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Bank of Japan Keeps Rates Steady

Daily Analysis - 31/01/2017

Central Bank Raises Growth Forecasts

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With few surprises left in the Bank of Japan’s toolkit, the Japanese institution opted to leave interest rates on hold at -0.10% while maintaining its current pace of easing and continuing to target a 0.00% yield on 10-year government bonds.

Japanese Growth Forecast More Upbeat


Although data last week exhibited the continued struggles facing the Bank of Japan as they work to restore inflation to the 2.00% targeted by the Abenomics, the Central Bank struck a more upbeat tone in their latest outlook.  GDP growth estimates for fiscal 2016 were upgraded to 1.40% compared to October’s forecast of 1.00% while 2017 was raised to 1.50% from 1.30%.

However, on the inflation side, the BoJ reaffirmed its earlier projection of 1.50% core CPI for 2017.  Two voting members of the Central Bank continued to dissent from policy, with a 7-2 vote reaffirming the commitment to a strategy of negative interest rates, asset purchases, and yield targeting for government bonds.  The resulting move after the announcement saw the Yen strengthen versus nearly all peers, with EURJPY under pressure after extending the previous session’s losses.

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France Expands at Fastest Pace in Three Quarters


An advance reading of French GDP for the fourth quarter of 2016 showed a surprising pickup in growth, with expansion coming in at 0.40% for the final three months of the year.  Besides doubling the third quarter reading of 0.20%, the latest figures mark the swiftest growth since the first quarter of 2016.

Momentum behind the gains came predominantly as a result of better household and government expenditures while higher investment and the export economy also benefited the figure.  On an annualized basis, gross domestic product improved by 1.10%, beating the 1.00% annualized pace recorded back at the end of the third quarter although still well below government forecasts of 1.40% for the calendar year.  After coming under significant pressure during the weekly reopening, equities remain on the retreat, with CAC 40 futures gapping lower at the open of trade.

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US Income Growth Outpaced by Spending


In another sign that inflation may be set to rise further in the coming months and quarters, US consumer spending rose by 0.50% during the month of December, matching expectations and exceeding the prior reading of 0.20%.  With consumer spending comprising over 60.00% of US GDP on an annual basis, the latest figures could foreshadow a further advance in prices, helping the Federal Reserve remain near its 2.00% medium-term inflation target.  Additionally, core PCE inflation, the preferred gauge of Fed policymakers, remained at 1.70% on an annualized basis, it does highlight the stability of price gains despite rising interest rates.

However, in a worrying sign that consumption may pull back down the road, personal spending continued to outpace personal income growth of 0.30% for December.  Nasdaq futures remain under pressure, falling for a second straight session as the Visa rules stir concern in technology companies about hiring talented foreign workers.

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ECB Balance Sheet Reaches Record Size


An update produced by the European Central Bank showed that the institution’s balance sheet continues to grow to previously unseen levels as asset purchases continue amid efforts to restore inflation and growth.  According to the report issued by the ECB, the balance sheet now totals €3.72 trillion.  Of this figure, €575.42 billion is European corporate bond issuance that the bank has purchased through its ongoing quantitative easing program, accounting for slightly less than 10.00% of the total amount outstanding.

At present, the balance sheet is now the size of roughly 36.00% of total annualized Euro Area GDP.  However, problems may lie ahead as the Central Bank runs out of applicable assets to buy.  In the meantime, the Euro will continue to remain under pressure as the balance sheet expands further, with EURGBP back on the retreat after two straight sessions of gains.

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