Fiscal > Monetary
Asian economies are starting to crank up the rhetoric around expansionary fiscal policy following their recent monetary policy efforts, with Japan and China leading the way. Overnight, in what could be yet another iteration of the confusing Abenomics plan, Japan’s PM Shinzo Abe announced a cut in the level of Corporation Tax by as much as 3.3% through next year. I am struggling to believe this is new, however, having heard similar noises earlier in the year.
China’s Finance Ministry has not advocated anything as concrete as that yet, but an article on its website overnight stated that it would be involved in a “stronger proactive fiscal policy”. As we indicated last week, fiscal policy is the next shoe to drop in the recovery mechanism for emerging markets from a Federal Reserve rate rise and tumult from the recent yuan devaluation.
Stocks in the region are being driven onward with emerging market and commodity currencies also enjoying a green day.
Canada and New Zealand central banks to meet in 24hrs
The central bank news for the week starts today with the Bank of Canada this afternoon. Canada has been beset by recession, collapsing oil market dynamics and a subsequent decline in domestic demand. In response, the Bank of Canada has cut rates to record lows but is expected to keep interest rates at 0.5% at its meeting this afternoon. We think this is right but that any comments appended to the release are likely to emphasise downside risks to the Canadian economy. It will be interesting to see whether any comments from Governor Poloz around the China situation more closely mirror those of Yellen and Carney (not too bothered) or Draghi (sounding alarm bells).
On the other side of the coin, tonight’s Reserve Bank of New Zealand announcement could easily see another rate cut given the continual pressures from the Chinese economy. Australia and New Zealand have been the most heavily affected ‘developed’ economies from the Chinese turmoil. The Kiwi dollar is stronger this morning on the wider risk appetite in markets but I can see a rate cut taking this lower over the course of the next 24 hours.
UK, Europe quiet
As you can possibly gather, there is little news from the UK, Europe or the US at the moment. Today’s UK industrial production numbers from the UK are expected to be a drag on sterling with lower North Sea oil production and falling export demand for UK industry the likely pressures. GBP is waiting rather cautiously on tomorrow’s Bank of England meeting.
Questions on whether the Bank of England is able or indeed prepared to look through the oncoming wave of deflation is key to rate prospects and may have turned hawkish notions dovish in recent weeks. GBP is relatively flat on the session with those industrial numbers due at 09.30.