Global Economic Headlines (12/4/18)

• FOMC minutes show that policymakers all saw strengthening economy, inflation
• Bank of Japan’s Kuroda offers upbeat view on prices, keeps pledge on easy policy
• China says it will fight back if US escalates trade spat
• World Bank raises 2018 East Asia growth forecast, says tighter policy likely needed
• Britain’s RICS house price balance holds at five-year low in March
• UK business lobby says economy “treading water” since start of 2018
• South Korea central bank holds rates steady, cuts inflation outlook
• Oil markets tense on Middle East crisis, US-China trade spat
• Ireland’s central bank ups its 2018 and 2019 GDP growth forecasts to 4.8% and 4.2% respectively

Top Two Stories

FOMC minutes show that policymakers all saw strengthening economy, inflation
All of the Federal Reserve’s policymakers felt that the US economy would firm further and that inflation would rise in the coming months, minutes of the central bank’s last policy meeting on March 20-21 released on Wednesday showed. The readout of the meeting, at which the Fed unanimously voted to raise borrowing costs by a quarter percentage point, also showed that policymakers were wary about the impact of the Trump administration’s trade and fiscal policies.
From a market perspective there’s not much for people to take away here as the Fed is still looking for a gradual pace of rate-hikes. The debate rages on whether that means three this year or four this year.

Bank of Japan’s Kuroda offers upbeat view on prices, keeps pledge on easy policy
Bank of Japan Governor Haruhiko Kuroda on Thursday stressed his resolve to maintain the central bank’s massive stimulus programme, even as he offered an optimistic view on prospects for meeting his 2% inflation target. Kuroda said Japan’s economy will continue expanding moderately as rising household income drives up spending. “With the output gap improving and medium- to long-term inflation expectations seen heightening, we expect inflation to accelerate as a trend and head toward 2%,” Kuroda told a quarterly meeting of the Bank’s regional branch managers. The Bank will maintain its ultra-loose policy “until needed to stably and sustainably achieve” its target, Kuroda said.
The central bank revised up its assessment for two of Japan’s nine regions in a report and maintained its rosy view for six areas, saying a tightening job market was supporting consumption.

Bond Market

US Treasuries
The Federal Reserve’s $4.4 trillion in bond holdings may not shrink as much as previously assumed, and could settle around $3 trillion by the beginning of 2021, according to the New York Fed in its latest annual projections. Last year’s median estimate saw the portfolio shrink to around $2.8 trillion by the end of 2021, suggesting a combination of interest-rate hikes, market fluctuations and shifting consensus among policymakers could permanently leave the US central bank with a larger portfolio of assets. The projections, based on published Fed and Wall Street predictions, show a range of scenarios in which the US central bank continues logging profits from the assets and turning over tens of billions of dollars to the US Treasury. Those scenarios included the portfolio dropping to between $2.5 trillion and $3.3 trillion, between the years 2020 to 2022. The Fed had only about $900bn in assets before the 2007-2009 financial crisis and recession. But in response it snapped up some $3.5 trillion in Treasury and mortgage bonds to encourage US investment, hiring and economic growth.

Eurozone Bonds
Eurozone government bond yields dropped back towards multi-month lows on Wednesday after the European Central Bank distanced itself from one of its Governing Council member’s comments of a move away from deeply negative deposit rates. Austria’s Ewald Nowotny told Reuters on Tuesday there was a possibility of a 20bps hike in the deposit rate as part of ECB efforts to normalise policy, but a Bank spokesperson said this did not represent its view. Meanwhile, Portugal, quickly followed on in the footsteps of Ireland, with a €3bn sale of a new syndicated April 2034 bond, with the offer more than five times over-subscribed. When the Portuguese government changed to a more left-leaning one, the markets got a bit nervous. However, the success of this trade is a good illustration of how far the country has come, and Portugal is now back at the long-end in style.

Gilts
Continued smooth progress toward Britain’s exit from the EU will allow the Bank of England to deal with above-target inflation. The market currently sees an 81% chance of the central bank hiking on May 10, with a 50% chance of a second increase by the December 2018 meeting. With the ECB’s Ewald Nowotny joining the chorus of hawkish-leaning central bankers, the Bank of England might have additional room to manoeuvre if it wants to ramp up its own hawkish rhetoric. UK rate-hike expectations are somewhat entrenched, so a shift in rates rhetoric and an ensuing rise in sterling could help reduce inflation, which remains above the Bank’s 2.0% target. It could also enhance its credibility.

Other Bonds
Long-term inflation expectations among money market players in Sweden were unchanged in April, according to the latest poll commissioned by the country’s central bank. Inflation measured with a fixed interest rate five years ahead, the horizon watched most closely by the Riksbank, is seen at 1.9%, the same as a month earlier. In one year, CPIF inflation is seen at 1.8%, again unchanged from the previous survey, the poll by Kantar Sifo Prospera showed. The Riksbank targets 2% CPIF inflation.

Key Economic Indicators of the Day
Time (BST) Country Release Period Merrion Market Last
7.45 France Consumer Prices March Final 1.5% (Y) 1.5% 1.5% (Y)
7.45 France HICP March Final 1.7% (Y) 1.7% 1.7% (Y)
10.00 Eurozone Industrial Production February 0.2% 0.1% -1.0%
11.00 Ireland Consumer Prices March 0.5% (Y) 0.4% 0.5% (Y)
11.00 Ireland HICP March 0.7% (Y) 0.6% 0.7% (Y)
11.00 Ireland Residential Property Prices March 12.5% (Y) 12.7% 12.5% (Y)
12.30 Eurozone ECB Policy Minutes March 7-8
13.30 US Import Prices March 0.2% 0.1% 0.4%
13.30 US Export Prices March 0.2% 0.2% 0.2%
13.30 US Initial Jobless Claims w/e Apr. 7 224,000 230,000 242,000

Key Economic Speeches/Events of the Day
Time (BST) Country Event
7.30 UK MPC member Ben Broadbent speaks in Sydney
8.30 Norway Norges Bank’s Oystein Olsen and Egil Matsen speak in Stavanger, Norway
9.30 UK Bank of England publishes its latest Credit Conditions & Bank Liabilities Surveys
13.15 Eurozone ECB Executive Board member Benoit Coeure and Bundesbank Vice-President
Claudia Buch participate in panel discussion in Paris
16.00 Germany Bundesbank board member Andreas Dombret speaks in Munich
16.30 Norway Norges Bank Deputy Governor Jon Nicolaisen speaks in Oslo
17.15 Eurozone ECB Governing Council member Jens Weidmann speaks in Berlin
17.55 Eurozone ECB Vice-President Vitor Constancio speaks in Brussels
22.00 US Minneapolis Fed President Neel Kashkari speaks in Minneapolis

Today’s Debt Auctions/Buybacks/Announcements
Time (BST) Country Auction
10.00 Italy Italy sells up to €4bn of 0.05%, 2021 BTP
10.00 Sweden Sweden sells 500m krona of 0.125%, index-linked 2032 SGB
16.00 Italy Italy sells up to €2.5bn of 1.45%, 2025; up to €1.25bn of 2.95%, 2038 and up to
€1.5bn of 3.45%, 2048 BTPs
18.00 US Treasury sells $13bn of re-opened 30-year bond

Alan McQuaid (12/4/18)
Economist