Bank of Japan’s mixed messages likely a green light to tactically drive Yen towards 150 against USD

BoJ MPM review – another mixed presser from Governor Ueda

• JPY: The BoJ leaves its monetary settings unchanged at its September MPM on Friday while also keepings its forward guidance unchanged. The BOJ continues to note “extremely high uncertainty surrounding economies and financial markets at home and abroad,” (the same language as July) which makes it difficult to make sweeping policy changes. The Bank reaffirms it will continue with its daily fixed rate buying operations at 1% and add to easing without hesitation if needed but at the same time, nimbly respond to prices, economic and financial conditions.
• JPY: In an interview with the Yomiuri Shinbun on September 9, BoJ Governor Ueda had mentioned that obtaining sufficient information and data by year-end to decide on a policy change is not a zero possibility, which then led to speculation about NIRP termination by year-end. On Friday, Governor Ueda seeks to clarify those remarks by saying that had he ruled out the prospect of a policy change by year-end, that would bind policy decisions at upcoming MPMs which is something he wants to avoid.
• JPY: However, there is some conflicting messaging on inflation and FX. The BOJ notes that “inflation expectations have shown some upward movements again” (the same language as last month), but still expects in the medium term for the pace of increase in core-CPI to decelerate given the extremely high uncertainty over prices and the economy. The Bank expects cost increases from import prices to wane but says there is a need to pay attention on the FX impact of the weak Yen on prices. Of note, the BOJ mentions it is watching FX developments closely.
• JPY: Citi Research’s baseline scenario, predicated on a US recession from early 2024, continues to put the termination of YCC in October 2024 followed by an exit from NIRP in January 2025. However, Citi Research assign almost the same probability to early normalization if the US economy and Japan inflation remain resilient. In this risk scenario, the timing remains uncertain, but Citi Research expect YCC to be terminated as early as the January 2024 MPM and NIRP at the March 2024 MPM.

August nationwide CPI — persistent price pass-throughs continue

• JPY: Japan’s nationwide core CPI (excluding only fresh food) rises 3.1% YoY in August as in July, slightly overshooting consensus expectations for a 3.0% YoY rise. Similarly, core-core CPI, i.e., CPI excluding fresh food and energy, increases 4.3% YoY in August, as in July. Core CPI to fall below 3% from September — Going forward, Citi Research expect core CPI to increase 2.8% YoY in September and October. Downward pressure from energy looks likely to increase in September. Meanwhile, Citi Research revise up their core-core CPI projection modestly from the August forecast, based on persistent price pass-throughs and Yen depreciation, as well as rising crude oil prices.

August customs-clearance trade - capital goods lead to export drop

• JPY: In data released earlier last week, Japan real exports decline by -6.6% MoM in August after a 1.2% MoM increase in July. Capital goods including SPE are the main drag and the July-August average stands 0.1% above the Q2 average (+2.4% QoQ in Q2 and -3.5% QoQ in Q1). It remains to be seen if exports will start to rebound given that the global manufacturing cycle is still stagnating and Citi Research pencil in only a small QoQ increase for goods exports in Q3, envisaging a deceleration from Q2, when auto exports provided a strong boost. The plunge in capital goods exports reflects weak chip demand — capital goods exports fall -14.0% MoM in August following a 2.5% MoM advance in July, driven by SPE and chips. The Japanese government introduced stricter export controls on production equipment for leading-edge semiconductors in late July. However, the regional breakdown shows not only exports to China but also those for NIEs and ASEAN nations falling sharply.
• JPY: Real imports drop MoM as well — real imports decline -4.0% MoM in August after a 1.8% MoM advance in July. The July-August average stands 0.5% below the Q2 average (-1.5% QoQ in Q2 and -5.0% QoQ in Q1). This leaves Japan’s trade deficit flat in August — the trade balance is ¥930.5bn in deficit before seasonal adjustments and ¥555.7bn in deficit after adjustments in August (-¥66.3bn and -¥600.2bn, respectively, in July). The trade deficit after seasonal adjustment though is largely unchanged in August, reaching the lowest level since end-2021.

