Highlights Of The Outlook For Economic Activity And Prices (July 2024)

Central Bank

Summary:

Japan's economy has recovered moderately, although some weakness has been seen in part. The year-on-year rate of increase in the CPI (all items less fresh food) has been at around 2.5 percent recently, as services prices have continued to rise moderately.Inflation expectations have risen moderately.

Japan's economy is likely to keep growing.

Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately, as well as financial conditions being accommodative.

Inflation is likely to be at around 2 percent from fiscal 2025.

The year-on-year rate of increase in the CPI is likely to be at around 2.5 percent for fiscal 2024 and then be at around 2 percent for fiscal 2025 and 2026. Meanwhile, underlying CPI inflation, which excludes temporary fluctuations, is expected to increase gradually and then be at a level that is generally consistent with the price stability target of 2 percent.

There are high uncertainties surrounding Japan's economic activity and prices.

There remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior. In addition, due attention is warranted on developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices.

The Bank will conduct monetary policy with the 2 percent target.

As for the conduct of monetary policy, while it will depend on developments in economic activity and prices as well as financial conditions going forward, if its outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

The Outlook For Economic Activity And Prices

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Economic

Central Bank

Jackson Hole to test overly dovish Fed cut bets

Following the unjustified panic triggered by the weaker-than-expected NFP report for July, investors have taken a calmer stance, thereafter, reevaluating their aggressive Fed rate cut bets as the incoming data suggested that the US economy is not faring as badly as initially feared.

That said, from penciling as many as 125bps worth of rate cuts by the end of the year at the start of last week, investors lifted their implied path only slightly. They are now expecting rates to be lowered by closer to 100bps, which remains an overly dovish bet as it means a reduction at each of the remaining decisions for 2024, including a 50bps cut.

Jackson Hole and PMIs Enter the Spotlight_1

The probability of a double cut at the upcoming meeting in September currently stands at about 25%, while such action is almost fully priced in for December. With that in mind, next week, investors will lock their gaze on the Fed's Jackson Hole Economic Symposium, which will be held on August 22-24.

The theme will be "Reassessing the Effectiveness and Transmission of Monetary Policy", suggesting that investors may have to digest a lot of commentary, not only from Fed Chair Powell and his colleagues, but from other major central bankers as well.

With inflation remaining close to 3%, it will be interesting to see whether Powell and other Fed members maintained their confidence about a downward trajectory in price pressures, and if so, how they are planning to move forward. Even if Powell repeats that the door to a September cut remains open, he is unlikely to satisfy those expecting hints about a double rate cut, which means that Treasury yields and the US dollar could still edge up.

Equity traders may be more eager to hear Powell's take on the US economy, especially after the latest turmoil. Further reassurance that the risk of a recession is not elevated may allow Wall Street to march further north, even if expectations of very low borrowing costs are scaled back.

The minutes of the latest meeting are due to be released on Wednesday, but investors may prefer to pay more attention to the Jackson Hole symposium for more updated information and signals. The preliminary S&P Global PMIs for August on Thursday may also attract attention as investors remain eager to find out how the world's largest economy is faring.

PMIs also on the front page of investors' agenda

The preliminary S&P Global PMIs from the Eurozone and the UK are also due to be released that day.

Jackson Hole and PMIs Enter the Spotlight_2

Getting the ball rolling with the Eurozone, at its latest meeting, the ECB decided to keep interest rates unchanged, and although President Lagarde did not commit to a September cut, she sounded downbeat about the Eurozone's growth outlook.

This allowed investors to nearly fully price in another 25bps reduction in September, and a set of downbeat PMIs may validate that view. That said, market participants may also dig into the minutes of the latest decision, due out the same day, for hints on how policymakers are planning to move forward.

In the UK, the Bank of England lowered interest rates on August 1 but signaled it will be ‘careful' about cutting again. This week's data revealed that the unemployment rate dropped to 4.2% from 4.4%, and that headline inflation rebounded somewhat to 2.2% y/y from 2.0%, even though the core rate slipped to 3.3% from 3.5%.

The data corroborated the BoE's view, but still, there is around a 30% chance that policymakers will opt for a back-to-back reduction on September 19. For that probability to go higher, the PMIs may need to point to a significant deterioration in business activity.

