JPY down on hopes of further BoJ easing; US, Japan PPIs

Market Recap
A generally “risk on” day. US stocks closed modestly higher and most Asian stock markets (except China) are higher this morning as well. The mood was helped by comments from Global Times editor Hu Xijin, who said that China will take some measures to ease the negative impact of the trade war. Odd that it didn’t help Chinese stocks, since Hu said the measures would help some Chinese companies. Also Trump indicated at a campaign rally that talks with China would continue next week

In any case, JPY is considerably weaker as a result; CHF, not so much. The difference may be because of Reuters headlines that said the Bank of Japan may be open to debating additional easing measures at its meeting on Sep. 19th. That’s in line with recent comments by BoJ Gov. Kuroda, who has sounded a bit more dovish recently (see below).

GBP is off the lows hit early yesterday morning but off the highs hit around the New York opening, too. The “no no-deal Brexit” bill makes it less likely that the UK will indeed crash out of the EU without an agreement on Oct. 31st, although it’s hard to see how that won’t happen, either – unless they reach some new agreement (highly unlikely), PM Johnson would have to ask for an extension and the EU would have to grant it. There’s still a chance that Johnson ignores the bill entirely and risks going to jail over it. At the same time, a cross-party group is working together to find a deal that can secure a majority in Parliament, but again, will the EU agree to any changes to the already-agreed Withdrawal Agreement?

Nonetheless, the options market is pricing out Oct. 31st as Brexit day – the 2m risk reversal, which currently covers that day, is becoming less negative. More good economic news – faster-than-expected wage growth and lower-than-expected unemployment also helped. The recent economic reports underscore why the Bank of England is reluctant to sound too dovish nowadays.

Today’s market

It’s producer price index (PPI) day today. About the only thing on the schedule (aside from the usual Wednesday data) are the US and Japanese PPIs. Plus the Japanese machinery orders, one of the more random indicators out there.

US PPI is expected to be unchanged from the previous month – that is, prices themselve are expected to remain unchanged, not the rate of change. That means the yoy rate of change of prices would stay at 1.7% yoy. The rate of change of core producer rprices (excluding energy) is expected to accelerate a bit. The message to the Fed from this would be no big acceleration in upstream inflation, but no deceleration either (well, on a month-on-month basis there is deceleration). This would be the third month in a row with headline PPI at 1.7% yoy. Yet if we take a longer view, a year ago it was 3.0%, while core PPI has come down from 2.6% (2.8% yoy the month before that). So the overall trend for the PPI is down, it’s just that it seems to have hit a plateau for the time being. Will it bottom out here or continue falling?

There seems to be a strong connection between China’s producer prices and US producer prices. The strong downward trend in Chinese prices suggests US prices have further to fall. The question is, will the Fed continue to take pre-emptive action or will it wait to see the rate of producer price inflation fall further? From what they say they seem to be moving pre-emptively, so I’d say these figures are likely to be neutral to bearish USD.

Japan’s PPI is expected to be almost pitiful. They’re looking for the third mom decline in four months, with the yoy rate of change falling at an accelerating pace. It’s hard to think that this is going to lead to acceleration retail price inflation any time soon. BoJ Gov. Kuroda has sounded a bit more dovish recently – in an interview on Sep. 6, he said it was still possible to lower negative interest rates even further. Regular BoJ Board dissenter Kataoka has been calling for this for quite some time; maybe people are starting to listen to him. The fact that long-term rates are coming down worldwide, giving banks capital gains on their global bond holdings, makes this even more feasible right now. A further decline in prices could increase speculation about this idea and therefore would be negative for JPY.

Japan’s core machinery orders are coming out at the same time. They’re also expected to be pretty bad, with the market expecting a decline both on a mom and yoy basis. That’s not surprising though after the previous month’s surprisingly good data – there’s likely to be some mean reversion (last month they were expected to be -1.0% mom but instead were +13.9% mom.) (That’s actually a great example of why I say that this is one of the hokiest indicators I know of. It’s a) amazingly volatile, and b) totally impossible to predict. There’s absolutely nothing to use to base a forecast on. Economists’ forecasts are really nothing more than guesses.)

You can see how this year, the six-month moving average hasn’t shown any real trend – it’s been negative three months and positive three months. Even with this month’s expected sharp decline though the six-month moving average would be positive. If by some miracle the estimates do come true, that could in theory be perceived as an improvement and therefore be positive for the yen. But given the global slump in investment, I think it would be seen more as a statistical fluke. JPY neutral

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Marshall Gittler

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