Japan back in recession as G20 ends solution-less

• Japanese economy slips back into recession, Q3 GDP falls 0.4% in Q3

• Sterling weak as we wait on tomorrow's CPI announcement, we expect a miss

• G20 meeting shows ambition from leaders but little agreement on action

• Friday's Eurozone GDP beat unable to paper over cracks in single currency

Good morning,

We thought last week would be an important one for the pound and it most definitely was. Sterling fell to fresh multi-month lows across the board last week as the Bank of England Quarterly Inflation Report suggested the MPC’s concern over the UK economy had increased in the past few months. Indeed, it seems that most commentators were cautiously optimisitic - with an emphasis on the optimistic - on the UK’s growth prospects, while now that emphasis has switched to being cautious.

I am once again looking for another negative week for GBP, for very similar reasons to last week’s declines. Tuesday’s CPI print is expected to show that inflationary pressures remained flat through October and were maintained at 1.2% YoY. That looks a bit rich to me. Supermarkets are at each other’s throats on fuel and food savings at the moment and while I expect clothing prices to have helped inflation, I am looking for the overall inflation number to fall further towards that 1% mark that would trigger a letter from BOE Governor Carney to Chancellor George Osborne. Wednesday’s minutes from this month’s Bank of England meeting should back up the tone of last week’s Inflation Report. We doubt that we will have seen the voting record change, and expect McCafferty and Weale to have voted for a rate hike, but any lessening of this hawkish pressure will only serve to push GBP lower further.

Comments from Carney and BOE Chief Economist Andy Haldane have kept GBP under wraps through the Asian session. “We’ve got huge disinflationary forces coming from our trade partners, particularly in Europe, and commodity prices have gone down quite sharply,” Carney said in an interview with The Australian newspaper.

For all the chatter about further quantitative easing and possible snap elections, Japan is back in focus this morning courtesy of falling back into technical recession. GDP shrank by 0.4% in Q3 following a 1.8% fall in Q2. The sales tax that was so lauded in April is the culprit and will now cast real doubt about the government’s ability to enforce tougher fiscal policy moving forward. Exports and consumer spending bounced back into positive territory but industrial production and manufacturing outweighed these gains handily. Yen initially weakened on the news, breaching the 117.00 mark in USDJPY, a fresh seven year high, but has strengthened as investors bet on a further delay to Bank of Japan monetary policy easing.

Local newspapers are reporting that a decision on an election could be made as soon as tomorrow morning.

Over the weekend, G20 leaders met in Brisbane but have flattered to deceive once again. It stands to reason that these meetings are largely cheerleading events; to show a semblance of togetherness and ambition. Details however are nowhere to be seen but politicians will return home with a warm feeling in their stomach.

Kiwi dollar has advanced overnight as well with retail sales advancing by 1.5% in Q3, beating the 0.8% expectation easily. NZ Finance Minister Bill English told reporters yesterday that a rate in NZDUSD of “mid-to-high 70s” was sustainable for the economy. The pair currently sits at 0.7946. Euro watchers will have taken a bit of cheer from Friday’s GDP report even though GDP for the whole of the Eurozone only expanded by 0.2% in Q3 and is up around 0.8% on the year, below the European Central Bank’s forecast of 1%.

As we make the final run into Christmas, I still feel that it is unlikely that the European Central Bank will reach a consensus on a looser monetary policy stance. The most common question I am asked on a daily basis is ‘why is the euro so strong?’ Simply speaking, I am expecting divergence in relative monetary policies to allow the USD and GBP to gain against the euro over the coming years but I am still not on board with the belief that EURUSD or EURGBP is going to crash to the floor. I put the chances that the Bank will go with a full quantitative easing plan in 2015 at 40%; without it we must look for the single currency to get stronger, or certainly not get dramatically weaker. Yes, Eurozone data’s bad but the data’s been bad for two years now. It was bad when EURUSD was at 1.17 and it was bad when at 1.39.

Have a great day.