Japan’s technical recession is no bar for the BoJ to commence tightening financial conditions

Japan Q4 GDP first estimate—domestic demand suppressed by inflationary pressures

• JPY: In data released last Thursday, Japan’s Q4’23 real GDP (first estimate) unexpectedly contracts -0.4% QoQ annualized, well below consensus projections for +1.1% QoQ annualized. This marks a second consecutive quarter of negative growth, meeting the definition of a technical recession. Contributions of domestic demand to the QoQ annualized GDP growth rate is -1.1ppt as rising inflation continues to weigh on consumer spending. However, the BoJ does not appear to be too concerned about the recent weakness of private consumption, saying that strong wage hikes this spring would likely improve the household income environment going forward.
   
• JPY: Citi Research expect Japan’s GDP may well decrease for a third consecutive quarter and currently expect Q1’24 GDP to decline -0.2% QoQ annualized, i.e., a third consecutive quarter of negative growth. While the Noto peninsula earthquake looks likely to have a limited impact, an expected drop-off in large deals in services exports as well as the impact of an auto production halt at a key automaker in the US will probably weigh on private consumption, business investment, and exports.

Week Ahead:

US - FOMC minutes and February (preliminary) S&P PMIs in focus this week

• USD: Minutes from the January FOMC meeting, out Wednesday, should reveal more of the discussion around what kind of signs Fed officials need to see to be more convinced that inflation is slowing sustainably to 2%. The majority of Fed officials likely expressed that March could be too soon for a policy rate cut which would be consistent with what has been heard from Fed officials since the meeting. More interesting should be the discussion around the balance sheet reduction process. With liquidity still above ample, the Minutes may mention that most Fed officials do not see a need to imminently change balance sheet policy but that it might be appropriate to slow down the pace of run off at some point this year as reverse repo balances have continued to decline. However, more specific details will likely be discussed at the March meeting.
   
• USD: US February (preliminary) S&P US Manufacturing PMI – Citi: 51.0, median: 50.1, prior: 50.7; S&P US Services PMI – Citi: 52.0, median: 52.0, prior: 52.5 - manufacturing diffusion indices have been improving somewhat in recent months with the Manufacturing PMI slightly in expansionary territory in January. Other manufacturing data such as manufacturing production has remained weaker declining by 0.5%MoM in January although partly driven by weather issues. Citi Research expect some further modest improvement in the S&P Manufacturing PMI to 51.0 in the February preliminary report but part of the strength is likely driven by longer lead times likely due to supply chain disruptions in the Middle East. Meanwhile, services diffusion indices have remained in expansionary territory and services consumption has continued to grow in real terms. Citi Research expect services consumption to continue to remain supported in the near term as long as the labor market holds up and expect PMI Services to decline modestly to 52.0 from 52.5, which would point to a slightly slower pace of growth in services activity.

Euro area and UK – February flash PMIs and ECB inflation expectations in focus this week

• EUR: Euro area February (flash) PMIs – Manufacturing PMI – Consensus 47.0, Prior 46.6; Services PMI – Consensus 48.8, Prior 48.4; Composite PMI – Consensus 48.5, Prior 47.9
   
• EUR: ECB January CPI expectations – 1Yr CPI expectations – Prior 3.2%; 3Yr CPI expectations – Prior 2.5%
   
• GBP: UK February (flash) PMIs – Manufacturing PMI – Consensus 47.5, Prior 47.0; Services PMI – Consensus 54.5, Prior 54.3; Composite PMI – Consensus 53.0, Prior 52.9

Japan – Private sector core machinery orders and customs-clearance trade balance in focus this week

• JPY: Citi Research pencil in a 2.4% MoM increase for private-sector core machinery orders in December — private-sector machinery orders excluding ships and power plants (private core orders) likely increased 2.4% MoM in December after a 4.9% MoM fall in November, leading to a 1.1% QoQ decline in the fourth quarter for a third consecutive quarterly fall (-1.8% QoQ in Q3). With global manufacturing activity continuing to mark time, orders from manufacturers probably rebounded only moderately from the November drop. Meanwhile, inbound demand and recovering movement of people likely supported a continued rebound in orders from non-manufactures.
   
• JPY: Japan customs-clearance trade balance likely turned positive in January — the customs-clearance trade balance likely came to a ¥1.4080trn deficit before seasonal adjustment and a ¥431.5bn surplus after it in January (+68.9bn and -¥412.7bn, respectively in December). Based on the flash data for the first twenty days of January there seems to have been a particularly large drop in imports, although exports decreased as well. Therefore, the trade balance is likely to turn positive on a seasonally-adjusted basis.

