- Focus ON US CPI, Michigan Sentiment and Equity derivatives expiries,
as BoJ and Fed meetings move to "front and central"
- US CPI: new year model autos, gasoline expected to offset drag from
food for headline; core CPI seen steady on OER and health care
- BoJ meeting outcome likely critical for near-term G7 bond market
outlook
- Charts - 5/30 yr spreads for JGBs, USTs, UK Gilts, Bunds, VIX vs MOVE
indices, G7 bond Markets at a Glance
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** EVENTS PREVIEW **
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So to end the week, a relatively sparse calendar, as the focus turns to next week's BoJ and FOMC meetings. Once the better than expected, but still soft overnight Singapore Exports data have been digested, there are Canadian Manufacturing Sales to accompany the highlight of the day: US CPI, which is followed by the provisional Michigan Sentiment reading for September. For US CPI the headline is expected to rise 0.1% m/m, which would edge the y/y rate up to 1.0%, but slow the 3-month annualized rate to 1.0% from 1.6%, which as with yesterday's run of data will certainly be seized up on by the FOMC doves. Core CPI is however expected (as ever) to rise 0.2% m/m, leaving the y/y rate unchanged yet again at 2.2%. At the headline level, much will depend on whether the big drag from food prices evident in the PPI, Import and Export prices is repeated, though there should be some offset from a reversal of last month's steep fall in Auto prices (new year models) and a modest rise in gasoline prices; the core CPI rise is likely to be paced by Housing (OER) and Healthcare. While the Michigan Sentiment's representative value given its tiny small sample size is highly questionable, but it is market sensitive, and is seen recovering modestly to 90.6 from a soft 89.8 in August, though equity market gyrations and presidential election concerns may well continue to weigh on the consumer mood.
Equity futures and options expiry will be a further point of focus, along with the continued steepening of govt bond yield curves, led by JGBs, as markets await the BoJ meeting. Expectations in terms of policy measures are as varied as the mixed messages that have come from the various balloons that the BoJ has floated. However it does appear that a further rate cut of at least 10 bps, perhaps as much as 20 bps is being factored in, along with measures to steepen the yield curve in order to offset the negative impact of the rate cut for banks. The key question is the extent to which the BoJ intends to 'abandon' purchases of long-dated (> 10 yrs) JGBs, as this will clearly spill over into other major govt bond markets, as the various 5/30 yr yield spread charts and the attached table of govt bond markets performance over the past 6 months attest. That said, recent weekly MOF flow data also highlight that there has been a considerable repatriation (profit-taking) by Japanese investors, both in foreign bonds and equities, ahead of half year end, which may act as a mitigating factor for domestic assets.
from Marc Ostwald