US inflation & Japan wage data are in focus this week

USD: Market focus to switch to US CPI and PPI reports after softer NFP report

The US dollar has continued to trade on a weaker footing at the start of this week after the dollar index hit a fresh low at 102.36. This month’s US dollar sell-off extended further after the release of the softer than expected nonfarm payrolls report for February. While the report revealed employment increased more than expected by 275k in February, the upside surprise was more than offset by a downward revision to employment growth in prior months of -167k. It resulted in employment growth in January being revised down to an increase of 229k rather than 353k as initially reported. Even after the downward revisions, the establishment survey still shows that employment growth has picked up over the last three months to February when it has averaged jobs gains of 265k/month compared to an average of 205k/month in the prior six months. In contrast, a marked divergence has opened up between the establishment and household survey that has been much weaker. In the household survey, employment decreased by -184k in February and it was the fourth negative print out of the last five months. As a result, the unemployment rate increased by 0.2 percentage point to a fresh high of 3.9%. There was also softer average hourly earnings growth of 0.1%M/M in February, and the prior January reading was revised lower by 0.1 percentage point to 0.5%M/M. Overall, the February nonfarm payrolls report is more supportive for the Fed to begin to lower rates if inflation continues to slow in the first half of this year. A further moderation in wage growth would provide evidence that the upside risks to the inflation outlook from the labour market are not materialising.

After the initial US dollar sell-off triggered by the release of the nonfarm payrolls report on Friday, there has been a lack of follow through weakness. Market participants focus will now quickly shift to the releases of the latest US CPI (Tues) and PPI (Thurs) reports in the week ahead which will be important for assessing the outlook for Fed policy. Fed officials have mainly indicated so far that they will look through the upside inflation surprise in January. However, if inflation surprises to the upside again in February it will be harder to judge it as just a bump in the road to slowing inflation, and provide more of a challenge to market expectations for the Fed to begin cutting rates in June and by around 100bps in total by the end of this year. As a result, the reports pose the main upside risks to the recent US dollar sell-off extending further this week.

HOUSEHOLD SURVEY HAS BEEN WEAKER THAN ESTABLISHMENT SURVEY

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Wage results to provide green light for BoJ hike in March

The yen has continued to strengthen overnight resulting in USD/JPY hitting a low of 146.54. It was announced overnight that Japan’s economy no longer fell into recession at the end of last year after an upward revision to GDP growth in Q4. The initial contraction in GDP of -0.4% Q/Q annualized in Q4 was revised up to growth of +0.4% driven by stronger capex. Private capex was revised higher to growth of 2.0% (non-annualized) from the preliminary estimate of a -0.1% decline. At the margin, the upward revision to GDP growth in Q4 has made market participants more confident that the BoJ will soon exit current loose monetary policy settings.

Building speculation that the BoJ will begin to raise rates at next week’s policy meeting in line with our own view has been reinforced as well by press reports at the end of last week. As we highlighted in our latest FX Weekly report (click here), press reports have indicated that BoJ members are leaning towards hiking rates this month. With the rate market in Japan having already moved to price in that scenario, we need to focus on potential other aspects of a policy announcement at the week on 19^th March. The first aspect will the communication. We see it as unlikely that the BoJ would signal a move as being a one-off. More likely would be to highlight the significance of a rate hike in signalling the end of the multi-decade period of mild deflation. We expect a second rate increase in Q4 although the meeting on 20^th September is very feasible. The second aspect is whether there’s a policy change in regard to the balance sheet. JIJI Press reported today that the BoJ would replace YCC with a plan to purchase JPY 6trn JGBs per month. On this second aspect we are not as sure and still believe there’s a good chance that the YCC is policy is maintained and the focus remains on the removal of NIRP/ZIRP initially. Even if however a YCC policy change is announced and if a target level (say of JPY 6trn per month) is announced we are sure the BoJ would caveat that with a degree of flexibility by emphasising a willingness to buy more.

In the week ahead, the key events will be the first announcement of the Rengo wage negotiation results on 15^th March which typically come out in the afternoon at around 16.00-17.00pm JST. Before that, most of large companies will announce their responses to this year’s Shunto wage hike demands on 13^th March. Stronger wage results would reinforce speculation over BoJ policy action next week and support our new short CHF/JPY trade recommendation (click here).

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	Eurogroup Meetings	--	--	--	!!
US	15:00	Consumer Inflation Expectations	--	--	3.00%	!
UK	17:00	BoE MPC Member Mann	--	--	--	!!
GE	17:00	German Buba Mauderer Speaks	--	--	--	!!

Source: Bloomberg