Fiscal package confirmed; yen gains

JPY: JGB yields fall reducing immediate yen downside risks

The fiscal stimulus package for Japan was today approved by PM Takaichi’s cabinet with the total size at JPY 21.3 trillion – the size had already been reported and the financial markets had already reacted – the 30-year JGB yield has increased sharply in November in anticipation. From the close at the end of October the 30-year yield jumped 35bps to yesterday’s new record intra-day high of 3.41%. The yield is down today in part of relief that the required JGB issuance may not be as large as initially feared. The package will involve JPY 17.7trn of actual spending and is larger than the supplementary budget from a year ago. Possibly also helping the bond market is the fact that a large portion (JPY 11.7trn) will be spent on inflation reducing measures, including subsidies for gas and electricity bills and the abolishment of the gasoline tax. In addition, the raising the tax-free income threshold is included, costing around JPY 1.2trn. The price measures in the fiscal package are estimated by the government to reduce the overall inflation rate by 0.7ppt between February and April next year. Around JPY 1.7trn will be allocated to defence to help the government bring forward by two years reaching a 2% goal for defence spending as a percent of GDP.

There have been conflicting reports over whether this fiscal package will require more or less JGB issuance compared to last year. Even though the package is larger, the convoluted and confusing construct of government fiscal accounts means it is unclear how much surplus funds are available to offset the cost and potentially lower JGB issuance. Certainly stronger tax revenues would diminish JGB issuance risks. Last fiscal year, the supplementary budget required JPY 6.7trn of additional issuance. PM Takaichi earlier indicated that JGB issuance for the full fiscal year will be less than last year’s JPY 42.1trn and FM Katayama has stated stronger tax revenues will help finance the package. So at this stage it remains unclear what the net impact of the supplementary budget will have on JGB issuance.

The yen is also strengthening, in part on the retracement in JGB yields but also reflecting tougher remarks on possible intervention to halt yen weakness. Earlier FM Katayama stated that the MoF was “deeply concerned over sudden, one-sided FX moves” and earlier had stated that the MoF would “respond appropriately”. The US equity market sell-off and drop in US 2-year yields will also help reduce yen selling and some reversal of the recent sharp yen sell-off looks likely over the short-term.

FOREIGN INVESTOR BUYING OF SUPER-LONG JGBS HAVE HELPED SLOW THE YIELD MOVE HIGHER – WILL FOREIGN INVESTORS CONTINUE TO BUY?

Source: Bloomberg, Macrobond & MUFG GMR

USD: Solid NFP likely enough for FOMC pause

The US jobs report for way back in September was certainly better than expected with the headline NFP stronger than the consensus – 119k versus 52k and even incorporating the 33k downward revision to the previous months. Still, there were plenty of weakness in certain sectors of the economy within the report and again private education and health and government jobs made up a large portion of total NFP – 81K of the total. But looking at just the NFP it will certainly add credence to those at the Fed arguing for caution – “many” FOMC members according to the minutes from the October meeting want to pause at the December meeting.

But the dollar failed to advance and front-end yields dropped a touch mainly due to the tick higher in the unemployment rate – from 4.32% to 4.44% and so not far from hitting 4.5%. We are somewhat surprised by the attention to the tick higher in the unemployment rate. Of course this is always an important element of the jobs data but the tick higher was not based on particularly bad news. The household survey data revealed a 470k increase in the labour force in September, outdoing the 251k new jobs created which resulted in the higher unemployment rate. It was the second consecutive month that the labour force expanded by more than job creation. In August the labour force increased by 436k, a larger increase than the 288k of new jobs created. So this breakdown of why the unemployment rate increased is much better than the alternative of large jobs losses.

The inability of the dollar to advance further could also be explained by the claims data. While the initial claims data did not indicate anything alarming, the continued claims total did increase to a new cyclical high, underlining the continued gradual weakening of labour market conditions. Additionally, the AI/Tech concerns have not gone away following another solid earnings report from Nvidia. The focus ahead of Nvidia’s results reflected overall AI valuation concerns and positive Nvidia earnings have not shifted those concerns. If this pull-back in AI/Tech extends it could well reinforce a worsening of sentiment into year-end that would weigh on US dollar sentiment.

All that said, it is unlikely to alter the likelihood of the FOMC holding off cutting rates on 10^th December. There are no more NFP reports before then and the jobs report yesterday was just not weak enough to see the Fed cutting. 10bps of easing remains priced in the OIS market for the December meeting and the removal of that pricing should support yields and the dollar. Only a financial market disruption, like a bigger AI-related market sell-off, would make a rate cut more plausible again. There is a CPI report on the day of the FOMC meeting but that would likely be too late to shape expectations at that stage.

CONSECUTIVE MONTHS OF LABOUR FORCE INCREASE HELPED LIFT UNEMPLOYMENT RATE

Source: Macrobond, Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com