Economics & Growth | UK | US
Charts of the Week: YCC Adjustment, US Household Optimism, and EUR/CHF Correction Nears
- By Matthew Tibble
- 6 min read
Summary
- The Bank of Japan (BoJ)’s unwinding of its Yield Curve Control (YCC), however slow, should see the JGB curve steepen.
- While US consumption has slowed from the unsustainable Q1 growth, resilient spending on durables signals households’ optimism.
- The case for a EUR/CHF correction builds.
- Driven by hospitality, European wage-intensive services inflation accelerates, which should worry the European Central Bank (ECB).
Unwinding YCC Should See the JGB Curve Steepen
The BoJ recently surprised us with their half YCC adjustment. They are sticking to the +/- 0.5% band around zero, but the thresholds are more flexible now. They will only use fixed rate operations at 1% JGB yields. This half-adjustment should take a lot of pressure out of YCC ending-type trades.
Going forward, one thing to focus on is that an unwinding of YCC, however slow, should see the JGB curve steepen. We are still well below previous levels of steepeness (Chart 1).
US Consumption Signals Household Optimism
Analysing US Q2 2023 GDP data, consumption slowed to +1.6% WoW SAAR from the unsustainable +4.1% Q1 growth, but resilient spending on durables signals households’ optimism. The resiliency of durables consumption is striking considering that it remains well above trend (Chart 2). It is likely to signal household optimism, which is consistent with the strong labour market and rising real wages.
EUR/CHF Approaching a Correction?
Focusing on EUR/CHF, the case for a correction builds. Three-month changes are in line with where they would typically bounce (around -3%) while, at the time of publishing the note, EUR/CHF was also approaching 0.95 – the SNB may well prove satisfied with EUR/CHF at the bottom of the past years range (Chart 3). This, alongside the unlikelihood that the European CESI can turn even more extremely negative, means that there is a good chance EUR/CHF could bounce from 0.95 in the near-term.
European Wage-Intensive Services Inflation Accelerates
Core and services inflation has surprised to the upside of ECB forecasts in June and July. The story for services is hard to parse from the headline alone (YoY rise continues, but MoM has been more varied). Instead, we assess momentum across headline CPI’s individual contributors by taking a three-month sum of the deviation vs a typical month (Chart 4).
This underlying story is hawkish. We do not have the detailed picture for July yet, but we can see that the disinflation out to June was driven by declines in MoM package holidays, communications, and non-energy utilities. The contribution of wage-intensive services is meanwhile growing, driven by hospitality (Chart 4). This should be a concern to the ECB.
