the preliminary figures for Japan’s third quarter GDP as widely expected, printed below the anticipated -0.8% year-on-year, making this the second consecutive quarter that the economy has contracted. Japan has slipped back into recession. This data is definitely not good news for Prime Minister Abe, who is still struggling with his arrows to stimulate the economy through wages as retail sales are still not at a strong enough level to provide with sufficient traction for the economy. We believe that, for the time being, these results will not trigger any additional policy stimulus. In addition business spending fell 1.3%, more than the anticipated 0.4%.
The pressure to ease will mount. The Bank of Japan’s official forecast of 1.2% for March 2016 seems impossible. As a result, major Japanese indices have dipped this morning at the opening session amid the atrocities in Paris on Friday night. The USDJPY is heading slightly upwards this morning. The fiscal and monetary arrows appear insufficient to boost the economy. Structural reforms are largely awaited. We remain bearish on the yen.”
US data, speaker and minutes this week
This week will provide a wealth of information regarding the FOMC monetary policy path. On Wednesday, the release of the FOMC meeting minutes should provide more insights into the Feds thinking. The October FOMC rate decision caught the markets off-guard with its hawkish tone, so these minutes could give clues on data hurdles and understanding of global risks. The plethora of Fed speakers last week suggests that a majority are comfortable with a December 25bp rate hike. However, weak domestic data in retail sales still have many doubting the strength of the US economy (specifically the US consumer). Elsewhere, CPI inflation data will be release. While not the Feds primary inflation measurement of choice its will provide a broad-based assessment of price pressure in the US. US headline CPI is expected to increase 0.2% m/m in line recovering from last month’s 0.2% decline. Core CPI (ex food and energy) is expected to rise 0.2%, which puts the rate at 1.9% y/y. Clear a solid read will strengthen expectation for December “lift off”. In addition to the data and meeting minutes, markets will get to hear from Fed officials including Kaplan (new Dallas Fed President Kaplan first economy focused speech), Dudley, Tarullo, Lockhart, and Bullard. The front-end of the US yields curve compressed forcing the USD back from post-employment highs. Despite expectations of a rate hike, upside in US treasury yields looks limited as divergence between the US and rest of the worlds will lead to steady demand for US govies. We remain bearish on the EURUSD at upside should be capped by 1.0900 with our focus on 1.0660.
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