Asia Breakfast Briefing - 23 Jan 2018 ASIAN PREVIEWBoJ policy decision and

ASIAN PREVIEW

BoJ policy decision and qtrly outlook the Asian highlights

SG CPI readings also of interest

Europe to feature EA, DE ZEW surveys, UK CBI ind trend orders, EA consumer confidence

Nothing of note in the US besides Redbook

Asia FX Strat: CNY rally justified by one wish and two positives

Viewpoint: Ader"s Musings -Join The Bond Bear Crowd

SINGAPORE DEC CPI due Tuesday 23 Jan; f/c 0.6% y/y, last 0.6% y/y

On a year-on-year basis, the Singapore economy reported a headline CPI of 0.6% for Nov, which beat consensus estimates of 0.55% and firmed from Oct"s reading 0.4%. Key lifts stemmed from Food (y/y 1.5%, driven by y/y price climbs in Hawker Food and Bread & Cereals) and Transport (y/y 2.6%, driven by y/y price climbs in Private Road Transport), while Housing & Utilities (y/y -2.4%, driven by y/y slumps in Accommodation) was the key drag. BBG consensus estimates currently prime for Singapore"s Dec y/y CPI reading to be unchanged from Nov"s at 0.6%.

That said, Singapore"s Dec y/y CPI print is likely to see conflicting drivers. On one hand, the y/y CPI print will likely start to see dampeners as low base effects from Private Road Transport wash out with increased parking fees from Dec 2016 getting fully incorporated into the y/y time series, while continued climbs in energy prices may provide mild counter buoys. Another possible drag on the Dec y/y CPI print may stem from a relentless general appreciation of the SGD in the periods leading up to Dec 2017. Further out, dampeners of Singapore"s y/y CPI prints will see further offsets by a likely bump in Fuel & Utilities inflation from Jul 2018 when the 2nd phase of Singapore"s water price hikes kick in.

BoJ Interest rate decision due Tuesday 23rd January 03:00am GMT

BoJ Quarterly Outlook Report due Tuesday 23rd January 05:00am GMT

The BOJ will next meet to set monetary policy on 22-23 Jan. No policy changes are expected at this stage, given core CPI remains less than halfway to their 2% target. Based on the recent Reuters poll of 40 economists, 40% see higher rates this year with 13/36 respondents stating that the JPY government could declare victory over deflation by end 2018.

Updated qtrly outlook report may not show any changes

The traditional attention would be on the BOJ"s qtrly outlook report. While we do not expect the BOJ to make any revisions to inflation f/cs, there could by revisions to the FY 2018 GDP to between 1.5%-1.9% from the current 1.4% estimate, as reported by Kyodo News. Reasons given for the upgrade were due to solid exports and capital spending, although we do not expect any changes.

Our base case is that the BOJ"s take on growth will likely to remain balanced with an upbeat external outlook offset by warnings of drag from a likely decline in public investments in 2018 and from the 2019 sales tax hike.

On inflation, the BOJ is likely to reiterate that it expects to hit the 2% target "around FY2019" although the risk remains skewed to the downside (subdued service/rental prices and increased competition by way of deregulations/tech disruptions aren"t transitory).

2018 focus on BOJ Gov and potential YCC tweaks

Will Kuroda be re-appointed?

BOJ Gov Kuroda"s term ends in Apr and whether he is re-appointed (or not) could have a big bearing on Japanese assets. At this stage, most signs point to him staying which means no radical policy shifts and a becalmed JGB market.

No YCC tweak for now but window will open starting from Q2

The BoJ caused quite a stir on the 9th of Jan when it bought Y190bn of 10-25y JGBs (prev Y200bn) and Y80bn 25+y (prev Y90bn) in its bond-purchase operation, prompting speculation of faster than expected tweaks to the YCC program and boosting the JPY.

However, we do not see the adjustments as signifying anything meaningful provided they occur in the 3-5yr and 5-10yr segments, while stealth tapering has in fact already been well underway and thus not a major surprise unless changes are formally announced.

