FX - The Week Ahead: BoJ signals delay to its rate hike cycle but markets are already positioned for this

BoJ September monetary policy review – upward revisions to domestic consumption met by concerns about the US economy

• JPY: Friday’s BoJ September meeting sees the Bank leaving its target rate unchanged as expected though guidance from the July statement that “if the outlook for economic activity and prices presented in the Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation” is dropped. But later in the press conference, Governor Ueda reminds markets that guidance remained unchanged. The assessment of personal consumption is revised upwards but is now met by Governor Ueda’s repeated mention of uncertainty surrounding the US economy in what turns out to be a dovish leaning press conference.
   
• JPY: Governor Ueda notes several times that it is necessary to see whether the US economy will experience a softer landing or a more severe adjustment, and what the pace of Fed rate cuts would be. Therefore, while domestic economic data, including personal consumption remains in line with expectations, raising the probability of BoJ’s 2% inflation target to be met, uncertainty about the US economy could keep the BoJ more patient. That said, Ueda indicates that his base scenario about the US economy is still a soft landing, but that downside risks have risen.
   
• JPY: The likelihood of domestic economic data including the October CPI and Q3 consumer spending preventing a BoJ rate hike therefore, appears to have diminished. But renewed concerns about the US economy appears to be a signal that the BoJ’s next 25bp hike may come later in December or in Q1/Q2 2025. The domestic political situation is also in focus with this week’s LDP presidential election. According to Kyodo and Bloomberg (September 16th) polls have narrowed the likely winners down to Koizumi, Ishiba, and Takaichi with the latter more negative about BoJ's policy normalization.

Japan nationwide CPI - October service prices in focus

• JPY: Data released Friday shows Japan’s nationwide core CPI (excluding only fresh food) rising 2.8% YoY in August, up slightly from a 2.7% YoY rise in July. Core-core CPI also picks up modestly from a 1.9% YoY advance in July to a 2.0% YoY increase in August with both matching consensus expectations. In addition to individual factors, including rising rice prices and the delayed launch of new products, earlier yen depreciation likely has an impact as well.
   
• JPY: Sustained YoY service inflation in October would probably be in line with the BoJ scenario — going forward, Citi Research expect core CPI to rise 2.3% YoY in September and 2.0% YoY in October. Reflecting the resumption of government subsidies for electricity and gas bills, Citi Research expect a tentative moderation to the lower-2% YoY range from September through November. But the focus will be on October data as businesses revise prices in October. If service inflation is sustained in the month, it would be on track for the BoJ scenario. Assuming the global economy, including US, remains firm, Citi Research expect the next BoJ rate hike in December this year.

NZ Q2 GDP – an upside surprise but with a still downward trend

• NZD: NZ data released earlier last week shows Q2 GDP having declined by -0.2% though the result is a bit better than consensus for -0.4% and crucially, is stronger than RBNZ’s -0.5% forecast. Over the year, activity is down -0.5%. By key industries, primary is down -1.6%, goods producing is up +0.6% and services–which accounts for 70% of the economy–is flat. But household final consumption is up +0.4%, higher than expected but that is largely due to consumers pulling forward purchases.
   
• NZD: The NZ economy is smaller now compared to last year, with annual GDP growth contracting. Even household consumption, which surprises on the upside for the quarter, is broadly flat over the year. Indeed, aside from tax cuts, household balance sheets are expected to struggle with high interest rates. But crucially, the labor market is expected to deteriorate further which means that the resilience of the households will likely break in H2’24. Citi Research expect the NZ unemployment rate to rise to around 5.6% by year-end, which would imply significantly more stressed household balance sheets.
   
• NZD: Implications for RBNZ – the result is unlikely to shift the dial for the RBNZ. National Accounts are subject to large revisions, and the 0.4pp forecast error for Q2 is well within the bounds of some of the large revisions seen from Stat NZ in the past two years. Thus, the RBNZ will continue to focus on the outlook ahead that is likely to be dominated by the concerning labor market trend and ongoing disinflation that will likely see inflation within the RBNZ’s 1%-3% target band by year-end. With annual GDP growth contracting -0.5% in Q2, the economy is clearly struggling though the upside surprise in GDP will likely remove pressure from the RBNZ to cut by more than 25bps in its October MPR. Thus, Citi Research continue to see a 25bp cut in October, followed by a 50bps cut in November. The risks though are skewed towards a 50bp cut in October and November with a terminal rate for next year expected at 3.0%, with risks of it being even lower should the NZ unemployment rate rise more sharply.

Week Ahead:

US – Core PCE, September PMIs and consumer confidence in focus this week

• USD: US August PCE Price Index MoM – Citi: 0.1%, median: 0.1%, prior: 0.2%; PCE Price Index YoY – Citi: 2.3%, median: 2.3%, prior: 2.5%; Core PCE MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; Core PCE YoY – Citi: 2.7%, median: 2.7%, prior: 2.6% - despite a stronger 0.28%MoM increase in core CPI in August, Citi Research expect core PCE inflation to rise a much more subdued 0.18%MoM, very similar to recent increases. This would be a further encouraging sign for Fed officials that inflation is easing, and Citi Research expect similar increases over the coming months. Base effects may keep YoY rates elevated in H2 at 2.7% in August, but a continued subdued monthly pace will be the more important signal for where annual inflation is headed into 2025.
   
