Originally published by Rivkin Securities
Thursday is all about central banks with both the Bank of Japan and European Central Bank meeting to set monetary policy. While no changes are expected from the current stances for either bank, the market will be listening closely to the rhetoric for any hints that either bank may begin to withdraw stimulus sooner than expected given the improving global outlook. Both central bank chiefs are likely to paint an optimistic outlook however will likely play down the potential for an early exit from stimulus programs.
Both economies have improved recently, Japanese core inflation measure now sits at +0.2% compared with -0.5% in the middle of 2016 shown on the first chart below, while the Euro-zone measure remains stable at +0.7%. Still while these levels represent a solid improvement, they are still well-below the BOJ’s price target of +2% and the ECB’s of close but just below 2%. Japan has a remarkably low level of unemployment which currently sits at +2.8%, however the economy faces structural issues resulting in weak wage growth of +0.4% year-on-year. Issues include low productivity in the services sector which has been driving employment gains as well as an ageing population and low population growth.
The Euro-zone economy is performing better in terms of wage growth which currently sits at +1.6% and unemployment has declined from +12% in 2013 to sit at +9.5% however remains well-above the 2007 low of +7.3% shown on the second chart below. The Euro-zone recovery has broadened recently but still remains at two-different speeds with the northern countries still continuing to outperform their southern counterparts including Italy, Spain and Greece which continue to deal with high levels of unemployment.
Global equity markets were mixed on Wednesday with US equities relatively flat following the release of Trump’s tax plan which confirmed largely what has already been stated including lowering business tax from 35% to 15%. The S&P 500 swung between gains and losses before finishing -0.05% lower while the Nasdaq 100 edged up by +0.13%. In Europe the Euro STOXX 600 gained +0.47%, as did the CAC 40 up +0.19% and FTSE 100 up +0.18%.
In currencies the euro weakened -0.20% boosting the US Dollar Index by +0.19% and the yen strengthened +0.05%. Government yields were little changed, German two and 10-year yields declined -1.7 and -2 basis points respectively, Japanese two and 10-year yields were unchanged at -0.201% and +0.018% respectively. In the US the two-year was unchanged at +1.2737% while the 10-year declined -2.5 basis points.
Locally the Australian dollar dropped -0.84% following inflation data that was slightly below estimates. Headline inflation for the first quarter rose +0.5%, less than the +0.6% forecast while a core measure, the RBA trimmed mean, was in line with forecasts for +0.5%. Either way the data should not sway the RBA in either direction for monetary policy. The S&P/ASX 200 index finished +0.69% higher and this morning we can expect a fairly flat start with ASX SPI200 futures down just -1 point in overnight trading.
Data releases:
· BOJ Monetary Policy Decision Approx. 12-3pm AEDT
· Euro-zone Consumer, Economic & Business Confidence Surveys (MoM Apr) 7:00pm AEDT
· ECB Monetary Policy Decision 9:45pm AEDT
· German CPI (MoM & YoY Apr) 10:00pm AEDT
· US Trade Balance (MoM Mar) 10:30pm AEDT
· US Durable Goods Orders (MoM Mar) 10:30am AEDT
Chart 1 – Japanese Inflation, excluding fresh food
Chart 2 – Euro-zone Unemployment
Source: TradingEconomics.com