We continue to expect no YCC tweaks with the window for such a move to open starting from Q2 as that would be the time when we get a clearer indication of whether Japan"s core CPI will start to trend up towards the 2% target (core CPI currently at 0.9% y/y).

As mentioned, thile stealth tapering has already been facilitated by YCC (2017"s monetary base expansion was well below the soft target of Yen80 trln annually), we think it"s inevitable that the BOJ will have to tweak it"s YCC parameters and more objectively discuss the notion of policy normalization towards 2019.

One reason for this is the lack of JGB supply with the large scale QQE having distorted the market by scooping up all the inherent supply in the secondary market.

As such, any YCC tweak would inherently boost the sustainability of QQE.

Another reason is that the QQE program has not had a sustained impact on Japan"s inflation/consumption dynamics or on the Yen.

This brings us to the scenario of decreasing benefits tied to 5yrs of QQE all whilst the negative effects (market distortion) build.

The above needs to be qualified to a degree.

While we think YCC tweaks could be made, the BOJ isn"t about to abruptly exit its stimulus program just yet and monetary policy as a whole will remain accommodative.

Much like what the ECB did with its taper move.

What"s clear though is that the days of stimulus expansion are over and that the bias ahead skews towards gentle normalization.

So when do we need to materially price in a YCC tweak? When the BOJ reduces purchases in the 3-5yr and 5-10yr segments at their regular bond purchase operations (last Nov"s moves were only symbolic reductions on the tails).

In so far as what tweaks could be seen, we suspect the initial move will come via lifting the 10yr JGB yield target to 0.10% from 0% (and subsequently to 0.15% and 0.20%) whilst keeping the s/t rate target around -0.10%. Why so and not BOJ Kataoka"s proposal of targeting the 15s below 0.20%? Because the BOJ will want to prevent a flattening of the yield curve.

Japan"s Dec trade balance (surv Y530bn, prev Y113bn) due Tuesday 23rd January 11:50pm GMT

Japan"s Nov trade balance surprisingly came in at a surplus of Y113.4bn in Nov, beating expectation of a JPY55bn deficit as exports surged 16.2%y/y (exp 14.6%) against a 17.2%y/y increase in imports. For exports, a notable driver was in the sale of semicon (54.7%) while shipment to China also hit a new record of Y1379.7bn. For imports, the main contributor was from electrical machinery, which increased 27.5%. For Dec, leading indicator PMI suggests continued robust external demand as export orders grew at a faster pace amidst demand from China and Taiwan, likely supported as well by a softer JPY. Imports however should also increase further due to higher commodity prices, although overall trade balance is expected to widen further to Y530bn.

OVERNIGHT SESSION WRAPS

US FX Close

EUR/USDUSD/JPYGBP/USDAUD/USDUSD/CADDOWDXYOPEN1.2255110.731.39000.80151.2460+142.8890.439HIGH1.2261111.221.39910.80271.2478CLOSED90.627LOW1.2224110.691.38850.79981.2435@90.362CLOSE1.2259110.951.39880.80141.245426214.6090.395

