JGB Yields Rise As BOJ Board Member Calls For Policy Overhaul

Economic

Bond

Summary:

Hajime Takata called for an overhaul of ultra-easy monetary policy, strengthening market expectations that normalisation is imminent.

Japanese government bond (JGB) yields rose on Thursday after Bank of Japan (BOJ) board member Hajime Takata called for an overhaul of ultra-easy monetary policy, strengthening market expectations that normalisation is imminent.

Takata said measures that should be under consideration include an exit from yield curve control (YCC), negative interest rates and a tweak to the BOJ's commitment to keep expanding its monetary base until inflation stably exceeds 2%.

The benchmark 10-year government bond JP10YTN=JBTC rose 2 basis points (bps) to a one-week high of 0.715%.

While the JGB market has already priced in an exit from negative interest rates at the bank's March or April meeting, Thursday's remarks seemed to give further confirmation, Makoto Suzuki, senior bond strategist at Okasan Securities, said.

"The market is probably more uncertain about whether the BOJ will be able to raise its policy rate gradually this year, or if ending negative interest rates will be all they can do."

Sources familiar with the BOJ's thinking say the central bank is on track to exit from negative rates in coming months.

A majority of economists polled by Reuters this month said they believe Japan's central bank will end its super easy policy at its April meeting.

With imminent policy normalisation priced in, a sale of two-year JGBs on Thursday saw somewhat lukewarm demand, despite the yield - which moves inversely to prices - sitting at its highest in over a decade.

The auction received bids worth 3.62 times the amount sold, lower than the bid-to-cover of 3.74 at the previous auction for the bond. A lower bid-to-cover ratio suggests weaker demand.

The two-year JGB yield JP2YTN=JBTC was last up 2 bps at 0.180%, hitting its highest since May 2011 after the auction.

The five-year yield JP5YTN=JBTC sat 2.5 bps higher at 0.370%, after touching a near three-month peak of 0.380%.

The 20-year JGB yield JP20YTN=JBTC rose 1.5 bps to 1.460%, while the 30-year JGB yield JP30YTN=JBTC climbed 3 bps to 1.755%.

Source:Reuters

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ING

Economic

Disinflation continues in France, but at a slower pace than before

Consumer prices in France rose by 2.9% year-on-year in February, compared with 3.1% in January, thanks to slower YoY increases in food prices (+3.6% compared with +5.7% the previous month), manufactured goods (+0.3% compared with +0.7%) and services (+3.1% compared with +3.2% in January). Conversely, due to the end of various support mechanisms which led to a 10% rise in household electricity bills in February, energy inflation rose again to 4.4% from 1.9% in January. Inflation, according to the harmonised index which is important for the European Central Bank, stood at 3.1% in February compared with 3.4% in January. This data once again confirms our view that the ECB will only start its rate cutting cycle in June, with a total of 75bp in cuts this year.

The next part of the road to 2% inflation will be more challenging

Looking ahead, inflation should continue to normalise gradually over the next few months, but disinflation will now be very gradual and will still take time. We will probably have to wait until the end of 2024 for the national index to reach 2% inflation, and until spring 2025 for the harmonised index. On the road to 2% inflation, the easiest part of the journey has already been completed and the rest will probably be more complicated.

Inflation in services is likely to remain particularly dynamic over the next few months and will stay close to 3%. Business surveys indicate that more companies are once again planning price increases. Unlike in other European countries, household energy bills will not fall in 2024 due to the end of various government support mechanisms, which will keep energy inflation in positive territory despite the fall in gas prices seen on world markets. The prices of manufactured goods should continue to moderate and could post a negative inflation rate in the coming months against a backdrop of persistently weak global demand.

The economy is still stagnating, despite revised GDP figures

In addition, INSEE today published a new estimate of GDP figures for the fourth quarter of 2023. The data has been revised slightly upwards, with quarter-on-quarter growth of 0.1% compared with the previous estimate of 0%. Investment was even weaker than announced, falling by 0.9% over the quarter, while household consumption was slightly stronger and stagnated over the quarter. The contribution of domestic demand is therefore unchanged, while the contribution of foreign trade is revised downwards and that of inventories is revised upwards by a large margin. All in all, an analysis of the details shows that this revision of the national accounts does not change the diagnosis: France was in stagnation at the end of 2023, just as it was in the third quarter of 2023.