Euro area PMIs point to a moderate contraction in GDP, euro area consumer confidence goes into reverse

• EUR: In data released Friday, the euro area September (flash) manufacturing PMI edges down from 43.5 in August to 43.4 in September (Consensus 44.0, Citi 43.7) but the euro area PMI Services index rises from 47.9 to 48.4 (Consensus 47.6, Citi 47.0) that leaves the euro area Composite Output PMI up by 0.4 points to 47.1 (Consensus and Citi 46.5). At these levels, the PMI Composite output is consistent with a -0.2-0.3% QQ GDP contraction (Figure 5) and if it stays at this level, a slightly deeper contraction in Q4 looks likely. The PMIs also show that labor market deterioration continues gradually, with the weakest employment intentions in almost three years.
• EUR: Country wise, France’s PMIs are surprisingly weak, supporting the outlook for the French economy to shrink in Q3 even though other business sentiment surveys appear more resilient and hard data has started Q3 on a positive note. And even within the PMIs, resilient employment expectations suggest French firms are looking through the soft patch and Banque de France itself, expects a modest expansion in Q3. Meanwhile, German business sentiment improves, but arguably with ‘low quality’. The key manufacturing PMI improves only slightly, suggesting sentiment is troughing but not yet rebounding meaningfully. Services PMI rebounds more sharply to 49.8, but that is undermined by employment expectations turning contractionary for the first time since January 2023.
• EUR: Euro Area consumer confidence also goes into reverse –the EU Commission’s flash consumer confidence indicator falls from -16.0 in August to -17.8 in September (Consensus and Citi -16.5). Rising fuel prices put renewed pressure on real purchasing power, but rising borrowing costs and growing economic skepticism also appear to weigh. The ECB and the EU Commission have pinned their hopes for strengthening consumption in their respective projections last week, but the reversal suggests clear downside risks.

UK September PMIs highlight deterioration in employment outlook and UK consumer data shows trends remain soft…at best

• GBP: Data released Friday shows the UK September (flash) services PMI printing at 47.2, down from 48.6 and well below consensus expectations (Citi 49.8, Consensus 49.4) and for those previously taking heart from stronger forward looking elements of the data, Friday’s release should prompt a re-appraisal. New work declines again to 48.7, with business optimism also ticking down. Here higher rates and weak purchasing power are noted as the major influences. The big news is on the employment index which falls nearly 5 points from 51.2 to 46.4 (in services). These data and the KPMG-RECs are now singing from the same hymn sheet. The price components of the series also fall further with input prices down from 68.5 to 64.9 and output prices declining from 57.1 to 56.4. Meanwhile, the September (flash) manufacturing PMI stabilizes this month, albeit at contractionary levels. Here new orders improve a little over 3ppt in a sign of a reversing inventory cycle. However even here contraction in employment rates accelerates - with the sub index down from 46.8 to 46.3. Here though output prices increase for the first time in three months. The notable news in this overall release is the sharp drop in the employment index in both services and manufacturing. The implication is that both the KPMG-RECs and PMI data are now telling the same story - namely employment reductions (Figure 8). 
• GBP: UK August retail sales data for August shows a modest rebound after a sharp fall in July. The headline index is up by 0.4% MM, following a fall of 1.1% in August. The series excluding auto fuel also increases 0.6%, after a 1.4% fall in July. The data is notable in that the CHAPS data shows consumer services spending falling by nearly 5% MoM through August and the overall picture seems likely to remain relatively weak. Meanwhile, the UK GfK consumer confidence index for September shows some improvement, increasing from -25% to -21% (Citi -26%, Consensus -26%). These data are continuing to improve alongside a sequentially stronger picture for real household disposable income, although the level remains subdued overall. Here it is notable that the primary improvements are in the macroeconomic expectations series, which tend to be more sentiment driven although major purchases also pick up, in a sign durable spending may begin to pick up somewhat.

Week Ahead: US August Core PCE MoM, Personal Income, Durable Goods Orders, New Home Sales July S&P CoreLogic CS 20-City MoM SA, Conference Board September Consumer Confidence, Euro Area Recession Watch, September (flash) HICP, UK GDP Revisions and Savings, Italy Fiscal Update, Australia August Monthly CPI, August Retail Sales, Canada September CFIB Business Barometer, Canada July GDP by Industry MoM, Singapore CPI (%YoY) August, China Manufacturing PMI September

US: Core PCE, durable goods, housing & consumer confidence data in focus this week