The US Senate managed to agree on a new short-term spending bill Monday, moving closer to ending the government shutdown which has been in effect since Friday afternoon as the House is expected to vote this afternoon. The USD Index, nevertheless, remained locked in a tight range over Wednesday"s 90.113 3+ year low with better-than-expected Chicago Fed National Activity Index data (0.27 vs. 0.22 est.) having a negligible impact. Sterling outgained each of its G-10 peers with Gbp/Usd and Gbp/Jpy both extending to near-19-month highs after Emmanuel Macron offered the UK a Brexit deal including partial access for financial services. Gbp/Aud and Gbp/Chf rose to 1-month and 1.5-month highs respectively, both over 2-sigma above their 20 DMAs. Germany"s Social Democratic Party voted over the weekend to begin formal coalition talks with Angela Merkel"s Christian Democratic Union, and Eur/Usd added modest gains while continuing to range below Wednesday"s 1.2323 3-year high. The ECB is expected to keep rates on hold when they meet Thursday. Eur/Gbp dropped to a 5-week low towards the key 9-month .8314/.8690 rising trendline at .8759. Usd/Jpy was in the black for only the 2nd time in 2 weeks ahead of the BoJ"s Policy Rate decision scheduled for release overnight where the bank is expected to leave rates unchanged. Usd/Chf traded in a tight, spinning-top range even though SNB President Jordan said the highly valued Swiss Franc is the reason the bank is continuing with expansive monetary policy. Aud/Usd and Nzd/Usd both moved higher while pressuring 3.5+ month highs marked last week. Tuesday"s calendar includes Richmond Fed manufacturing Index data and Chicago Fed"s Evans who is not expected to address current economic conditions. Additionally, the US Senate Banking Committee will hold a hearing considering the nomination of Marvin Goodfriend as a governor of the Federal Reserve Board in Washington.

US Treasury Close

10-YEAR30YY10YY5YY2YY2/105/3010Y SwapHIGH96-23+

2.9422.6692.4632.07759.248.52.754LOW96-132.8982.6302.4312.05756.645.92.666LAST96-15

2.9272.6612.4602.06959.046.72.710CHANGE+ 0+/32-.006+.002+.010+.004-0.1-1.5-.007

TREASURIES CLOSE 3:00PM – Volumes overnight were modest amidst the US government shutdown which extended into its third day. Over the weekend, San Francisco Fed"s Williams, a voter, had opined that potential US economic outperformance could lead to 4 rate hikes in 2018. Treasuries posted new marginal lows into the North American session. 10-year yields made new 3-year 6-month highs to expose 2.675 (0.500x 1.318/2.639 from 2.014) and the July 2014 2.687 range top. 7-year yields posted new 6-year 8-month highs, 5s recorded new 7-year 8-month highs, 3s reached new 10-year 1-month highs and 2s nudged up to new 9-year 4-month highs. Even though the US December National Activity Index beat forecasts, there was some consolidation throughout the morning. 3-month bills drew 1.43% with only 26.7% going to indirects - down from 47.2% at the prior auction - while 6-month bills drew 1.615% with 51.3% going to indirects - up from 37.9% in the prior auction. As news that the government shutdown could end in the afternoon took root, yields climbed back up towards session highs into the close with the belly in the lead. The curve flattened with 5/30s heading back towards the September 2007 narrows at 44 near a Fibonacci equality projection at 42 (288/184 from 146), but 2/30s carved out a range above last Wednesday"s trough at 77. New contract lows were posted in all futures instruments overnight, and trade remained heavy into the close. FVH8 broke down from a 5-week bear channel to offer scope to a Fibonacci projection at 114-22 (117-11/116-17*7 from 117-03*2) while TUH8 lapsed beneath a 2.5-month bear channel to shift the focus towards 106-20*5 (1.618x 107-07*5/106-31, 107-02*2). Tuesday"s calendar includes Richmond Fed manufacturing Index data and Chicago Fed"s Evans, who is not expected to address current economic conditions. Also, the US Senate Banking Committee will hold a hearing considering the nomination of Marvin Goodfriend as a governor of the Federal Reserve Board in Washington, and $35 bln 4-week bills and $26 bln 2-year notes will be on the auction block. MO

