Macroeconomics: The Day Ahead for 22 October

There are UK inflation and Japan Trade data to digest, but otherwise the statistical cupboard is bare today, with a smattering of ECB speakers and an as expected further 25 bps rate cut in Indonesia. The focus outside of overarching national and geopolitical themes will therefore be on corporate earnings, with Tesla the headliner, though there will be interest in the likes of Alcoa, Hilton Worldwide, IBM, Southern Copper and Canada’s Teck Resources, while Barclays and Unicredit head the run in Europe. As Takaichi takes the reins as Japan’s new Prime Minister with Satsuki Katayama as Finance Minister, some of the market assumptions about the new government policy direction may prove to be less well founded. She will, above all be focused on winning back support for the LDP, and given broad based support from most political parties for a cut in suspension of the Sales Tax on Food, and other measures to address public concerns about inflation pressures, this will likely be an early policy initiative, even if it will come with a relatively high price in fiscal terms. That said, Katayama is a veteran of the MoF, and will doubtless find ways to avoid a surge in borrowing to finance this, particularly as Takaichi has stated that her aim is to boost economic growth rather than fiscal health. Takaichi’s initial comments about the BoJ, ostensibly supporting its nominal policy independence, mark a shift from the sharp BoJ criticism she voiced, above all in response to the July 2024 rate hike. It will also be interesting to hear what Katayama said about the JPY, given that she has previously stated that she thought 120-130 vs. USD would be a more appropriate level, which implicitly would green light further BoJ rate hikes. As much as Takaichi is better aligned with the current US administration in policy and ideological terms, she has touted a need to renegotiate parts of the trade with the US, which could create tension. She has also touted moves to curb number of foreign workers, which, without further measures to increase female participation in the labour force would be a headwind given very adverse demographic trends. She has also mooted curbs on foreign visitors, though as we have previously noted record numbers of tourists have helped to counter the weak trend in domestic household consumption. The outlines of a potential JPY 13.9 Trln budget package overnight appears to focus measures to ease inflation on gas and electricity subsidies and grants to local governments, as well as boosting investment and security/defence, with the aim of passing the legislation in the current extraordinary session of parliament. The question remains about which other political parties can be enlisted to support the package, and what concessions might need to be made. Per se Japan requires continued careful attention as the new government outlines its policy priorities, which may prompt further volatility in the JPY.

** U.K. – September CPI and PPI **

– CPI came in below expectations across the board, though at 3.8% y/y headline with core at 3.5% y/y and Services at 4.7% y/y, it remains high. Food prices accounted for most of the miss, falling to 4.5% y/y against the BoE’s estimate of 5.0%; this cancelled out upward pressures from base effects in road fuel prices and airfares. Notably, the 3-mth annualised rate for headline CPI stands at a benign 1.6%. PPI was also lower than expected with a flat m/m reading on Output and a drop of -0.1% for Input, suggesting little in the way of pipeline pressures. The data will probably not be enough to assuage the MPC’s hawks from voting against a rate cut in November, but it may well be enough to bring governor Bailey down on the side of the doves.