Bank of Japan Stands Pat

Daily Analysis - 31/10/2017

Yen Rallies to More Than 1-Month High Against Euro

The Japanese Yen touched the highest point against the Euro since September 15^th after the Bank of Japan slashed some of its price forecasts and left monetary policy unchanged early Tuesday. The Central Bank voted 8-1 to keep both its short and long-term interest rates steady.

Japanese Inflation Forecast Trimmed

The Bank of Japan opted to stick with its aggressive measures to boost inflation as other major central banks around the world begin to wind down stimulus. In a statement following the end of a two-day meeting, the BoJ said it is maintaining the short-term interest rate at -0.10% and the target for the 10-year government bond yield at 0.00%. The outlook report accompanying the statement forecast inflation to hit 2.00% in fiscal year 2019-2020.

However, core consumer prices are now expected to grow 0.80% during the current fiscal year, lower than an earlier projection of 1.10%. The Japanese economy has now grown for six straight quarters, but the country's 2.00% inflation target remains elusive, with core inflation coming in at a mere 0.70% in September. EURJPY is down in Tuesday morning trade, with the pair last seen just above the strong support around the 131.400-zone.

US Consumer Spending Posts Robust Gains

Fuelled by strong demand across sectors, especially motor vehicles in the wake of recent hurricanes, consumer spending in the United States recorded its biggest increase since 2009 in September. Per a Commerce Department report delivered late on Monday, consumer spending, which accounts for over two-thirds of economic activity in the country, soared 1.00% last month.

The increase was the single largest gain recorded since August of 2009, smashing economist forecasts of an 0.80% incline. The big surge was driven by a 14.70% rise automobile purchases as drivers began replacing the estimated 300,000 vehicles that were destroyed when hurricanes Harvey and Irma slammed Texas and Florida in late August and early September. Dow futures are currently consolidating in a narrow range around 23300 after slipping during Monday’s session.

Britons Continue to Rely on Cheap Credit

The latest figures unveiled on Monday showed that net consumer credit increased by GBP 1.60 billion ($2.10 billion) last month, down from the GBP 1.80 billion gain recorded in August as the pace of UK secured borrowing slowed. Economists surveyed by the Wall Street Journal projected a sharper slowdown of GBP 1.50 billion. The Bank of England had earlier warned that sustained growth in consumer credit presents "a pocket of risk" in an otherwise benign borrowing backdrop.

Separately, leading market research firm GfK said British consumers turned gloomier in October, although they continued to splurge on major purchases. GfK’s monthly consumer sentiment index fell to -10 this month from -9 in September, matching the consensus estimate, while continuing to hang near a three-year low. FTSE 100 futures are currently hovering around the 7460-mark, rebounding modestly from the prior session’s losses.

Tighter Pollution Rules Hurt Chinese Manufacturing Growth

Chinese factory activity cooled more than anticipated in October, retreating from a more than five-year high. As government officials increasingly prioritize efforts to clamp down on industrial pollution, the measures are forcing many steel units to curb production ahead of the winter months.

The official Manufacturing Purchasing Managers’ Index released on Tuesday slipped to 51.6 in October from 52.4 in September. It was the weakest reading in three months, and trailed a consensus forecast of a 52.0 print. Separate data from the Chinese National Bureau of Statistics showed the official Non-Manufacturing PMI coming in at 54.3 for October, down from a recent peak of 55.4 recorded in the previous month. The sub-index for the key services sector fell 0.9 points from its September high to 53.5. After tumbling in Tuesday Asian trade, the USDCNH pair is currently hovering around 6.6300.