DAY AHEAD

Time (GMT)CtyEventPeriodSurveyPriorRevised22/1/18 21:30NZPerformance Services IndexDec--56.4--22/1/18 22:30AUANZ Roy Morgan Weekly Consumer Confidence IndexJan-21--123.5--22-01-18MUCPI Composite YoYDec--1.69%--23/1/18 - 29/01/18THCar SalesDec--78082--21/1/18 - 25/01/18SLSri Lanka NCPI YoYDec--8.40%--18/1/18 - 22/01/18IDMotorcycle SalesDec--550303--18/1/18 - 22/01/18IDLocal Auto SalesDec--96148--18/1/18 - 25/01/18SLExports YoYNov--14.10%--18/1/18 - 25/01/18SLImports YoYNov--0.20%--23/1/18 02:00PHGDP Annual YoY20176.70%6.80%6.90%23/1/18 02:00PHGDP YoY4Q6.70%6.90%--23/1/18 02:00PHGDP SA QoQ4Q1.70%1.30%--23/1/18 04:30JNAll Industry Activity Index MoMNov0.80%0.30%--23/1/18 05:00SICPI NSA MoMDec0.20%0.60%--23/1/18 05:00SICPI YoYDec0.50%0.60%--23/1/18 05:00SICPI Core YoYDec1.40%1.50%--23/1/18 05:30JNNationwide Dept Sales YoYDec--2.20%--23/1/18 05:30JNTokyo Dept Store Sales YoYDec--3.80%--23/1/18 06:00JNMachine Tool Orders YoYDec F--48.30%--23/1/18 08:00TAIndustrial Production YoYDec1.20%0.85%--23/1/18 08:30HKCPI Composite YoYDec1.70%1.60%--23/1/18 09:30UKPublic Finances (PSNCR)Dec--12.9b--23/1/18 09:30UKCentral Government NCRDec--12.3b--23/1/18 09:30UKPublic Sector Net BorrowingDec4.2b8.1b--23/1/18 09:30UKPSNB ex Banking GroupsDec5.0b8.7b--23/1/18 10:00GEZEW Survey Current SituationJan89.689.3--23/1/18 10:00GEZEW Survey ExpectationsJan17.717.4--23/1/18 10:00ECZEW Survey ExpectationsJan--29--23/1/18 11:00UKCBI Trends Total OrdersJan1217--23/1/18 11:00UKCBI Trends Selling PricesJan--23--23/1/18 11:00UKCBI Business OptimismJan---11--23/1/18 15:00USRichmond Fed Manufact. IndexJan1820--23/1/18 15:00ECConsumer ConfidenceJan A0.60.5--23/1/18 23:30AUWestpac Leading Index MoMDec--0.10%--23/1/18 23:50JNTrade BalanceDec￥535.0b￥113.4b￥112.2b23/1/18 23:50JNTrade Balance AdjustedDec￥276.7b￥364.1b--23/1/18 23:50JNExports YoYDec10.00%16.20%--23/1/18 23:50JNImports YoYDec12.40%17.20%--23-01-18JNBOJ 10-Yr Yield TargetJan-230.00%0.00%--23-01-18MUVisitor ArrivalsDec--2833t--23-01-18JNBOJ Policy Balance RateJan-23-0.10%-0.10%--

Central Bank Watch

Time (GMT)CtyEventPeriodSurveyPrior23/1/18 15:00USSenate Holds Confirmation Hearing for Fed Nominee Goodfriend

23/1/18 23:30USFed"s Evans speech (no discussions on mon. pol, econ conditions)

23/1/18 /2018JNBOJ 10-Yr Yield TargetJan-230.00%0.00%23/1/18 /2018JNBOJ Outlook Report

23/1/18 /2018JNBOJ Policy Balance RateJan-23-0.10%-0.10%

Auctions

Time (GMT)CtyEventPrev Avg YieldB/C01/1/18 - 31/01/18MAMalaysia to Sell 15Yr Bonds Due 2033 (Reopening)

23/1/18 05:00PHPhilippines To Sell PHP20 Bln 3-Yr Bond

23/1/18 09:00IDIndonesia to Sell 6Mo Islamic Bills, 2,4,7,15Yr Sukuk

23/1/18 10:30UKU.K. to Sell GBP1 Bln 0.125% I/L 2026 Bonds-1.85%2.99x23/1/18 10:30GEGermany to Sell EUR5 Bln 0% 2019 Bonds (DE0001104701)-0.74%1.7x23/1/18 18:00USU.S. to Sell USD26 Bln 2-Year Notes1.92%2.52xDestinations: