impeding corporate bond issuance and bank lending. Per se, this suggests that this was primarily a technically, rather economically motivated adjustment. Still, the fact remains that the BoJ’s ownership of the JGB market has just moved above the 50% mark was probably also not immaterial to the decision, and given recent market chatter about policy changes after Kuroda retires at the end of Q1 2023, there is an element of ‘floating a kite’ to test market reaction. Kuroda’s press conference comments has been at pains to stress that it is ‘appropriate to continue easing policy’, that there will be no (near term) need ‘to further expand the trading band’, and that ‘today’s decision is not a rate hike’. But he also noted that if ‘ the possibility of achieving 2% price target draws near, we can discuss timing of exit’, though adding they would not ‘hesitate to ease monetary policy further if necessary’, and that ‘I don’t see the need’ for a revision of the 2013 BoJ Government joint statement.

** U.S.A. November Housing Starts **

Today’s ever volatile Housing Starts and Building Permits follow on from a record 12th consecutive fall in the leading NAHB Housing Market Index (31. vs. expected 34, prior 33), which failed to get any form of boost from lower mortgage rates, underlining that affordability will have to improve a lot more than the drop from October’s peak of 7.16% to 6.41% at the start of this month, particularly as this stood at 3.27% in mid-December 2021. Starts are seen falling a further 1.8% m/m to 1.425 Mln SAAR, with Permits also seen lower at 1.48 Mln, both of which are no worse than very long-term averages. As elsewhere in the developed world, the outlook for the housing sector remains fairly bleak given the scale of central bank rate hikes, and this may well be among the key factors that temper Fed hawkishness in coming months.