• US August Core PCE MoM – Citi: 0.1%, median: 0.2%, prior: 0.2%; Core PCE YoY – Citi: 3.8%, median: 3.9%, prior: 4.2% - elements of 0.28%MoM US core CPI in August but some softer details of PPI data lead Citi Research to forecast a more modest 0.14%MoM increase in core PCE inflation. Core services prices ex-housing, which rose a solid 0.37%MoM in CPI, should rise 0.17%MoM in PCE inflation while goods prices should decline modestly as in CPI. Shelter prices should continue to slow over the coming months, but this will have less of a disinflationary impact on PCE inflation than on CPI. Meanwhile, headline PCE inflation should rise 0.4%MoM due to higher energy prices and rebound modestly to 3.4%YoY.
• US August Personal Income – Citi: 0.4%, median: 0.5%, prior: 0.2%; Personal Spending – Citi: 0.6%, median: 0.4%, prior: 0.8% - incomes should rise a solid 0.4%MoM in August, with strength largely in labor incomes. A solid 0.6% increase in retail sales data in August also leads Citi Research to expect a similar increase in total personal spending.
• US August Durable Goods Orders – Citi: -0.6%, median: -0.4%%, prior: -5.2%; Durable Goods Orders ex Trans – Citi: 0.3%, median: 0.2%, prior: 0.4%; Capital Goods Orders Non-defense ex Air – Citi: 0.0%, median: 0.1%, prior: 0.1% - durable goods orders should fall 0.6%MoM in August, reflecting a continued normalization in orders of transportation goods such as aircraft after recent strength. A continued pickup in demand for goods, as well as goods prices starting to rise again, would also be evident in a 0.3% increase in durable goods orders excluding transportation. The next durable goods report for September will likely reflect some impacts of the auto workers’ strike that began mid-way through the month.
• US July S&P CoreLogic CS 20-City MoM SA – Citi: 0.84%, median: 0.55%, prior: 0.92%; S&P CoreLogic CS 20-City YoY NSA – Citi: 0.03%, median: NA, prior: -1.17%; S&P CoreLogic CS US HPI YoY – Citi: 0.76%, median: NA, prior: -0.02% - as the supply of existing homes for sale has been constrained by high mortgage rates discouraging owners from selling, housing resale prices have picked up substantially since the spring. Citi Research expect sizable increases to continue in the coming months, with a 0.84%MoM increase in the 20-City Case Shiller index and national home prices rising on a YoY basis again in July.
• US August New Home Sales – Citi: 676k, median: 700k, prior: 714k; New Home Sales MoM – Citi: -5.4%, median: -2.0%, prior: 4.4% - new home sales should fall in August to 676k, a lower level than in the last few months but still well-above the lows in new home sales reached in mid-2022. While high rates have limited the supply of available existing homes for sale and pushed any marginal demand into new housing, high rates will still weigh on housing demand generally.
• Conference Board September Consumer Confidence – Citi: 108.0, median: 105.5, prior: 106.1 - consumer confidence measures bottomed during summer of last year and have been generally improving since then after smoothing through some volatility. Citi Research expect a modest bounce back in the Conference Board consumer confidence index in September to 108.0 from 106.1 mainly because this measure is more sensitive to employment conditions than the University of Michigan Sentiment index and initial jobless claims have continued to trend down and declined to the lowest level since January last week.

Euro area: German ifo and euro area September (flash) HICP in focus this week

• Euro Area Recession Watch – the slight improvement in the PMIs in September suggests that the euro area economy is in a moderate contraction phase, with consumer resilience offsetting weak manufacturing. In the Ifo (Monday) and ESI surveys (Thursday), Citi Research expect some evidence that manufacturing has reached a trough, but that weakness is spreading to services and thus the labor market. Euro Area money supply and credit data will likely also continue to paint a bleak picture. German Ifo Business Climate, September – Citi Forecast 85.6, Consensus 85.1, Prior 85.7; Ifo Expectations, September – Citi Forecast 83.2, Consensus 82.8, Prior 82.6; Ifo Current Assessment, September – Citi Forecast 88.0, Consensus 87.9, Prior 89.0; Euro Area Economic Confidence, September – Citi Forecast 92.5, Consensus 92.1, Prior 93.3 (95 recession).
• Eurozone September (flash) HICP – headline and core inflation rates should drop back sharply on base effects (gas spike and German train ticket in Sep22), to 4.5% and 4.8%, respectively. However, sequential growth is more interesting to gauge price pressures - energy HICP should be up again this month, by 1.3% MM, and Citi Research pencil in another gain of 0.3% (seas adj) for core HICP (0.5% MM NSA). September is usually a month with a high concentration of price changes, which should allow those sub-sectors still lagging behind in the price adjustment to hike their prices. Euro area; HICP Inflation, September – Citi Forecast 4.5% YY, Consensus 4.5% YY, Prior 5.2% YY (large base effects in energy and core); Core Inflation, September – Citi Forecast 4.8% YY, Consensus 4.8% YY, Prior 5.3% YY (core HICP +0.3% MM (SA)).
• UK: Revisions and savings — in focus for the UK this week will be the UK GDP revisions on the 29th September, and the credit data the same day. In the former case, the focus will be on the impact of the 2023 Blue Book revisions for growth in 2022, where the 1.8pp upward revision for 2020/1 will likely mean a small give back effect through 2022 as inventories were subsequently revised down. Elsewhere, the key object of interest is the income account data for Q2, where Citi Research expect the household savings rate to have fallen further to 8.3% from 8.8% in Q1 – although still well above pre-Covid levels. Also of interest here will be the data on corporate profitability, where Citi Research expect overall growth to have remained relatively subdued. Otherwise, UK credit growth for August should show mortgage approvals continuing only at a low ebb with credit conditions overall in the UK continuing to tighten. Quarterly National Accounts, GDP, Q2 – Citi Forecast 0.2% QQ, Consensus 0.2% QQ, Prior 0.1% QQ (BoE: 0.1%, possible downward revision).
• Italy fiscal update – the Italian updated stability program (DEF) will be released this week and will likely report up-revisions to the 2023 and 2024 deficit targets, from 4.5% to 5% and 3.7% to 4%, respectively. Cash funding needs also likely to be higher than reported in April. Italy updated Deficit Target, 2023 – Citi Forecast 5.0%, Consensus 8.0% (2022 - revised up from 4.5%, 2024 at 4.0% (vs 3.7%)

