Reassuring us employment report, slight shift in the ECB’s communication, the BoJ has confirmed it is maintaining its policy

Macro Highlights - 3/14/2018

In short
  • In the United States, the February employment report confirmed that wage growth remained contained, as we expected, which should limit the rise in inflation expectations
  • The ECB took a small step toward exiting its current monetary policy, which nevertheless should remain accommodative according to our scenario
  • In Japan, BoJ governor Haruhiko Kuroda confirmed that the bank will not be exiting its accommodative monetary policy in the immediate future

United States – the February employment report tends to confirm a contained rise in wages, details of the trade measures announced by Donald Trump are slow to come

While the January employment report for the US, showing a 2.9% increase in average hourly earnings year-on-year, had led to concerns regarding the inflationary risk, the February report was reassuring. Not only was the y-o-y hourly earnings growth figure revised down to 2.8% for January, but it came in at 2.6% for February.

Moreover, while monthly job creation was robust, at 313,000 vs. 239,000 in January and an average of 182,000 in 2017, the unemployment rate remained stable at 4.1%. This notably resulted from the increase in the participation rate, from 62.7% to 63%. The participation rate of the 25-54 age bracket rose significantly, up from 81.7% in January to 82.1% in February. This improvement in the participation rate is in line with our expectations and underpins our forecast of only moderate wage growth in the US in 2018 (see our Weekly of 26 February).

This employment report could contribute to limiting inflation expectations in the US. It should be noted that while inflation expectations have risen since end-December 2017, long-term expectations have remained contained up until now. Thus, while the 2-year inflation swap rate increased from 2.01% to 2.13%, above its average between 2010 and mid-2014 of 1.74%, its 10- year equivalent has risen from 2.23% to 2.33%, which remains below the average of 2.56% observed between 2010 and mid- 2014 and is also lower than the January 2017 level of 2.37% (see right-hand chart).

Concerning foreign trade, while Donald Trump confirmed his announcement from the previous week that the US would be imposing trade tariffs on all steel and aluminium imports (of 25% and 10%, respectively), he only gave partial details with r egard to the products or countries that will be exempt.

For the time being, only Canada and Mexico are likely to be temporarily exempt from the new duties, notably due to the high level of integration of these two economies with respect to the US and their shared commitment to protecting US national security. The US President also implied that other exemptions could be granted to certain countries, but no additional indications were given.

Euro zone – the European central bank made a slight change to its communication, but its monetary policy remains accommodative

Following its monetary policy meeting of 8 March, the European Central Bank (ECB) maintained its key rates, the deposit rate and the refinancing facility, at -0.40% and 0.00%, respectively. Furthermore, it confirmed its intention to continue its asset purchases at a monthly pace of EUR30 billion up to September 2018 “and beyond, if necessary”.

Conversely, it made a change to its communication by dropping the “easing bias” it had maintained up until now on its asset purchase plan, according to which, if the economic outlook were to deteriorate, or if financial conditions became “inconsistent with further progress towards a sustained adjustment in the path of inflation”, it would be “ready to increase the asset purchase programme in terms of size and/or duration”.

The other elements of its monetary policy stance, namely the forward guidance, were kept. The ECB thus reiterated:

  • its forward guidance on interest rates, indicating they would remain at current levels for an extended period of time, and well past the horizon of the net asset purchases;
  • its forward guidance with regard to reinvestments, which it implements when the securities it holds arrive at maturity, stating that it would continue them “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”.

Moreover, Mr Draghi’s tone at his press conference was dovish. The ECB president downplayed the importance of removing the easing bias on its asset purchase programme, indicating that it was a “backward-looking” measure (i.e. based on the now lower risk of a fall in inflation) and not a “signal” of a change in the monetary policy.

He reiterated that inflation “has yet to show convincing signs of a sustained upward trend” adding that, overall, the economic situation had not changed very much since the last ECB meeting. This was moreover confirmed by the latest ECB Staff projections, which have changed little compared to the previous ones made in December 2017.


