Japan slips further into recession as Abe delays planned tax hike
Week Commencing Monday 8st December 2014
This Week in Brief
- In the UK we are only looking out for manufacturing production which should continue to post positive, albeit down 0.2 percent on the month.
- In the US we expect retail sales to come in around 0.3 percent for the month and the UoM to post a further high of 89.1 versus 88.8 last month.
- In Europe we are watching to see how many banks refinance through the ECB’s TLTRO scheme. We do not expect a massive uptake considering banks are probably being more cautious given the current economic situation across the channel. If this is the case, roll on QE Mr Draghi!
Overriding Market Themes
Starting in the Far East, Japan's economy shrank more than initially reported in the third quarter on declines in business investment. The news surprised markets and backed up support for premier Shinzo Abe's recent decision to delay a second sales tax hike. The revision to an annualised 1.9 percent contraction from a preliminary 1.6 percent fall confirmed Japan slipped into recession and smashed market expectations of a 0.5 percent contraction this quarter. Adding to the pessimism, manufacturers' confidence slid in December and is expected to deteriorate further, highlighting the shaky economic performance of the world’s third largest economy. The key factor behind the GDP downgrade was a 0.4 percent decline in business investment, revised from a preliminary 0.2 percent fall. Analysts had expected capital spending to be revised up after an upbeat survey last week. With all this in mind, it will be interesting to see how Abe’s snap election pans out on the back of this, so far he has been reasonably popular but recent events may well damage his strong image on the economy.
Moving back to home shores, the UK services sector grew at a faster-than-expected rate in November, easing fears of a slowing economic recovery. The headline PMI index measuring activity in the sector rose to 58.6 in November from 56.2 in October, where a reading above 50 indicates expansion. It beat City expectations of a much smaller increase to 56.5. Employment, new business, and backlogs of work in the services sector all increased at a faster rate in November, and firms were feeling more optimistic about the outlook for business. This is of course good news, however the UK economic recovery has been heavily reliant on services, which so far is the only major sector of the economy where output has surpassed its pre-crisis peak. The combined all-sector PMI - including services, manufacturing and construction - rose to 57.8 in November from 56.4 in October.
GBP This Week
We have a very quiet week ahead for the UK with manufacturing production the only release of note. Expectations point towards further growth in this indicator, however the rate of growth should decline from the 0.4 percent posted last month to a more conservative 0.2 percent this month. That said, the year on year figure should improve from 2.9 percent to 3.2 percent.
USD This Week
We have a busier week ahead for the US with retail sales and the UoM all expected to release data into the marketplace. Starting with Thursday’s retail sales figure, we estimate a positive release of 0.3 percent to match last month, however given it is the season of goodwill the risk on this is certainly to the upside.
Moving to Friday, the release of the preliminary University of Michigan consumer sentiment survey should be interesting, especially seeing how the latest figure released was the highest in over 7 years. We are seeing strong uptrends on this one, and with this in mind we expect a continued expansion to around 89.1 from 88.8 last month.
EUR This Week
We have a quiet week for Europe as well, with the figures from the latest tranche of TLTROs set to be released. Unfortunately, given that growth prospects have worsened across the zone we fear that banks will be hesitant to lend and will most likely defer until the situation improves, therefore we expect a somewhat reduced take-up. Should this happen, it would further strengthen speculation that the ECB will have no choice but to implement a QE program. Of course, the converse is true and should we see a strong TLTRO take-up that it may well appear that Draghi’s current measures are sufficient.