These new figures do not change the outlook for 2024, either. The year has clearly started with a low level of activity. The household consumption data for January also published today confirms this. Despite the upturn in confidence, household consumption of goods fell by 0.3% in volume terms in January, compared with an increase of 0.3% in December. Nevertheless, the details are better than the overall figure. The fall was mainly due to the decline in household purchases of transport equipment (-6.7% over the month, compared with +4.8% in December). Against a backdrop of tighter environmental bonus and penalty schemes, car sales fell sharply. All other categories of goods consumption rose in January, unlike in previous months.

A gradual recovery expected in 2024

Ultimately, while the first quarter is likely to see the French economy stagnate once again, we are a little more optimistic about the rest of the year. Gradual disinflation, wage increases, a still tight labour market and a recovery in consumer confidence should enable household consumption to pick up over the course of the year, supporting French growth. Investment could also pick up in the second half of the year in the wake of interest rate cuts. On the other hand, fiscal policy is becoming much more restrictive, with the announcement of a €10 billion savings plan that will weigh on public spending and investment, despite the Olympic Games scheduled for the third quarter.

After further stagnation in the first quarter, we expect growth to accelerate over the course of the year, enabling GDP to grow by an average of 0.5% over the year. For 2025, GDP growth of 1.3% is expected.

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FastBull Featured

Remarks of Officials

On February 28, local time, Boston Fed President Susan M. Collins delivered the speech as follows.

Although inflation has fallen sharply from its peak, it is still at a high level. We still have a long way to go before achieving a durable return to 2% inflation.

Despite the restrictive nature of monetary policy, economic activity has been resilient. This is mainly due to strong household consumption, which has driven economic growth and has remained strong recently. There is still room for wage growth to rise, and it may rise faster than the inflation target and productivity growth, but this does not necessarily lead to inflation. Rather, this situation may be an attempt to bridge the gap between previous productivity gains and price increases.

Goods inflation has fallen to pre-pandemic levels. I also want to see continued declines in housing inflation and non-shelter services inflation. At the same time, wage growth should be aligned with price stability, and I will continue to watch for signs of an orderly moderation in labor demand, given the importance of developments in the labor market to the wage and inflation outlook.

January's jobs report far exceeded expectations, and December's data was also revised upward. At the same time, the January CPI data was also on the high side. More confidence is needed to ensure that inflation can come down sustainably. The path to economic development is expected to be "bumpy", so it is important not to overreact to individual data readings.

It will likely become appropriate to begin easing policy later this year when methodical rate cuts would provide flexibility in risk management while furthering the Fed's dual mandate goals.

Collins’s speech

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Ukadike Micheal

Economic

Forex

Switzerland's economy defied expectations by maintaining momentum at the end of the previous year, with the gross domestic product (GDP) expanding by 0.3% in the fourth quarter. This growth, surpassing the predicted 0.1% increase, was particularly resilient in the face of challenges in the manufacturing sector, notably in chemicals and pharmaceuticals.

The State Secretariat for Economic Affairs highlighted a dip in manufacturing value added, driven by the chemical and pharmaceutical industry entering negative territory due to declining exports. However, other industrial sectors experienced growth after two negative quarters. The overall annual performance in 2023 exceeded expectations, with the Swiss economy expanding by 1.3%, compared to the anticipated 0.7%.

Despite manufacturing setbacks attributed to weak global demand and a strong franc, Switzerland has found resilience in its services sector, especially in tourism. The economy's ability to offset manufacturing challenges with growth in other sectors mirrors trends seen across European peers.

Looking ahead, economists express optimism about continued GDP growth in the coming quarters. Zurich's KOF economic research center notes increased confidence among firms regarding business trends, particularly in manufacturing. The positive outlook suggests a potential continuation of Switzerland's economic momentum.

A notable factor influencing future economic dynamics is the Swiss National Bank's expected interest rate cuts later in the year. While analysts do not anticipate a move in the upcoming March meeting, the central bank's potential actions could further shape the trajectory of Switzerland's economic performance.

From a technical viewpoint, the unexpected strength in Switzerland's GDP indicates a level of economic resilience that transcends manufacturing challenges. The ability to navigate global economic headwinds, including a strong franc, showcases the diversified nature of the Swiss economy. The positive sentiment among businesses, especially in manufacturing, aligns with broader trends seen in economic indicators.