Will CPI data halt the loonie's recovery?

The Canadian CPI figures are scheduled to be released on Tuesday and the nation's retail sales on Friday. The BoC cut interest rates by 25bps at each of the last two decisions, keeping the door open for more action down the line.

Investors are convinced that the Bank will continue cutting at each of the remaining decisions of the year and a further slowdown in inflation may add credence to that view, thereby weighing on the loonie at the time of the release. Jackson Hole and PMIs Enter the Spotlight_3

Jackson Hole and PMIs Enter the Spotlight_3

However, currently, the oil-linked currency seems to be mainly driven by the rebound in oil prices, which is the result of supply concerns due to the increasing tensions in the Middle East, as well as easing demand worries as recession fears abate. Therefore, given that a dovish path is already priced in for the BoC, a further slowdown in inflation is unlikely to alter much the current outlook.

Japan's CPI inflation also on tap

Finally, during the Asian session Friday, Japan releases its own Nationwide CPI numbers for July and according to the Tokyo prints for the month, headline inflation slowed but underlying prices continued to accelerate. If this is reflected on the national prints, then the probability for another BoJ hike by the end of the year may increase.

Jackson Hole and PMIs Enter the Spotlight_4

Nevertheless, even if this translates into a stronger yen, the latest relief in investors' appetite is unlikely to allow the currency to stage a rally similar to that of the past few weeks. Interest rates in Japan remain very low compared to other major central banks, allowing some market participants to reuse the yen as a funding currency while increasing their risk exposures.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

Switzerland’s Franc rose back near its January highs against most major currencies in early August and sight deposit data released on Monday suggests this led central bank to step in with fresh sales of the currency, and large purchases of foreign counterparts to combat the move.

“The data reveals the second largest build in sight deposits since April (the rise in Mid-East tensions) and the fourth largest build since 2023. This is significant and illustrates the SNB’s concerns about the overall impact on inflation and financial conditions,” BofA Global Research strategists said on Wednesday.

The increase in sight deposits to CHF 463.1 billion, from CHF 453.9 billion, confirms that recent purchases of foreign currency have been significant and far more so than in the opening quarter when the Swiss currency weakened of its own accord, and data showed the SNB sold only around 281 million Francs.

Swiss Franc Sales from SNB, Sterling’s Yield, Bode Well for GBP/CHF_1

Above: GBP/CHF shown at daily intervals alongside USD/CHF and EUR/CHF.

Switzerland has reverted to sales of the Franc and purchases of foreign currency since December when the central bank ended roughly eighteen months of earlier interventions that had seen it buying the Franc in large quantities in order to strengthen its own currency and ward off imported inflation pressures.

Inflation has since fallen as low as 1% and been projected to remain subdued beneath 1.4% for the foreseeable future, prompting the SNB to cut interest rates in March and June, while seeking to weaken the currency. Currency trading is a well established part of the monetary policy toolkit in Switzerland.

“Our directional bias is for renewed weakness versus some of the main casualties of the recent position squeeze: lower CHF versus AUD, GBP,” BofA Global Research strategists said. “A slightly more defensive position for a weaker CHF is grind-higher trades in EUR/CHF and USD/CHF.”

The SNB’s current FX stance is potentially bullish for GBP/CHF and Sterling, which is one of the top five components of the trade-weighted Swiss exchange rate and also one of the top four holdings in the Swiss National Bank’s portfolio of official reserve assets, which is among the largest in the world.

Sterling could also benefit from its comparatively high yield offering relative to the Franc and other liquid G10 currencies, as well as the Bank of England’s continuing effort to bring down inflation in the UK. The BoE expects inflation to rise again into year-end, to around 2.75%, so might welcome a stronger currency.

GBP/CHF was already one of the two best performing pairs for Sterling over the week to Friday but BofA Global Research forecasts suggest that it’s likely to rise further, to 1.20, by year-end. EUR/CHF, meanwhile, is seen rising back to 0.9968 and USD/CHF has been tipped for a recovery to 0.89.

