FX

Japan’s February customs-clearance trade data - goods exports lackluster

_{Posted on Mar 18, 2023}

JPY: Japan’s real exports rise 1.7% MoM in February, a slow rebound from a 3.3% MoM drop in January. Since the beginning of this year, Japan’s goods exports have been sluggish. The shift from goods to services and faltering demand for capital goods amid rising interest rates in Europe and the US may be behind this sluggish performance and with the US economy likely to enter a recession, Japan’s goods exports may face an extra headwind. Has the underlying trend of real exports weakened? — real exports increase 1.7% MoM in February after declining 3.3% MoM in January and the January-February average now stands 5.3% below the Q4’22 average. Meanwhile, real imports in February and March affected by the Chinese New Year — real imports fall 5.6% MoM in February after a 0.4% MoM advance in January. Due to the Chinese New Year, exports from Greater China fell in January and the January-February average now stands at 6.3% below the Q4 average. Going forward however, a domestic demand recovery looks likely to support an uptrend. Trade deficit narrows in February — Japan’s trade balance is ¥897.7bn in deficit before seasonal adjustments and ¥1.1907trn in deficit after adjustments in February (-¥3.4986trn and -¥1.8233trn, respectively, in January). The trade deficit after seasonal adjustment has shrunk as real exports increase while real imports decline.

Japan wage negotiations - making the case for changes to YCC (yield curve control) but not NIRP by the BoJ in April

JPY: March 15 was a key day for management disclosure of responses to spring wage hike demands at large Japanese companies. With consumer price inflation at a 40-year high, a succession of large hikes was announced. The first round of responses show a rise of 3.80% for salaries including the seniority-driven portion and 2.33% for base salaries excluding this portion - biggest since the 1990s. Focus for the macro wage outlook is breadth and size of hikes by SMEs, which account for c70% of the total. Rapid negotiations could bring forward YCC adjustments — if negotiations progress quickly at SMEs, most settlements could be clear by the fourth-round tabulation, which is likely to be published in mid-April. In that scenario, the BoJ would be more likely to base decisions regarding YCC modifications on the data available at its April 28 meeting.

JPY: But 2024 negotiations more important for BoJ’s decision on NIRP (negative interest rate policy) — Citi analysts do not expect this year’s wage negotiations to provide a basis for BoJ scrapping negative interest rates. So much of the current wage hikes comes from indexing it to 40-year high inflation, so that real wage growth will be at best zero (negative growth is more likely). The BoJ is expecting consumer price inflation of less than 2% from autumn 2023. In this scenario, unless the spring 2024 wage negotiations produce base salary increases on par with 2023 or larger, which would lead to positive real wage growth, sustained demand-led inflation looks unlikely in Japan which would make it difficult for the BoJ to exit NIRP.

University of Michigan survey suggests limited concern over financial system so far

USD: The US University of Michigan Consumer Sentiment Index released Friday, declines to 63.4 from 67.0 in the March preliminary report. Both the Current Conditions and the Expectations Index decline to 66.4 from 70.7 and 61.5 from 64.7, respectively. The median for 1Yr inflation expectations also drops to 3.8% from 4.1% while the median for 5-10Yr inflation expectations shifts down slightly to 2.8% from 2.9%. The preliminary report for March is based on answers to interviews from end of February until March 15th, which includes some of the recent period of market volatility. As such, the 3.6 point drop is not abnormally large and is roughly in line with the drop seen in the Conference Board Index during the last couple of months.

Week Ahead – FOMC, BoE and SNB board meetings

USD: FOMC meeting – Citi analysts expect a 25bp rate hike at this week’s Fed meeting to take the Fed Funds rate to 4.75-5.0%. Chair Powell is likely to emphasize inflation can be addressed through policy rates, while financial stability can be addressed through other tools. No hike might be interpreted as the Fed is aware of more problems in the banking sector than the public. Citi analysts also expect median dot for year-end 2023 to rise 25bp from 5.00-5.25 to 5.25-5.5% and 2024 dot to rise 25bp. Fed will also update its quarterly economic forecasts.

JPY: Nationwide consumer prices (Feb): Citi Forecast: 3.1% YoY, Previous: 4.3% YoY; Excluding Fresh Food: Citi Forecast: 3.0% YoY, Previous: 4.2% YoY; Excluding Fresh Food and Energy: Citi Forecast: 3.4% YoY, Previous: 3.2% YoY – Citi analysts expect nationwide core CPI measures to rise from the previous month but fall sub 2% YoY from early autumn as the impact of past rises of commodity prices and Yen depreciation diminishes.

EUR: Euro Area: fall-out from turbulences – financial market turbulences will play a role this week at the ECB Watchers conference on 22 March. Markets pricing very little further tightening could invite some hawkish pushback. A day earlier, the ZEW investor confidence index could be weak. Germany: ZEW Expectations, March: Citi Forecast 16.5, Consensus 20.0, Prior 28.1; ZEW Current Assessment, March: Citi Forecast -42.0, Consensus -50.0, Prior -45.1; Euro Area ZEW Expectations, March: Citi Forecast 15.0, Prior 29.7.

GBP: UK: BoE board meeting (could pause) and inflation data - BoE Bank Rate: Citi Forecast 4.0%, Consensus 4.25%, Prior 4.0% (hawkish pause); UK: CPI Inflation, February: Citi Forecast 10.0% YY, Consensus 9.8% YY, Prior 10.1% YY (BoE: 10.1% YY - Feb MPR): CPI Core, February: Citi Forecast 5.8% YY, Consensus 5.7% YY, Prior 5.8% YY (A little below BoE expectations).

CHF: SNB meeting – Citi analysts expect SNB to hike its policy rate by 50bps to 1.5% this week despite the turmoil surrounding the banking system. If calm returns, Citi analysts expect a terminal rate of 2.5%: SNB Policy Rate: Citi Forecast 1.50%, Consensus 1.50%, Prior 1.0%.

CAD: Canada CPI NSA MoM (Feb) – Citi: 0.5%, median: 0.6%, prior: 0.5%; CPI YoY – Citi: 5.3%, median: 5.4%, prior: 5.9% - Citi analysts expect a 0.5%MoM rise in CPI in February, although with risks tilted slightly to the upside. Key shelter prices should remain soft in line with modestly declining new home prices, although with possible further upside to shelter prices such as rents. The February CPI report will be the only inflation report ahead of the BoC’s next meeting in April where the core measures will be more important. The 3mth pace of core inflation is still running around 3-4% on an annualized basis, which notably was referred to for the first time in the March policy statement as too high. This could eventually be cited as a factor leading the BoC to adjust rates higher again.