Japan prints money as the UK economy looses it
Week commencing Monday 14th January 2013
Overriding Market Themes
The Japanese Government has authorised a 10.3 trillion yen stimulus package aimed at reviving their struggling economy. The package will include a number of infrastructure programmes, as well as incentives for businesses to boost investment. Tokyo estimates that the stimulus will boost the Japanese economy by roughly 2% and create somewhere in the region of 600,000 jobs, a task which the economy has failed to manage as of yet. Japan’s economy has been hit badly by a dip in exports amid slowing global demand (especially from the Eurozone) and subdued domestic consumption, and this has placed the world’s third largest economy in recession over the past 2 quarters. Among those pledges were continued calls to devalue the Yen, as a weaken Yen bodes well for the country’s exporters. The yen has weakened nearly 12% against the US dollar since November last year on hopes of such moves. It was trading close to 88.97 yen against the US dollar in Asian trade on Friday. The government said that it would continue to keep a watch on the currency's movements and respond if necessary.
The UK economy contracted by 0.3% in the last 3 months of 2012, according to a fresh report from the NIESR (National Institute of Economic and Social Research). The NIESR blamed the contraction on an artificially strong set of growth figures for the third quarter, and when coupled with this Q4 adjustment, would mean that the economy saw a 0% growth for the whole of 2012. It seems all Olympic and Paralympic tickets were considered to have been purchased in the third quarter of 2012, when the games actually took place. This inflated the economy, registering a growth rate of 0.9% in the 3 month period, and meant that without the one-off factor, the economy would have had to find considerable growth from elsewhere to avoid a contraction in the final 3 months. Having dived into the figures, we concur with the gloomy outlook of the NIESR. Concentrating on production, which grew 0.3% in November compared with October, was primarily down to North Sea Oil and Gas production, which had resumed following some essential maintenance. Construction continued to decline as the sector registered a contraction of 3.4% in the month. Both of these sectors are dwarfed by the Service Sector, which posted 0.1% growth in October compared with September.
The latest unemployment rate in Greece has surpassed Spain’s, rising to a whopping 26.8%, making Greece top the unemployment tables in the European Union. The Greek economy remains in recession and the government is in the process of administering one of the harshest austerity programs in the world, in order to continue meeting the terms of its financial bailouts. So far, the European Central Bank, International Monetary Fund and the European Commission have pledged a total of EUR 240 billion in rescue loans, of which Greece has received more than two thirds. With the country still in recession, and more spending cuts on the way, we project the unemployment figure to surpass this current high, and perhaps even peak slightly above the 30% mark.
Finally, across the pond in the US of A, the US trade deficit has widened unexpectedly in November, after a rise in the import of foreign consumer goods. Figures from the Commerce Department have shown that the gap widened by 16% to USD 48.7 billion versus a contraction estimated by the markets. This deficit is the largest recorded since April 2012, and indicated that US manufacturers continue to struggle supplying domestic demand. On the bright side, this is a sign that the US retail sector continues to grow amid strong consumer spending. This is a good sign for the US economy as well as the global economy.
GBP This Week
This is a relatively quiet week for Sterling as we kick off with CPI on Tuesday. Inflation has been fairly robust, with CPI rising by 2.7% in each of the past two readings, with markets are expecting an identical rise in the upcoming release. We then look towards Friday’s Retail Sales, which have looked weak as of late, and came in flat in December. The markets are expecting a slight improvement in the January release. Sterling continues to be volatile in January, with it making some gains last week mainly because of the ECB rate decision and broad dollar weakness. The pound will continue having trouble sustaining any upward movement if we see UK releases continue to be weak.
USD This Week
We start the week looking forward to Ben Bernanke’s speech at the University of Michigan, which might not be the most interesting of speeches but may detail some of his more longer term thoughts in terms of rate hikes. Moving to Tuesday, we are watching US Retail Sales and Core Retail Sales, with the market expecting 0.2% growth on both. Wednesday’s Core CPI should show a slight increase in the price of goods and services by roughly 0.1% to 0.2%. Thursday sees unemployment claims, which should come in roughly at a 369,000 against a previous 371,000 figure. Finally, the Preliminary University of Michigan Consumer Sentiment should show U.S. consumer sentiment declined further in December, with a lower than expected reading of 74.5 compared to 82.7 in November. A rise to 75.1 is forecasted.
EUR This Week
Headlining this week is the Spanish 10 year bond auction, with yields expected to come in below December’s 5.29%. Lower yields should continue to reassure markets that’s Spain is meeting its fiscal obligations and continues to remain credit worthy. Industrial Production on Monday is also worth watching, as output registered a 1.1% contraction in October contrary to forecast of a 0.3% rise. The situation will continue to deteriorate unless a solution is found for the Eurozone’s debt crisis. A rise of 0.3% is expected. Draghi’s relatively positive words about the debt crisis and the financial system seem to mirror the continued drop in bond yields. Is the worst really behind the zone? Maybe! But it is still uncertain if there will be any ‘positive contagion’ to the real economy, which is clearly still on the back foot.
In Other News
The Royal Air Force has sent the first of two C17 aircrafts to assist the French as they battle against Islamist militants in Mali. The first plane flew from RAF Brize Norton to the Evreus airbase, where it will be loaded with French armoured vehicles and other equipment before flying to Bamako. This comes as the French military has kept up its aerial bombardment of militant targets for a third day. Slightly closer to home however, the UK is under attack, from the weather! Parts of England have seen some light snow overnight, as forecasters warn of a second, heavier band, that will fall across large areas of the UK in the afternoon.
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