Swiss Franc Sales from SNB, Sterling’s Yield, Bode Well for GBP/CHF_2

Above: GBP/CHF shown at weekly intervals alongside USD/CHF and EUR/CHF.

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Cohen

Economic

Central Bank

Central bank chiefs congregate in Jackson Hole for their annual retreat, U.S. Democrats choose their presidential candidate and energy markets ricochet due to a confluence of Middle East and Russia-Ukraine tensions, while global PMIs are due.

Here's your guide to the week ahead in financial markets from Ira Iosebashvili and Lewis Krauskopf in New York, Naomi Rovnick and Nina Chestney in London, and Kevin Buckland in Tokyo.

1/ Jackson Hole

Central bankers from around the globe gather in Jackson Hole, Wyoming, from Thursday for the Fed's annual conference to chart the way forward for monetary policy. In focus this year are labour markets - a shift away from last year's inflation theme.

U.S. Fed chief Jerome Powell gets a chance to fine-tune his message before September's monetary policy meeting. Most market participants believe the Fed will begin cutting rates next month, after months of keeping them elevated to tamp down inflation.

How big the world's foremost central bank will go, and how deeply it will eventually cut, remain open questions: a spate of recent alarming economic data - including unemployment numbers - pushed investors to ramp up bets on a 50 basis point cut in September.

2/ Mixed Picture

The outlook for global growth is another piece of the puzzle. Markets are febrile and struggling to assess the economic outlook as business activity softens but inflation stays above central banks' target levels.

Purchasing managers' indexes deliver a real-time snapshot of economic activity and - with most of them out on Thursday - will provide the next set of clues. July's PMIs suggested an economic slowdown combined with persistent inflation, showing why central banks are in a bind.

U.S. manufacturing activity weakened and German numbers were surprisingly dour, indicating Europe's economic powerhouse is contracting. But manufacturers' input prices in advanced economies hit an 18-month high.

Inflation will dictate the pace and depth of future rate cuts. A repeat of July's dour PMI trends might mean monetary easing happens more slowly than markets would like.

3/ Irate Over Rates

The Bank of Japan's sudden pivot from uber-dove to ultra-hawk has put it in the firing line for lawmakers, after peppering its surprise rate hike at the end of July with hints of more to come.

One unexpected result was the steepest rout for Japanese stocks since 1987's infamous Black Monday, amid a destabilizing spike in the yen against the dollar.

Politicians set to grill BOJ Governor Kazuo Ueda and his peers on Aug. 23 will do well to remember some of their most senior figures were leaning on the central bank to help reverse the yen's exceptional weakness in the run-up to the move.

Recent macroeconomic indicators at least have been on the BOJ's side, showing a stronger-than-expected rebound in growth amid a recovery for consumption.

A potentially bigger test comes the day of the special parliamentary session, with the release of the latest consumer price figures.

4/ Democrats On Display

The U.S. presidential race heats up again with the Democrats aiming to generate fresh momentum for the candidacy of Vice President Kamala Harris at the party's convention in Chicago.

Since her late entry into the race after President Joe Biden stepped aside, Harris has galvanized Democrats and erased the lead of Republican candidate Donald Trump in some opinion polls, edging ahead of Trump in some betting markets ahead of the Nov. 5 vote.

The four-day convention kicks off on Monday with a series of high-profile Democrats expected to give speeches geared toward rallying support for Harris.

The race is tight and investors are hoping to learn more about her policy positions.

Harris has been at pains to emphasize she would never interfere in Fed independence - a view that contrasts sharply with that of the Republican nominee and former president, who said presidents should have a say on Fed decisions.

5/ Tensions

A confluence of risk factors has pushed and pulled global energy markets in recent days, and there is little sense that will abate. Concern that conflict is spreading in the Middle East and threatening supply from the region has lifted international crude prices above $80 a barrel.

At the same time, worries about the strength of demand, particularly in China, are somewhat limiting oil’s gains.

European wholesale gas prices meanwhile have been volatile, with the spectre of Russian gas supply disruption on a transit route via Ukraine amplifying Middle East concerns.

Markets are concerned that heavy fighting near the Russian town of Sudzha, where Russian gas flows into Ukraine, could result in a sudden stop to transit flows via the war-torn nation before a five-year deal with Russia's Gazprom expires. Take Five: How Deep a Cut?_5

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

S&P Global Inc.

