Inflation in Japan Surprises to the Topside

In focus today

In the euro area, we look out for the January monetary aggregates and lending data. We focus on the lending data as there have recently been signs of a rebound in loan growth and the credit impulse. A rebound in the credit impulse will be key for the euro area growth outlook in 2024.

In Hungary the central bank will announce its policy rate. The market consensus is a rate cut of 100bps from 10.0% to 9.0%.

Overnight the Reserve Bank of New Zealand will announce its cash rate decision. We expect an unchanged rate decision, but markets are pricing in a 25% chance of an additional rate hike – 9 months after the latest one.

In the US the republican primary elections head to Michigan.

Economic and market news

What happened over night

In Japan core CPI rose 2.0% y/y in January (cons.: 1.9%, prior: 2.3%). It marked the 22nd straight month in which inflation matched or exceeded the Bank of Japan’s target. Core CPI excludes fresh food. Stripping away both fresh food and energy, CPI rose 3.5% y/y in January (cons.: 3.3%, prior: 3.7%). Hence, the release supports the case for the BoJ to end its negative interest rate policy. The next key release to look for in Japan is the first tally of the spring wage negotiations set to be released on 15 March. It will likely provide pivotal clues about whether Japan will experience another year with significant broad-based wage increases. Our base case remains that the BoJ will exit its yield curve control and end its negative interest rate policy at the April meeting.

What happened yesterday

Sweden cleared the final hurdle to join NATO after the Hungarian parliament as the last member state approved Sweden’s accession to the defence alliance.

ECB’s Stournaras sounded relatively hawkish on monetary policy. He said that he expects the first rate cut to be in June, but that he does not think the ECB should wait longer than that. He also said that any monetary policy adjustments must be gradual and that he is against abrupt changes in monetary policy. The hawkish tone is surprising since Stournaras is known to be one of the most dovish members of the ECB.

In the US we also heard some hawkish tones from Fed’s Schmid who remained focused on the threat of high inflation and therefore is in no rush to lower interest rates. This is in line with other Fed members who have the over past few weeks have spoken about keeping policy rates at the current level until they are more confident that inflation is heading towards the 2% target.

The US Congress is under pressure to move forward on spending bills to avoid a partial government shutdown in five days. Nevertheless, a group of conservative hardliners in the House have repeatedly blocked legislation. In the Senate, the republican leader McConnell said that the republicans in the Senate are not going to shut down the government, but he does not control the members of the House.

Regarding the Israel-Hamas conflict, US president Biden said that he hopes for a ceasefire to start by next Monday as the parties seem to be nearing each other in a deal in negotiations in Qatar. Early Tuesday Biden said that Israel had agreed not to engage in military activity during the Ramadan.

Equities: Global equities were lower yesterday in an uneventful session with no major macro news to set the direction. Despite equities being lower we still saw cyclicals outperforming led by consumer discretionary, tech and industrials. It is worth nothing that small caps were doing good and hence there are no signs of negative shift in sentiment but rather some wait-and-see mode ahead of bigger macro events later this week. In US yesterday, Dow -0.2%, S&P 500 -0.4%, Nasdaq -0.1% and Russell 2000 +0.6%. Asian markets are mixed this morning with Chinese A-shares outperforming. Futures are lower in both Europe and US.

FI: Global bond yields rose on Monday ahead of European inflation data as well as comments from Federal Reserve members and mixed demand at yesterday’s record-size auction of 5Y US Treasuries. The US treasury sold USD 64bn in the 5y benchmark yesterday with a bid-to-cover of 2.4 relative to 2.3 at the previous auction. Furthermore, the US Treasury also sold USD 63bn in the 2Y segment. 10Y US treasuries rose some 3bp, while the 10Y German government bond yields increased some 7bp.

FX: Yesterday’s session marked a rather quiet start to the week. Generally, pro-cyclical currencies are still benefiting from the aftermath of last week’s rally in global equities, favouring scandies, EUR, and GBP, while the USD trades on the back foot, causing EUR/USD to consolidate in the 1.08-1.09 range. A stronger-than-expected Japan January CPI print added some support to the JPY. Overnight, we expect an unchanged rate decision from the Reserve Bank of New Zealand (RBNZ).