Japan Q1 GDP data, while better than expected, was still weak


MAJOR HEADLINES – PREVIOUS SESSION

  • US Apr. Housing Starts out at 458k vs. 520k expected and revised 525k prior

  • US Apr. Building Permits out at 494k vs. 530k expected and revised 511k prior

  • US ABC Consumer Confidence out at -45 vs. -42 expected and -42 prior

  • JP Q1 Housing Loans out at +3.5% y/y vs. +3.3% prior

  •  JP Q1 GDP out at -4.0% q/q, -15.2% y/y vs. -4.3%, -16.1% expected and revised -3.8%, -14.4% prior resp.

  • JP Q1 GDP Deflator out at 1.1% vs. 1.8% expected and 0.7% prior

  •  AU Westpac May Consumer Confidence out at -4.3% vs. +8.3% prior

  • AU Q1 Wage Cost Index out at +0.8% q/q, +4.2% y/y, as expected, vs. 1.3%, 4.3% prior resp.


THEMES TO WATCH – UPCOMING SESSION

  • GE PPI (0600)

  • JP Convenience Store Sales (0700)

  • UK BOE Minutes (0830)

  • Swiss ZEW Survey (0900)

  • UK CBI Industrial Trends (1000)

  • CA CPI (1100)

  • US MBA Mortgage Applications (1100)

  • CA Leading Indicators (1230)

  • US Geithner testifies on TARP (1330)

  • US FOMC Minutes (1800)

Market Comment:

A slightly more cautious mood filtered through into the prevailing sentiment in Asia, in both FX and equity markets. The release of Japanese GDP data for Q1 may have had some impact, though the initial reaction was that the numbers were actually better than expected. However, at -4.0% q/q and -15.2% y/y, the data was the worst on record and the immediate gains in the Nikkei were soon given back. While found it convenient to link JPY strength seen in the Asian session to the better-than-expected numbers (expectations were for -4.3% q/q and -16.1% y/y) it would appear that the market was simply hit by huge selling from one Japanese name, hitting with JPY attached to it: USDJPY, AUDJPY, NZDJPY, EURJPY and GBPJPY all were pressed lower under relentless selling and we may need patience until the orders are exhausted before pressing on with yesterday’s trend. Musing by the authorities after the data showed PM Aso saying that it highlighted the country’s severe economic conditions, with the worsening in the corporate sector filtering down into households. Finance Minister Yosano added that the figures reflect a rapid worsening of the economy and expected it to continue to be in a severe state. He is still concerned about a sharp deterioration in unemployment but saw some bottoming out in exports and output.

Other data releases in Asia were rather more disappointing. Australia’s consumer confidence data showed a surprising u-turn in May. The Westpac index fell 4.3% on the month, reversing some of the 8.8% jump in April and pulled the index back into negative territory for the year. Note the survey was conducted just after the release of the Budget and consumers may have been spooked by the talk of record, and ballooning deficits while the RBA’s earlier decision to keep rates unchanged also helped dent sentiment. We still maintain that physical consumer consumption will be the only true indicator that the worst is behind us, and this is unlikely to happen soon if sentiment surveys continue to pivot around parity.

UK Chancellor Alistair Darling appeared optimistic and hoping for an early Christmas present in an interview with the Times. He predicted that the recession would be over by Christmas and brushed aside doubts that his Budget forecasts were overoptimistic. To recap he predicted that UK growth would hit 1.25% next year after a 3.5% contraction this year. He appeared to be putting more pressure on banks to boost lending again to both consumers and companies. Certainly GBP has been the darling of the markets over the past 24-48 hours, partly attributable to the weaker USD, but GBPUSD managed to break new highs for 2009 last night. However, one word of caution – the 200-day MA stands in the way at 1.5550 at the moment.

There was also more positive news for the financial sector last night after BoA announced that it had successfully raised about $13 bln after selling 1.25 bln shares of common stock. With the bank’s recent sale of a $7.3 bln stake in China Construction bank, BoA is now more than half-way towards raising the $33.9 bln required under the US Treasury’s stress tests. While on the subject of banks, TARP and possible repayments may be in the news again tonight as US Treasury Secretary Geithner testifies before the Senate Banking Committee about oversight of the plan. CNBC has reported that TARP repayment announcements would be made on June 8th and that the Treasury will announce a process for auctioning TARP warrants in the next few days.