Commodity Bloc - Australia’s Q4 wage price index, NZ Q4 ex-inflation retail trade, Canada CPI and retail sales in focus this week

• AUD: Australia Q4 Wage Price Index - Citi QoQ forecast; 1.1%, Previous; 1.3%; Citi YoY forecast; 4.3%, Previous; 4.0% - while not as strong as the record 1.3% increase recorded in Q3, Citi Research’s 1.1% forecast for Q4 is well above the average post pandemic growth rate of 0.7%. This is because the labor market remains tight. Citi Research expect wage pressure to remain from some private sector employers negotiating individual contracts while enterprise agreements lodged with the Fair Work Commission showed a small increase in negotiated wage gains compared to Q3. In yearly terms, wage costs are likely to increase from 4.0% to 4.3%, but Q4 should mark the high point for yearly growth. Citi Research’s yearly forecast is higher than the RBA’s 4.1% forecast but the risk to Citi’s forecast is probably to the downside.
   
• NZD: NZ Q4 Ex-Inflation Retail Trade - Citi QoQ forecast; -0.3%, Previous; 0.0% - in nominal terms, the value of electronic card transactions fell by 0.5% in Q4. With higher prices for retail items in the quarter excluding food, household appliances and furniture, Citi Research expect a small positive retail trade deflator that would reduce the volume of retail expenditure. Going the other way, the QSBO reported some retailers experiencing increased sales over the quarter. On balance, real retail trade is likely to decline by 0.3% in Q4 but there is the potential for a surprise result. The RBNZ doesn’t forecast retail trade, but on Citi’s forecast for Q4, a flat result is likely on total household consumption. This would be stronger than the RBNZ’s -0.4% Q4 household consumption forecast from November 2023.
   
• CAD: Canada January CPI NSA MoM (Jan) – Citi: 0.5%, median: 0.4%, prior: -0.3%; CPI YoY – Citi: 3.4%, median: 3.2%, prior: 3.4% - Citi Research expect a 0.5%MoM increase in headline CPI in January with the YoY reading remaining at 3.4%. Shelter prices are expected to remain strong, though some recent comments from BoC officials have been interpreted as looking through strength in shelter inflation. While officials may be unlikely to raise rates again due to shelter inflation alone, the path of shelter inflation will still likely be a very important consideration in setting policy. The path of the core inflation measures will remain the most important element of monthly inflation reports. The 3-month average annualized pace of CPI-median and CPI-trim will likely remain elevated in January as a weaker reading from October drops out of the 3-month calculation. And the preferred leading indicators of core inflation like the CFIB price plans survey still suggests that 3-month core could drop closer to 2.5% by mid-year, but currently, BoC officials would need at least a few months of 3-month core inflation around 2.5% to feel comfortable lowering rates.
   
• CAD: Canada Retail Sales (December) – Citi: 1.4%, median: 0.8%, prior: -0.2%; Retail Sales ex Auto- Citi: 1.3%, median: 0.6%, prior: -0.5% - Citi Research expect a notable 1.4%MoM increase in retail sales in December, partly reflecting somewhat stronger goods prices but still with a strong ~0.8% increase in real retail sales. This would be stronger than Statistics Canada’s estimate for a 0.8% increase in nominal sales. A strong increase in retail sales in December would suggest that real goods consumption will rise again in Q4. This would be one factor supporting tracking of Q4 GDP growth closer to 1% than the BoC’s latest estimate for flat growth.

Asia EM - China LPR and Singapore CPI in focus this week

• CNH: China 1-Yr Loan Prime Rate (%) – Citi Forecast 3.45, Consensus 3.43, Prior 3.45; 5-Yr Loan Prime Rate (%) – Citi Forecast 4.05, Consensus 4.15, Prior 4.20 – the State Council meeting on January 22 appears to be a policy put. Given reactive policy style so far, it might take worsening economic data and/or market performance to trigger more action. With already low expectations on the economic front, policy responses could be more important than the sparse data points. Specifically, Citi Research pencil in an asymmetric LPR reduction on February 20, with 15bps cut at the 5yr tenor and no change at the 1yr, following the bigger-than-expected RRR cut. The team also expects PSL operations to continue in the first 2 months, up to RMB150bn, before the new quota is approved for 2024. Discussion on fiscal policy could also heat up in the run-up to the NPC, and the latter could be a real test for policy pivot.
   
• SGD: Singapore CPI (%YoY) January – Citi Forecast 3.9, Prior 3.7; CPI (%MoM) – Citi Forecast 0.3, Prior 0.4; Core CPI (%YoY) – Citi Forecast 3.4, Prior 3.3 – Citi Research assume 75% pass through of GST hike in January, except in food services, where a full pass through is assumed, and raw food, where there is likely limited pass through on absorption of the GST hike by some supermarkets. Citi Research also incorporate spillover of public transport fare hikes in late December, while electricity and gas tariffs also rising 3-4% on higher carbon taxes. A source of uncertainty is the extent of GST pass through or degree to which GST related cost increases were front loaded in December.