Commodity Bloc: Australia’s monthly CPI, retail sales and Canada’s CFIB business survey in focus this week

• Australia August Monthly CPI: Citi YoY forecast: 5.2%, Previous; 4.9% - monthly inflation likely accelerated from 0.2% in July to 0.6% in August. This would imply a yearly un-rounded reading of 5.248%, or rounded to 5.2%. Citi Research s the range for this week’s print as likely 5.1-5.5%, noting the longer tail as an upside risk to their forecast.
• Australia August Retail Sales: Citi forecast: 0.5%, Previous; 0.5% - retail sales likely expanded further in August thanks to discretionary spending on services.
• Canada CFIB Business Barometer (Sep) - the CFIB survey of businesses is the preferred monthly survey indicator in Canada, and recent data has continued to suggest easing inflationary pressures by the end of the year. Price plans among businesses, which tends to lead trends in core CPI, fell to 3.0% in the last reading for August. The BoC policy statement also cites corporate pricing behavior as a factor that will be closely watched in gauging if price pressures are returning to 2%. While this does suggest an eventually lower rate of core inflation, it may not be until early-2024 that this becomes apparent in hard data releases. Other details of the survey also suggest a loosening labor market, with a smaller share of firms indicating labor shortages, and the possibility for some slowing wage growth. These trends continuing in September CFIB data suggests similar dynamics could appear in the BoC’s Business Outlook Survey released next month ahead of the October 25 policy decision. The BoC would likely put the most weight on the BOS survey, but ultimately signs of easing inflationary pressures in survey data will need to be confirmed in hard data for the Governing Council to conclude rates are at an appropriately-restrictive level.
• Canada July GDP By Industry MoM (Jul) – Citi: -0.1%, median: NA, prior: -0.2%; GDP YoY – Citi: 0.9%, median: NA, prior: 1.1% - Citi Research expect a modest -0.1% decline in July GDP by industry, slightly softer than Statistics Canada’s initial estimate for output to be flat on the month. Citi Research expect similar 0.1%MoM declines in both goods producing industries and services industries. Weakness in July GDP would be partly due the strike of port workers in British Columbia that lasted.

Asia EM: Singapore CPI and IP, China manufacturing PMI in focus this week

• Singapore CPI (%YoY) August – Citi Forecast 4.0, Consensus 3.9, Prior 4.1; CPI (NSA, %MoM) – Citi Forecast 0.8, Prior -0.2; Core CPI (%YoY) – Citi Forecast 3.5, Consensus 3.5, Prior 3.8; Singapore Industrial Production (SA, %MoM) August – Citi Forecast -1.4, Prior 4.1; Industrial Production (%YoY) – Citi Forecast -3.4, Prior -0.9.
• China Manufacturing PMI September – Citi Forecast 50.3, Prior 49.7 – Citi Research expect China’s manufacturing PMI to return to the expansionary regime in September, extending the recovery trend. If it materializes, it would further confirm the cyclical bottom of the economy. The impact of recent policy efforts will likely gradually show up in the data. Indeed, the operating rates of heavy industries such as asphalt and cement rebounded in September.