• USD: US August Personal Income – Citi: 0.4%, median: 0.4%, prior: 0.3%; Nominal Personal Spending – Citi: 0.3%, median: 0.3%, prior: 0.5%; Real Personal Spending – Citi: 0.2%, median: NA, prior: 0.4% - personal income should rise 0.4%MoM in August, supported by wages and salaries and rental income. After remaining flat in July, wages and salaries should increase 0.6% in August, following the 0.7% rise in private payrolls. Meanwhile, personal spending should continue to increase in August but at a more modest pace than in July. Citi Research expect nominal spending to increase by 0.3%MoM but real spending to increase by a somewhat more modest 0.2%MoM.
   
• USD: S&P US September Manufacturing PMI – Citi: 48.8, median: 48.5, prior: 47.9; S&P US Services PMI – Citi: 55.8, median: 55.2, prior: 55.7 - manufacturing diffusion indices have been in contractionary territory in recent months continuing to point to weakness in the manufacturing sector. Weakness in the S&P Manufacturing PMI in August was relatively broad-based with the main sub-indices output, new orders and employment in contraction. Hard manufacturing production data has been a bit volatile recently due to weather disruptions but on a 3m moving average production overall has been moving sideways. With rates still elevated Citi Research expect the manufacturing sector to continue to remain under pressure and expect only a modest improvement in the S&P Manufacturing PMI to 48.8 from 47.9 in the preliminary September reading. Meanwhile, the services PMI has remained in expansionary levels, but the employment detail has been weaker. Citi Research expect the services S&P PMI to be little changed at 55.8 in the September release.
   
• USD: US September Conference Board Consumer Confidence – Citi: 102.8, median: 103.5, prior: 103.3 - the Conference Board Consumer Confidence index has stayed within a relatively narrow range in recent months as the present situation index has generally been on a downtrend while the expectations index has been increasing. Consumers are increasingly expressing that jobs are harder to come by which has weighed on the present situation index. From a fundamental perspective, many indicators such as the hiring rate, job openings, the unemployment point to the labor market softening. There also does seem to be some residual seasonality with the labor market differential since in recent years it has tended to fall until October/November and then temporarily increased in December/January. Citi Research expect the Conference Board Consumer Confidence to decline very modestly to 102.8 and generally see downside risk to sentiment measures as the labor market could soften further.

Euro area and UK – Euro area and UK flash PMIs, German Ifo and jobs data, SNB and Riksbank policy meetings in focus this week

• EUR: Euro Area recession watch — the flash September PMIs (Monday), the Ifo survey (Tuesday) and the EU Commission’s Economic Sentiment Index (Friday) could paint a familiar picture. German manufacturing leads weakness (albeit this month potentially tapered by cheaper oil) but the periphery holds up well. No clear signal for the October ECB. Euro area PMI Manufacturing, September – Citi Forecast 46.5, Consensus 45.7, Prior 45.8; PMI Services, September – Citi Forecast 52.5, Consensus 52.3, Prior 52.9; PMI Composite Output, September – Citi Forecast 51.0, Consensus 50.6, Prior 51.0; Euro Area Economic Sentiment Index, September – Citi Forecast 96.3, Consensus 96.5, Prior 96.6.
   
• GBP: UK: Watching growth, but not like a hawk — the deterioration in consumer confidence last Friday backs a modest softening trend in much of the sentiment data of late. With expectations moderating back last month, Citi Research see some potential for this month’s PMI data to soften modestly – particularly on the services side. With the MPC currently still focused on residual inflationary risks, soggy activity and a softening labor market increasingly hold the key to a change in policy approach. UK: PMI Manufacturing, September – Citi Forecast 52.0, Consensus 52.2, Prior 52.5; PMI Services, September – Citi Forecast 52.9, Consensus 53.5, Prior 53.7 (modest softening).
   
• CHF: SNB: which tool to use — the pressure to cut is high for the SNB to resist. However, Citi Research expect growing discomfort as the SNB approaches accommodative territory despite robust growth and sticky domestic inflation. Therefore, Citi Research expect the SNB to use the latest stabilization in FX to pause rate cuts and soon change to interventions to manage FX. SNB Policy Rate – Citi Forecast 1.25%, Consensus 1.00%, Prior 1.25%.
   
