BoJ raise asset purchases unexpectedly
Eurozone CPI set to dominate the European session
Core PCE price index on US agenda
Happy Friday and a happy Halloween!
Global indices look set for a very strong end to the week as the Bank of Japan expanded the rate of asset purchases against most market expectations. Coming off the back of yet more weak inflation data, this move is both rational and unlikely and thus we have seen major gains globally overnight. The European session looks likely to be a lively one too, with the Eurozone CPI dominating an already busy session. European indices are expected to open higher, with the FTSE100 +62, CAC +41 and DAX +101 points.
The release of Japanese inflation data overnight was always likely to be a significant affair, bringing with it yet another indication that the Japanese are moving further rather than closer to the 2% target that Shinzo Abe said he would reach by next year. The fall to 3% means that when we strip out the effects of the April sales tax, the real rate of inflation stands at a meagre 1%. Today’s other readings failed to bring much more joy to the BoJ, with unemployment rising to 3.6% and household spending down -5.6% year-on-year. Thus the need for stimulus was a well-established and expected affair, but it was the timing of it which caught the markets offguard, with a Bloomberg survey finding only 3 of 32 economists expecting a move. A mix of big economic news, coming at a time when few market participant expect it, makes for a substantial move in the markets; on this occasion sending the Nikkei almost 700 points higher, and the USDJPY towards the strongest day since Q1 2013. That being said, the amount of asset purchases in question are not so far removed from the BoJ of old, with a new monthly rate of Y80tn ($724bn), rather than the Y60-70tn we have been so used to. That marks a 12.5-25% rise in asset purchases which to some may be seen as a bold move, but to me seem like somewhat timid in the face of a disinflationary scenario. It remains to be seen whether this will be enough for Japan or whether Kuroda will have to come back to this question once more to raise the rate of purchases further in the future.
Looking towards the European session, the main event of the day is always likely to be the Eurozone CPI reading which could pile yet more pressure upon Mario Draghi to implement further unconventional measures in the future. The falling inflation scenario has been one which dominated the past three years, slipping from 3% in Q4 2011 to the 0.3% seen in Q4 2014. This has been the core driver of ECB monetary policy over the past year or so, bringing with it all types of measures, from negative deposit rates, to TLTRO’s and ABS programmes. For the most part, the unknown impact of the TLTRO and ABS policies mean that we are highly unlikely to see the imposition of a fully blown QE programme anytime soon. However, should Eurozone CPI fall any further there would at least be more of a chance that it could happen due to the impact it would have on German opinions in particular who remain one of the biggest oppositions to such a move. For the most part, the likes of Germany are still focusing on their domestic reading, which we saw remained at 0.8% yesterday. However, with the monthly German CPI figure coming in at -0.3%, there is reason to be worried and thus any further move towards the dreaded deflation for the Eurozone number today could bring yet more hope of a full QE programme at some point down the line. That being said, with markets expecting a rise to 0.4%, we could see some sort alleviation of the pressure placed on Mario Draghi to do more for the time being.
The inflationary focus continues later in the US session, with the release of the core PCE price index; the Feds preferred measure of inflation. With many expecting to see the FOMC hold off on the first interest rate hike owing to falling CPI inflation, we would need to see a major move lower in this figure today to confirm that stance.
Published On Fri, Oct 31 2014, 06:18 GMT