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The Japanese Cabinet Office downgraded its growth assessment for the first time since November in today’s monthly report. Weakness in private consumption and production are to blame. The economic recovery is likely to remain tepid after unexpectedly slipping in recession in H2 2023. The first downgrade of production in almost a year comes as manufacturing activities, and especially carmakers, had to temporarily halt production and shipments. The sluggish economic outlook suggests that the window of opportunity for the BoJ to finally get rid of negative policy rates and/or yield curve control in the wake of >2% inflation is rapidly closing. The central bank meets next on March 19, but that meeting risks coming too soon lacking the outcome of the annual “Shunto”, the spring wage offensive. That leaves the April 26 BoJ-meeting as the preferred option given availability of new quarterly growth and inflation forecasts as well. Unless of course markets force the BoJ’s hand by sending an already weak Japanese yen (USD/JPY) into tailspin. Officials can still swap current verbal intervention warnings for effective ones, but they are aware of their limited use if not backed by a proper monetary policy. USD/JPY 151.91/95 (2023/2022 top) is still at risk of giving away, bringing the 1990 (!) top at 159.30 as next technical reference.

Opening our report with the monthly eco update by the Japanese government is testament to the anemia of market relevant economic updates so far this week. It shows in limited daily changes on main FI, FX and stock markets. US Treasury yields lose 0.8 bps (30-yr) to 1.9 bps (2-yr) in technical rebound action after testing YTD highs at the end of last week. German Bunds underperform US T’s with yields adding 2 to 2.5 bps across the curve. EUR/USD fails to profit from the slight advantage, treading water just above 1.08. European stock markets cling to small gains, whereas major WS benchmarks again show some vulnerability. Minutes of the January FOMC meeting are unlikely to change the status quo later today given sharp market repricing since. Nvidia earnings after WS close can leave a stamp on risk sentiment tomorrow.

News & Views

The National Bank of Belgium’s consumer confidence indicator slipped in February, extending a weak start of the year. The general index eased from -2 to -5, the lowest since October of last year and as such barely holding above the long-term average (around -7). There was a significant deterioration in the expected development of the general economic situation, which is nearing the 2023 lows again. The NBB reported a sharp drop in consumers’ saving intentions, wiping out much of the improvement registered in the final months of last year. Expectations for households’ financial situation were downgraded too. Unemployment expectations were a rare bright spot though, with the indicator improving to levels last seen mid-2022.

South African assets are among the better performers today. Government bonds gain ground, prompting yields to drop between 13-16 bps at the long end of the curve. The South African rand appreciates against the dollar with USD/ZAR easing to 18.81. This outperformance follows the Finance Minister Godongwana’s annual budget speech, the last one before the May 29 general election – where the ruling African National Congress party risks losing a majority for the first time since 1994. The most cheered upon budget decision is that Treasury will tap the contingency reserves at the central bank to decrease the amount of debt needed to fund deficits. The latter are seen shrinking from 4.5% this FY to 3.3% in the FY ending March 2027. The debt ratio is now expected to peak lower at 75.3% in 2026 instead of 77.7%. The Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to be tapped has risen from just ZAR 1.8bn in 2006 to about 500bn in 2023. These (unrealized) profits reflect the slump of the ZAR against the dollar over the years. ZAR 150bn will be used immediately while an additional ZAR 100bn is set aside for later. That leaves ZAR 250bn in the coffers, provided the move today hasn’t set a precedent for future governments. Other announcements include increased spending for health and security as well as a two-year extension (2027) to monthly grants that date back to the coronavirus era. Something’s got to give, though, and Treasury, amongst others, opted for a stealth tax hike by not adjusting personal income tax brackets for inflation.

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