Analysis and implications:

  • The ECB’s decision to drop the easing bias on its asset purchase programme is a first step towards an exit from its accommodative monetary
  • This change is nevertheless minor in a context in which inflation is generally not expected to drop sharply and force the ECB to increase the pace and duration of its asset purchase programme once
    • The ECB’s dovish tone underpins our scenario in which the ECB would end its asset purchase programme in September 2018 but maintain its key rates at the current levels and its forward guidance on rates and reinvestments throughout 2018. Its monetary policy would thus remain
    • As a result, we continue to expect a steepening of the European yield curve in upcoming months and maintain our German yield forecasts for the 2-year Schatz and 10-year Bund at -0.35% and 1.00%, respectively, at end-2018.
    • In addition, we continue to anticipate a depreciation of the euro against the dollar as from the second quarter of 2018 if, as we expect, the growth differential between the US and the euro zone widens in favour of the

Japan – Haruhiko Kuroda confirmed that an exit from the accommodative monetary policy is not on the immediate agenda

Last week provided several occasions for Bank of Japan (BoJ) officials to clearly indicate their intention to durably maintai n an accommodative monetary policy.

This clarification seemed necessary as expectations that the BoJ would exit its monetary policy had recently been reinforced following:

  • the slowdown in its monthly JGB (Japanese Government Bond) purchases over the past few months;
  • the statement by Mr Kuroda, during his confirmation hearing for another term as central bank governor before the lower house of parliament on 3 March, that the BoJ could start thinking about exiting its monetary policy during the fiscal year starting in April

Thus, during his second hearing on 6 March, this time before the Senate, Mr Kuroda clarified his comments, saying that with the BoJ anticipating that inflation could move back towards its target of 2.0% during the 2019 fiscal year, it could “discuss how to move forward with exit” at that time, but that this did not mean it would be changing its accommodative policy this year.

Moreover, during their respective hearings before the house of representatives, the two BOJ deputy governor nominees, Masazumi Wakatabe and Masayoshi Amamiya, provided a very dovish message. Mr Wakatabe notably indicated that additional monetary easing could be implemented if necessary, specifying that, from an economic point of view, monetary policy had no limits.

Lastly, following its monetary policy meeting of 9 March, the Bank of Japan maintained its key rate at -0.1% and reiterated its target of a 10-year JGB yield of close to 0.00%. Eight members of the monetary policy committee voted in favour of this decision, while Goushi Kataoka once again opposed it, considering that the BoJ should expand stimulus even further by revising its target for the 10-year JGB yield downward.

During his press conference following the meeting, Mr Kuroda once again adopted a dovish stance, reiterating that an exit by the BoJ from its monetary policy was not imminent, and stating that the slowdown in its asset purchases should not be interpreted as a change in monetary policy, the objective of the BoJ being the level of the 10-year yield and not the amount of bonds purchased.

Analysis and implications:

  • Despite the acceleration in GDP growth from 0.9% in 2016 to 1.7% in 2017 and the very low level of employment (at 2.4% in January, its lowest level since April 1993), Japanese wages have not seen a significant increase: they were up 0.7% year-on-year in January, after 0.9% in December and 0.4% growth over the full-year
  • As a result, inflationary pressure in Japan remains contained. In January, core inflation, e. excluding energy and fresh food, stood at 0.4%, after 0.3% in December and 0.1% on average in 2017. While we anticipate a slight slowdown in GDP growth in 2018, we continue to believe that inflation is likely to see only moderate growth and remain well below the target of 2.0% in 2018 and 2019.
  • We thus maintain our scenario according to which the BoJ should maintain its accommodative monetary policy and is unlikely to change its key rate or target 10-year yield in 2018. This week’s communication by BoJ members supported our forecast.

China – the national people’s congress continues, constitutional changes

During its National People’s Congress, China validated the proposal to abolish the limit of two five-year presidential terms. The current president, Xi Jinping, could now remain in power beyond 2022. He thus reinforces his powers and sphere of influence in China, which should consolidate the economic priorities highlighted at the 2017 Party Congress, which are to manage the country’s financial imbalances, reform state-owned companies and gradually open up the country internationally.

Sophie Casanova - Economist, Central banks,
François Léonet – Economist, Emerging markets,
Lisa Turk - Economist, the United States.