-    FOMC minutes and Bernanke comments may have dampened tightening fears

-    China’s extended slowdown could feel like “hard landing” to commodity markets

-    Bank of Japan probably on hold today, but job not yet done

 

Key Market Themes

The markets will probably still be digesting the minutes of the last FOMC meeting, which will have been released on Wednesday after this Daily was written, as well as Fed Chairman Ben Bernanke’s speech on “A Century of US Central Banking”. The reactions will be determined mainly by what the media chooses to focus on, rather than a balanced assessment of what is actually new and what is not. But we suspect that there will be greater emphasis on the Fed’s stated intention to keep monetary policy loose “for a considerable time after the asset purchase program ends and the economic recovery strengthens”. Bernanke may also take the opportunity to join other Fed officials in suggesting that the recent rise in Treasury yields has gone too far.

 

In the meantime, the spotlight has fallen on the Chinese economy and on Japanese monetary policy. (See the respective country sections below.)

 

China’s weak external trade data for the month of June, released on Wednesday, simply added to the mounting evidence that demand is slowing. In particular, China’s exporters had their worst single month since the depths of the global financial crisis. Efforts to crack down on illicit cross-border capital flows may have played a large part, but the weakness was not confined to areas where over-invoicing was previously rampant.

 

The bigger picture is that China’s policymakers finally seem willing to tackle the economy’s structural imbalances. This reduces the threat of an abrupt slowdown further down the line, but it also means that growth is likely to be far weaker over the next few years than most currently anticipate. Indeed, we expect growth in China’s GDP to slow further from around 7.5% this year to 7.0% in 2014 and just 6.5% in 2015. (See our China Economics Update, “China embraces reform – and slower growth”, published on 4th July.)

 

What’s more, we expect growth in investment to ease from previous double-digit rates to just 5% in 2015. If we are right, this could still feel like a hard landing for commodity producers, even if it is not at a macro level for China as a whole. Along with ample supply, this is a key reason why we are forecasting further declines in the prices of most industrial metals, despite the prospect of an extended period of very loose monetary policy in the developed world. For example, we expect the price of copper, currently around $6,730 per tonne, to drop below $6,000 no later than the first half of 2014. (See our Commodities service for more.)

 

Elsewhere, consensus expectations of additional easing from the Bank of Japan (over and above that already announced) have faded. The Japanese central bank’s policy guidance has been much more successful in keeping yields low than that of either the Bank of England or the ECB. (As Chart 1 shows, 10-year JGB yields have been anchored below 0.9% since mid-May, even as US Treasury yields have surged.) For now at least, the pressure for further action is off, and we are not expecting any major announcements from the Policy Board meeting that concludes today.

 

Nonetheless, we still think that the Bank of Japan will have to do more at some point. There are already some tentative signs in the business and consumer surveys that the economic recovery is slowing. Inflation should surge this year and next, if only as a result of the scheduled hikes in the consumption tax (in April 2014 and October 2015) and the pass-through of yen weakness. But ample spare capacity means that underlying price pressures are likely to remain subdued and even the planned doubling of the monetary base may not be enough to raise inflation to 2% on a sustainable basis. The substantial fiscal tightening in the pipeline may still justify a further easing in monetary policy too, although the Bank of Japan will probably want to wait until the tax hikes are actually confirmed.

 

Barring some fresh financial crisis in the meantime, this suggests late October as the earliest timing for the next big move by the Bank of Japan, or, if the economic recovery still looks firm in the autumn, early in 2014 instead. Whatever the precise profile, however, the risks to Japanese monetary policy should be skewed towards further easing for the foreseeable future, even as the US Fed starts to scale back its stimulus. We therefore continue to expect the yen to weaken further against the dollar, falling to 105 by end-2013, 110 by end-2014 and 120 by end-2015. (Julian Jessop & Mark Williams)

 

What to watch for this week: North America

No major data or events scheduled for today.

 

Continental Europe

No major data or events scheduled for today.

 

UK

No major data or events scheduled for today.

 

Japan

The Bank of Japan’s two-day July meeting (which concludes today) is unlikely to result in any major policy changes. Indeed, the Board is probably much happier with recent market developments – particularly the renewed decoupling of JGB yields from those elsewhere – than its counterparts in Europe and the US. The Board will also be publishing an interim update of the GDP and inflation forecasts which were released in the April “Outlook for Economic Activity and Prices”. Some small upward revisions are possible, and it will be interesting to see whether the wide range of Board members’ forecasts for inflation in 2015 has narrowed. (For more explanation, see our Bank of Japan Watch published on Monday.) But we are not expecting any major forecast changes either.

 

Meanwhile, consumer confidence slid from 45.7 in May to 44.3 in June. (Data released on Wednesday.) This was weaker than expected, and slightly lower than the 44.5 recorded in April after the Bank of Japan’s announcement of aggressive monetary easing. Sentiment remains at relatively high levels and could pick up again in July (in good time for the Upper House elections), especially if equity prices build on their gains since the June survey was taken. Nonetheless, the Economy Watchers Survey (EWS), taken towards the end of June when the Nikkei had already recovered somewhat, also showed confidence weakening.