Switzerland's economic performance at the close of 2023 defied expectations, showcasing resilience in the face of manufacturing challenges. The balanced growth across sectors, coupled with positive outlooks from businesses, positions Switzerland favorably in the global economic landscape. As the Swiss National Bank considers potential interest rate cuts, the economic trajectory of Switzerland becomes an area of interest for analysts and market participants alike.

Source: Bloomberg

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Ukadike Micheal

Economic

Forex

In February, Spanish inflation, in line with predictions, experienced a significant downturn, dropping to 2.9%, marking the first instance in six months that it has fallen below the 3% threshold, according to the country's statistics office. This development is noteworthy, as inflation figures often serve as crucial indicators of economic health and can influence various aspects of financial decision-making.

Additionally, core inflation, a metric that excludes volatile components like energy and fresh food prices to offer a more accurate reflection of underlying price pressures, mirrored the general trend by dipping from 3.6% to 3.4%. Core inflation is an essential gauge for policymakers and market analysts to discern the fundamental forces at play within the economy, providing insights into the sustained factors impacting overall price levels.

Concurrently, French inflation figures, released on the same day, displayed a less pronounced slowdown than anticipated, registering at 3.1% in February. The comparative analysis of inflation trends across Eurozone countries becomes crucial in understanding the regional economic dynamics and potential divergences in policy responses.

As the spotlight now shifts to German inflation data, expected later on the same day, and overall eurozone inflation data scheduled for release on Friday, market participants eagerly await insights into potential shifts in broader economic trends. Germany, as the largest economy in the Eurozone, often sets the tone for regional economic performance, making its inflation figures particularly impactful for market sentiments.

From a technical viewpoint, the moderation in Spanish inflation signifies a potential adjustment in consumer purchasing power and the cost of living, impacting both households and businesses. This shift can influence consumer behavior, investment decisions, and overall economic activity.

The dip in core inflation further underscores the complexity of the inflationary landscape. Understanding the driving forces behind this decline is crucial for policymakers as they formulate strategies to manage economic stability and growth. A nuanced examination of the components contributing to core inflation provides a more comprehensive understanding of the structural elements at play.

The French inflation figures, while showing a smaller-than-expected slowdown, introduce an element of divergence within the Eurozone. Variations in inflation rates among member countries can lead to variations in economic policies and responses, as each country grapples with unique challenges and opportunities.

Looking ahead, the timing of rate cuts at the European Central Bank's meeting gains heightened significance against the backdrop of these inflation figures. The central bank's decisions will likely be influenced not only by individual country metrics but also by the collective eurozone inflation data. The potential for monetary policy adjustments introduces an additional layer of complexity for investors and businesses navigating the current economic landscape.

The recent developments in Spanish and French inflation rates contribute valuable insights into the evolving economic narrative within the Eurozone. The nuanced perspectives offered by core inflation figures and the upcoming German data deepen our understanding of the intricate factors at play. As market participants await the overall eurozone inflation data, the implications for the European Central Bank's policy decisions become a focal point in navigating the dynamic landscape of inflation and its broader economic impact.

Source: Financial Times

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Samantha Luan

Economic

Forex

The Pound New Zealand Dollar (GBP/NZD) exchange rate soared on Wednesday, following a dovish interest rate decision from the Reserve Bank of New Zealand (RBNZ).

At the time of writing, GBP/NZD traded at around NZ$2.0744, a rise of just over 0.9% from Wednesday’s opening levels.

New Zealand Dollar (NZD) Slides amid Dovish RBNZ Interest Rate Decision

The New Zealand Dollar (NZD) slumped on Wednesday, following the Reserve Bank of New Zealand’s latest interest rate decision.

While the RBNZ kept interest rates unchanged at 5.5% as expected, the accompanying forward guidance had an unexpectedly dovish lean.

An excerpt from the RBNZ’s accompanying statement read: ‘The Committee remains confident that the current level of the OCR (official cash rate) is restricting demand. However, a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 percent target. The OCR needs to remain at a restrictive level for a sustained period of time to ensure this occurs.’

While the central bank further hinted that it was unlikely to cut interest rates until 2025, speculation had mounted recently that the RBNZ may have to tighten rates further.

However, Wednesday’s decision confirmed to markets that the RBNZ had now concluded its tightening cycle, which sapped sentiment towards the ‘Kiwi’ during the day’s trade.