Economic

Data Interpretation

A return to growth

Japan's economy enjoyed a strong second quarter, according to official data, which corroborate recent robust survey data. Gross domestic product rose 0.8% in the three months to June, according to initial estimates from the Cabinet Office. The expansion comes as welcome news after the official data had shown GDP contracting 0.6% in the first quarter.

The second quarter improvement had been flagged in advance by the au Jibun bank PMI survey, compiled by S&P Global, which signalled rising output in the five months to May. Although the survey's headline index covering output of goods and services indicated no change in June, the second quarter average reading was a solid 51.5 against a survey long-run average of 49.2. Any index reading above 50 signals an expansion of output.

Encouragingly, the index rebounded from 49.7 in June to 52.5 in July, indicating a solid start to the third quarter for the Japanese economy.

Gathering headwinds

Whether this recent improvement in growth can be sustained in coming months is uncertain. While positive signs were provided by new orders growth reviving in the July PMI survey, with jobs growth and future business optimism also both ticking higher, Japan's economy certainly faces near-term challenges.

First, financial market volatility has spikes in Japan in recent weeks, fuelling uncertainty among investors, borrowers and savers alike.

Second, political uncertainty has arisen after the surprise announcement that Prime Minister Kushida will not be seeking re-election.

Third, a slowing in global tradehas hit Japan's openly oriented manufacturing economy, contributing to a 29th successive monthly fall in goods exports and leaving the economy reliant on the service sector to sustain growth.

Fourth, the decline in goods exports comes despite a historical low value for the yen, which has driven up import costs. At 2.8%, inflation consequently remains elevated by historical standards for Japan.

These higher costs and currency woes have prompted a tightening of monetary policy by the Bank of Japan, which hiked interest rates in August to a post-financial crisis high of "around 0.25%". The hike came after policymakers ended Japan's negative interest rate regime back in March.

Higher interest rates are typically designed to support the currency and dampen domestic demand, which will act as additional brakes on exports and domestic spending respectively.

How Japan fares against these headwinds will be revealed by the flash PMI data, published 22nd August. The flash PMI will be eyed in particular for insights into manufacturing sector performance (notably including exports) as well as clues as to the resilience of consumer spending, and in particular that of foreign tourists, which has helped bolster the Japanese economy amid the weakness of the yen. Finally, price data will also be keenly assessed for future inflation trends.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

The Conference Board

Data Interpretation

Economic

Cooler US Activity Near-term

US economic activity is poised to decelerate, but a recession remains unlikely. US real GDP grew at a robust 2.8% quarterly annualized rate in Q2 2024, but we continue to anticipate material slowing in the second half of this year. Consumers are losing momentum, and the labor market has downshifted from the heady post-pandemic days of outsized hiring. The anticipated weakness in economic activity notwithstanding, we do not project a recession and the 2024 annual growth rate likely will be a healthy 2.4% given the better-than-expected rise in Q2 GDP growth. Growth prospects should improve in 2025 as inflation converges to 2% and the Fed cuts interest rates, which we posit will start as soon as September 2024.

Softer Asian Economic Outlook

The outlook for Asian economies is softer given downgrades to projected real GDP growth in India, South Korea, and Indonesia. Forecasts for China and Japan remain unchanged despite ongoing economic challenges.

Real GDP in China growth slowed in Q2 2024 due to weak domestic demand and the sluggish property sector. However, at the recently concluded Third Plenum meeting, the government signaled that it would intensify fiscal support and monetary easing. With overall growth at 5.0% in H1, and given our expectations for increasing government support in H2, we maintain our 2024 growth forecast at 5.0%. We expect fiscal stimulus to continue (with diminishing returns) next year, but weak domestic consumption will continue to weigh on the economy. Consequently, we maintain our 2025 real GDP forecast of 4.5%.

While India continues to be a bright spot in the global economy, we slightly lower our forecasts for 2024 and 2025. While Prime Minister Modi was reelected earlier this year his party’s command of parliament was eroded. Modi’s BJP Party must now work with political allies to push through new budgets and reforms, which will likely curb potential economic growth. Despite the downgrade, India remains one the fastest growing economies in the world. We forecast growth of 6.8% in 2024 and 6.2% in 2025.