 

This may reflect an increasing focus on the downsides of “Abenomics”, including the planned consumption tax hikes and potentially painful labour market reforms. But for now at least, sentiment is still much better than before PM Abe was elected. (Julian Jessop)

 

China

No major data or events scheduled for today.

 

China’s trade data for June, released on Wednesday, were far worse than most had expected. Export values were 3.1% lower in June than the same month a year earlier, the weakest growth rate since October 2009. If anything, the underlying picture is worse still. Exports were weak in June last year, which should have boosted the y/y growth rate. The level of exports fell by 7.4% m/m in June in seasonally-adjusted terms. A drop of that size hasn’t been seen since January 2009.

 

Aggressive efforts to crack down on the use of trade transactions to evade capital controls may explain some of the weakness. Exports to Hong Kong and Taiwan, which were implicated in much of the apparent over-invoicing of shipments earlier this year, have continued to weaken. But exports to the rest of the world slowed too and are also now below their year-ago level. What’s more, the new export orders components of the two manufacturing PMIs are both well below 50, suggesting the weakness is real.

 

Nonetheless, China continued to run a large trade surplus in June ($27.1bn). Some commentators have cited the export figures as evidence that the renminbi is now overvalued. But this gargantuan surplus is a reminder that we shouldn’t just look at the export side of the equation, and supports our view that the renminbi is still undervalued. (Qinwei Wang)

 

Other Asia-Pacific

Although we think the Bank of Korea (BoK) will keep interest rates on hold at 2.5% today (02.00 BST), after lowering them in May, low inflation means the central bank certainly has scope to cut rates further. Economic growth picked up slightly in the first quarter, but more recent data have been downbeat. A strong recovery is unlikely so long as global demand remains weak. Overall, we have one further rate cut pencilled in for later this year, and expect monetary policy to remain loose in 2014-15.

 

Meanwhile, we expect Bank Indonesia (BI) to raise its main policy rate by 25bp to 6.25% today amid concerns over the outlook for inflation. In recent months inflation has been near the top-end of BI’s 3.5-5.5% target range and is likely to rise as high as 8% y/y in the coming months after the government pushed ahead with plans to scale back fuel subsidies. (Gareth Leather)

 

Elsewhere, we think there is very little chance that Malaysia’s central bank (BNM) will change its policy rate of 3.0% at today’s meeting (11.00 BST). The main concern for BNM is that credit growth has been running at a high rate for over two years. However, GDP growth slowed to its weakest since 2009 in Q1, and monthly data show no sign of a pick-up in Q2. Meanwhile, inflation is still very low by past standards, at just 1.8% y/y in May. Against this backdrop, we expect BNM to wait until next year before tackling credit growth.

 

Finally, the Bank of Thailand (BoT) kept its policy rate at 2.50% at its meeting on Wednesday, as widely expected. Earlier fears about excessive currency strength and capital inflows have dissipated in the wake of the emerging market sell-off in recent weeks. However, current economic conditions do not warrant monetary policy tightening any time soon. While we are pencilling in a rate hike next year as growth prospects improve, our end-2014 rate forecast of 2.75% is below the consensus of 3.0%. (Krystal Tan)

 

Other Emerging Markets

Turning to Latin America, interest rate announcements are due in Chile and Peru tonight. While the rhetoric from Chile’s central bank has become notably more dovish, a recent acceleration in inflation and consumer spending may be enough to deter a rate cut. We’re sticking to our call for 25bp of easing (to 4.75%) this month, but acknowledge that the decision is likely to be a close call. Elsewhere, the latest data from Peru offer little to suggest that a change in monetary policy is on the cards. We expect interest rates to be left at 4.25%. (Michael Henderson)

 

Key Data and Events

Thu 11th      -    Idn  Interest Rate Announcement

              -    Jpn  2014 Monetary Base Target

            00.50  Jpn  Core Machinery Orders (May)

            02.00  Kor  Interest Rate Announcement

            02.30  Aus  Employment Change (Jun)

            02.30  Aus  Unemployment Rate (Jun)

            05.01  Mly  Industrial Production (May)

            07.45  Fra  CPI (Jun)

            08.00  Slk  Wage Growth (May)

            08.00  Hun  CPI (Jun)

            08.00  Tur  Current Account (May)

            08.30  Swe  CPI (Jun)

            09.00  EZ   ECB Monthly Bulletin (Jun)

            11.00  Mly  Interest Rate Announcement

            11.00  Ire  CPI (Jun)

            13.00  Brz  Retail Sales (May)

            13.30  US   Initial Jobless Claims (6th Jul)

            13.30  US   Import Prices (Jun)

            13.30  CA   New House Prices (May)

            19.00  US   Monthly Budget Statement (Jun)

            23.00  Chl  Interest Rate Announcement

Fri 12th    00.00  Per  Interest Rate Announcement

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