Elsewhere, mixed levels of risk appetite exerted further pressure on the antipodean currency. As a more risk-sensitive asset, investor preference for safer options kept NZD exchange rates lowered.

Pound (GBP) Mixed amid Lack of Data

The Pound (GBP) traded in a mixed capacity on Wednesday, due to a lack of impactful macroeconomic data releases.

Furthermore, ahead of a speech from Bank of England (BoE) policymaker Catherine Mann, investors had little reason to engage with Sterling.

While Mann is considered one of the more hawkish members of the BoE’s Monetary Policy Committee, the lack of data left the Pound exposed to market dynamics.

While it was able to gain ground against the New Zealand Dollar, this was due to it slumping on the back of the RBNZ’s interest rate decision, as opposed to any strength from within the Pound itself.

Additionally, a mixed market mood further pressured the increasingly risk-sensitive Pound. As the lack of data left it exposed to risk appetite, the lack of favour for risk-intensive assets left GBP exchange rates to flounder.

Pound New Zealand Dollar (GBP/NZD) Exchange Rate Forecast: ANZ Business Confidence in Focus

Looking ahead for the New Zealand Dollar, the latest ANZ business confidence data is due to print early on Thursday. Economists forecast that confidence will have improved in February, with the index expected to increase from 36.6 to 38.

If this prints in line with forecasts, the ‘Kiwi’ may gain ground as it could show improving economic conditions. However, if accompanying analysis remains negative or sombre, the New Zealand Dollar may weaken against its peers.

Reserve Bank of New Zealand Governor Adrian Orr is due to deliver a speech on Friday. Following Wednesday’s interest rate decision, Governor Orr is likely to maintain the central bank’s dovish shift, which could weaken NZD exchange rates.

For the Pound, impactful data releases are few and far between through to the end of the week. As such, focus may be on the final manufacturing PMI.

Should the figures confirm that the UK’s manufacturing sector remains in contraction, the Pound may struggle to find its footing on Friday.

Elsewhere, risk appetite is likely to play a key role in shaping the pairing. If trading conditions improve, the more risk sensitive New Zealand Dollar may gain ground over the Pound.

Source:ExchangeRates

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Ukadike Micheal

Economic

Forex

Unexpectedly, Sweden's largest Nordic economy contracted in the final quarter of the previous year, challenging the narrative that it had successfully avoided a short-lived recession. According to Statistics Sweden, the seasonally adjusted gross domestic product (GDP) shrank by 0.1% in the three months through December, contrary to the 0.1% growth estimated by economists surveyed by Bloomberg. This unexpected contraction marks the third consecutive quarter of economic decline.

The downturn is attributed to reduced investments in intellectual property products and dwellings, along with increased service imports, according to Jessica Engdahl, the head of the statistics office. Notably, household consumption expenditure increased, breaking a streak of five quarters of decline.

Sweden's economic challenges stem from rising borrowing costs, particularly affecting households with substantial debts and short-term fixed interest rates. This situation has led to decreased spending amid slumping home prices and a sharp decline in housing construction. While weak domestic demand persists, the country's export sector benefits from a weaker krona.

From a technical perspective, the unexpected contraction in Sweden's GDP reflects the intricate interplay of various economic factors. Rising borrowing costs have a direct impact on consumer behavior, influencing spending patterns and contributing to a decline in domestic demand. The housing market dynamics, with falling prices and reduced construction activity, further amplify the economic challenges.

The resilience of Sweden's export sector, fueled by a weaker krona, provides a counterbalance to the domestic economic woes. A weaker currency makes Swedish exports more competitive in international markets, potentially bolstering the country's trade performance. However, this export-driven strength may not fully offset the broader economic downturn, as the domestic challenges have a more immediate and pronounced effect on the overall economy.

Looking ahead, the unexpected contraction in Sweden's GDP adds a layer of complexity to the economic landscape. Policymakers may need to consider a delicate balance between addressing domestic economic challenges and leveraging the strength of the export sector. Additionally, monitoring borrowing costs and their impact on household debt becomes crucial in navigating the path to economic recovery.

Sweden's unexpected economic contraction raises concerns about the broader implications for the country's economic stability. The intricate web of factors, from borrowing costs and household debt to housing market dynamics and export competitiveness, highlights the complexity of managing a modern economy. As Sweden navigates these challenges, a comprehensive approach that addresses both domestic and international factors will be essential for sustaining economic resilience and fostering long-term growth.