Thursday, May 19, 2011

Japanese Recession!

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By Mike Conlon | May 19, 2011

Last night, Japan reported GDP figures that came in worse than expected, showing a quarterly decline of .9% vs. an expectation of a .5% decline, pushing the YoY figure to a negative 3.7% vs. the expectation of a negative 1.9%. By definition, this puts Japan in recession as the effects of the natural disaster there added insult to injury.

However, the rebuilding that will take place as a result of the disaster may help add to GDP in the coming quarters and Japan has become accustomed to tepid economic growth over the last 20 years so the market reaction has been muted so far.

Speaking of GDP, I mentioned yesterday that the BOE minutes showed that the Central bank didn’t want to raise rates with declining GDP figures, but if those declines are the result of the lack of government spending (one of 4 GDP components) then that should be seen as a good thing and should have little affect on monetary policy.

The reason I say this is because UK retail sales figures came in better than expected, showing signs of life in the UK consumer.

Yesterday’s release of the FOMC meeting minutes showed that the Fed is in no hurry to exit QE2 so the market took that as a sign that all systems are go and stocks and commodities pushed higher to end the day. Oil is back to over $100 and gold is hovering around $1500.

Now the supply/demand debate is starting to enter the commodity space, as adverse weather and flooding are reducing supplies of commodities thereby driving prices higher, but this belies the impact of US monetary policy.

Later this morning we will get existing home sales as well as initial jobless claims which are expected to be back in the low 400s. At this point, economic prospects are beginning to look weaker and the effect of QE2 has created higher food and energy costs and raised stock prices but little else. Thanks, Bubble Ben! I’d ask where Obama is in all of this but I think its probably better that he is not involved.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as increased risk appetite is driving markets early, and consumer inflation expectations came in lower than last month’s reading. An important point to remember is that it is the expectation of inflation, and not so much the figure itself, that is the driver of consumer behavior.

Kiwi (NZD): The Kiwi is also higher as budget projections show that the NZ economy will return to surplus in 4 years after the costs of the earthquake are factored in, as government spending cuts attempt to reign in debt levels.

Loonie (CAD): The Loonie is trading higher as oil prices are back to over $100 and the release of the BOC review will show what the Central bank thinks of the state of the economy. Tomorrow’s CPI data release and retail sales figures may provide further clarity on the inflation situation. (Click chart to enlarge)


Euro (EUR): The Euro is taking a break from the action today as DSK has officially resigned as Head of the IMF. Now the search for a new chief begins, and in the meantime ECB honcho Trichet will be speaking on the state of the Euro zone economy. Expect the Euro to trade on anti-Dollar sentiment.

Pound (GBP): The Pound is mostly higher as retail sales figures came in better than expected. Sales ex auto fuel came in showing an increase of 2.7% vs. an expectation of 2.2%. If the UK consumer is still breathing in the face of the rampant inflation they are experiencing and not just spending on necessities, then declining GDP due to government austerity should be viewed as a good thing and not used as an excuse to keep rates low for a long time.

Dollar (USD): Well it looks like the Fed is not willing to let the US economy attempt to stand on its own two feet just yet. In no hurry to exit QE2, today’s existing home sales figures will shed light on whether or not the true problem in the USâ€"the housing marketâ€"is starting to recover. Initial jobless claims are going to be back in the 400s, and I’m still uncertain how the Fed is supposed to help employment anyway.

Yen (JPY): The Yen is weaker across the board after GDP figures came in worse than expected showing that Japan is indeed in recession. While this not a surprise and therefore the market reaction subdued, I’m not quite certain what it is going to take for Japan to be able to turn this situation around, outside of further monetary easing. The Japanese rate policy decision is due out tomorrow. (Click chart to enlarge)


If a global economic slowdown is due to governments reduced spending, then I am all for it! However, keeping rates low and encouraging higher prices in this type of economic climate doesn’t help the average person.

While the supply/demand debate does have some merit when it comes to commodity prices, I am still convinced that it is Fed policy that is pushing prices higher. I believe that demand is fairly constant whether oil is at $50, $75, or $100.

China is paying with what it considers “monopoly money”, as the massive Dollar reserves they have accumulated mean they will buy at any price. It is the average consumer, however that cannot compete in that environment so higher prices effect them more.

In addition, when true supply issues arise, the fact that prices are already high leaves little room for error. It’s like going to an auction and bidding on something that you really want, but realizing that a billionaire wants it as well. You may as well give up on the spot, as there is no way you are going to win.

Unfortunately, this is the economic story unfolding today.

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