• EUR: German unemployment — has been rising every month for more than two years, but mostly because of immigration and not lay-offs. With growing signs of stress in manufacturing, rising redundancies could be an important signal ahead of the October ECB meeting. German Ifo Business Climate, September – Citi Forecast 86.4, Consensus 86.0, Prior 86.6; Ifo Expectations, September – Citi Forecast 86.6, Consensus 86.5, Prior 86.8; Ifo Current Assessment, September – Citi Forecast 86.2, Consensus 86.1, Prior 86.5; Germany Unemployment Change, September – Citi Forecast 20k, Consensus 13.5k, Prior 2.0; Unemployment Rate, September - Citi Forecast 6.0%, Consensus 6.0%, Prior 6.0%.
   
• SEK: Sweden’s Riksbank: not if, but how fast to ease — the policy dilemma for the Riksbank has quickly turned from whether to cut the policy rate to ‘how fast’ to lower it. Citi Research expect gradualism to still prevail at this week’s meeting, with a third 25bp rate cut this year to 3.25%, but risks are skewed towards a larger move. Riksbank Policy Rate – Citi Forecast 3.25%, Consensus 3.25%, Prior 3.5% (risks are for a bolder move of 50bp cut).

Japan – Tokyo CPI in focus this week

• JPY: Tokyo core CPI to moderate to +2.1% YoY in September — Citi Research expect core CPI in Tokyo (CPI excluding fresh food) to increase 2.1% YoY in September, slowing from a 2.4% YoY rise in August. The resumption of government subsidies for electricity and gas prices will probably moderate core inflation in the month. Meanwhile, CPI excluding fresh food and energy (i.e., core-core CPI) will probably increase 1.7% YoY in September, picking up slightly from a 1.6% YoY advance in August. Earlier yen depreciation and rising materials costs will likely result in higher inflation for food and consumer durable goods.

Commodity Bloc – RBA board meeting, Canada’s CFIB price plans and GDP in focus this week

• AUD: RBA board meeting – Citi Forecast 4.35%, Consensus 4.35%, Prior 4.35% - with Australia’s labor market loosening only gradually, there is no reason for the RBA to follow the Fed and Citi Research expect no rate cuts this year and only 75bps worth of cuts next year, starting in February.
   
• AUD: Australia August monthly CPI YoY – Consensus 2.7%, Prior 3.5%; CPI Trimmed Mean YoY – Prior 3.8%
   
• CAD: Canada CFIB Business Barometer - core inflation in the last few months has eased somewhat faster than implied by the leading CFIB price plans indicator. But the CFIB is just a survey of business price plans and hard price data could diverge from these signals, but at the very least, the stickiness to price plans keeps markets aware of possible upside risks to core inflation measures in the next few months. But even if there is an upside surprise to core inflation in the next few months, it is unlikely to derail further BoC rate cuts altogether. Other details of the CFIB survey could also be important indicators of weakening activity. For instance, the gap between businesses expecting stronger performance and those expecting weaker performance is smaller than pre-pandemic. This is not a particularly encouraging signal for BoC officials needing to see activity pick-up in the second half of the year in order to close a too-wide output gap.
   
• CAD: Canada July GDP by Industry MoM (Jul) – Citi: 0.1%, median: NA, prior: 0.0%; GDP YoY – Citi: 1.4%, median: NA, prior: 1.2% - Citi Research expect a 0.1%MoM increase in July GDP by industry, slightly stronger than Statistics Canada’s estimate for flat activity on the month. Weakness should be largely concentrated in goods sectors after a pick-up in goods production in recent months. Generally, Citi Research expect a further weakening in the labor market will weigh on demand for discretionary services. The release of July GDP data, as well as any revisions to June and the preliminary estimate for August, will be more important than usual in assessing the likely outcome of the next BoC decision. BoC officials have been clear in their communication that they need to see growth pick up at least to around 2% in order to help close the output gap. Citi Research continue to think that Q3 GDP growth, even after July data, will be reasonably tracking closer to 1-2% as opposed to the BoC’s latest forecast of 2.8%.

Asia EM – Singapore August CPI in focus this week

• SGD: Singapore CPI (%YoY) August – Citi Forecast 1.9, Consensus 2.1, Prior 2.4; CPI (%MoM) – Citi Forecast 0.4, Prior -0.3; Core CPI (%YoY) – Citi Forecast 2.6, Prior 2.5 – Citi Research see core CPI edging up to 2.6% in August (and 2.7% in September). The forecasts are slightly higher than MAS’s latest forecast of 2.5% YoY in August and 2.4% in September, but which would be consistent with both MAS’s latest outlook for core to “continue on a gradual moderating trend for the rest of the quarter”, and the avoidance of further negative MoM NSA prints, and which would be consistent with a 50bps slope reduction as a risk, rather than baseline scenario. Oct-24 easing risks will increase if August core CPI continues to see negative momentum (i.e at most 2.4%), and especially if negative momentum accelerates (which would likely bring YoY readings 2.4%), and/or if domestic activity falters, as policymakers may then question whether the persistence of sequential deflation qualifies as a “fundamentally different” trajectory (vs Jan-Jul MPS projections) that reflects overly restrictive monetary policy settings.