BoJ In Focus
Risk appetite remained subdued on Tuesday with EUR losing across the board during New York hours. The German ZEW survey for economic sentiment came in slightly above expectations at -18.2 in September but the current conditions index was softer at 12.6 against a consensus of 17.7. UK August CPI inflation was in line with expectations at 0.5% m/m and 2.5% y/y; RPI inflation was slightly lower than expectations at 0.4% m/m (consensus +0.5%) and 2.9% (consensus 3.1%). Our economics team notes that despite the persistence of inflation, subdued wage inflation should encourage the MPC to expand its Asset Purchase programme once again in November. The September MPC minutes due today will probably offer further guidance on policy. Also on tap today is the BoJ’s policy decision. Our economists see greater probability of easing next month, when the BoJ releases its inflation projections, though risks that the central bank moves today are increasing. Nikkei reported that the BoJ initially intended to stand pat until next month but is now set to “discuss monetary easing” on Wednesday as weak foreign demand threatens the domestic economy. The newspaper also noted that the BoJ, if it pursues additional easing, will increase the asset purchases in the coming January–June period and eliminate the minimum bidding yield to buy long term bonds. These in theory are JPY negative but we note that the size of the Asset Purchase Programme should be increased by at least JPY10 tr to have a meaningful move higher in USDJPY. Meanwhile, data in the US surprised to the upside with the current account deficit in Q2 narrowing to 3.0% of GDP from 3.5% in Q1 and NAHB Housing market index rising to 40 in September. More crucially, sales expectations for the next six months printed in a positive territory for the first time since 2007. FOMC members Dudley and Evans were on wires on Tuesday backing the Fed’s policy decision. Evans noted that the unemployment rate will fall below 7% by the end of 2014 due to QE3. Dudley acknowledged that Fed tools “aren’t perfect” for stimulating growth and the central bank is “not out of ammunition” for more measures. Ahead today, Bernanke is scheduled to meet with the Senate Finance Committee to discuss economy and ‘fiscal cliff’. No major announcements are expected after the private meeting.
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UBS Investment Bank