For Japan, we maintain our current GDP forecasts of 0.1% in 2024 and 1.3% in 2025 but acknowledge that downgrades may be warranted in next month’s update. Japan made headlines in early August when its stock market collapsed. Triggered by an interest rate hike by the Bank of Japan and concerns about US labor market data (see our assessment here), the Nikkei fell more than 12% on August 5. Although markets subsequently recovered, the event may have damaged consumer and business confidence. Additional data are needed to determine the effects of the financial market meltdown.

2024 forecasts for Indonesia, South Korea, and Taiwan were all slightly downgraded this month. The somewhat lower projects reflect smaller-than-anticipated growth rates in the first half of 2024. Still, the outlooks for these economies for 2025 remain positive.

Unchanged European Growth Outlook

We maintain our Euro Area forecasts of 0.8% for 2024 and 1.3% for 2025. GDP data in Europe has come in largely as expected over the past month. August holidays are underway and political and business developments have been limited or are expected to have minimal impact on near-term growth.

Mixed Emerging Market Outlook

Our 2024 forecast for Latin America inched down by 0.2 percentage point to 1.3%, while the 2025 estimate was unchanged at 2.7%. The downgrade reflected softer-than-expected growth in Mexico in the second quarter of the year. However, the incoming administration is expected to enjoy a strong majority in Congress that should enable it to implement fiscal policy without much resistance. We forecast that the Mexican economy will expand by 1.6% in 2024 and 2.9% in 2025.

Growth projections for the Middle East & North Africa were downgraded in both 2024 (3.4%) and 2025 (4.0%). This was largely due to weak real GDP growth in Saudi Arabia in the first half of the year. We expect year-on-year growth in the country to emerge from negative territory in Q3 2024, but the momentum moving into 2025 will be more muted than previously forecasted.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Thomas

Economic

China has emerged as the sixth largest investor in Vietnam, with new projects surging sevenfold, reported the Ministry of Planning and Investment's Foreign Investment Agency.

A prime example is the interest shown by Goldwind, a global leader in wind turbine manufacturing, in establishing a state-of-the-art wind turbine component manufacturing and assembly plant in the northern port city of Hai Phong. With over 47,000 turbines supplied and a total installed capacity exceeding 97 GW, Goldwind's interest signals a significant boost for Vietnam's renewable energy sector.

The recent Hai Phong investment promotion conference in China's Shenzhen city saw the awarding of seven new and expanded investment certificates to Chinese investors, totaling nearly 200 million USD. These investments span a range of industries, including solar panel production, electronic components, and automotive parts manufacturing. Additionally, the Hai Phong Economic Zone Authority (HEZA) also signed four memoranda of understanding with major Chinese investors.

Minister of Planning and Investment Nguyen Chi Dung highlighted a positive shift in Chinese investment toward hi-tech and green energy sectors, such as technology, electronics, manufacturing, infrastructure, renewable energy, and electric vehicles. This marks a departure from traditional investments in labour-intensive industries like furniture, steel, and apparel

Notable projects from Chinese giants such as Goertek, BYD, Radian, Brotex, Wingtech, Deli, and Trina Solar have already established their presence in Vietnam, with investments ranging from millions to billions of USD.

Beyond investment, China remains Vietnam's largest market for agricultural products. According to the General Department of Vietnam Customs, two-way trade exceeded 100 billion USD for the first time in 2018 and soared to 171.2 billion USD in 2023, accounting for over 25% of Vietnam's total export-import turnover.

As many as 11 types of Vietnamese fruit, including mango, dragon fruit, and durian, are among the top exports to China, said General Secretary of the Vietnam Fruit and Vegetable Association Dang Phuc Nguyen.

Prof. Nguyen Mai, Chairman of the Association of Foreign Invested Enterprises (VAFIE), attributed Vietnam's appeal to its favourable geographic location, relatively low labour costs, affordable land rentals, and tax incentives. The availability of locally produced raw materials, which can be exported with added value, also further enhances Vietnam's attractiveness to Chinese investors, he said.