- USD/JPY stymied awaiting developments in China
- Economic growth expected to plunge in the fourth quarter
- Safe-haven trade in abeyance as US dollar pauses
Indecision ruled the dollar/yen market this week. Monday saw the pair open and close at the same rate, Tuesday the difference was three points, Wednesday and Thursday’s start and finish were exact reversals and Friday’s open and close were the same as Monday and Tuesday. The overall range of 109.56 to 110.14 gave no hint of direction as Monday’s open at 109.75 was essentially Friday’s open and close 109.78 and 109.78.
The yen safety trade of the final two weeks of January seems to have dissipated as the continuing corona virus crisis in China elicited no flight to either the dollar or the yen.
Japanese statistics February 10-14
The two sides of the Economy Watchers Surveys for January from the Cabinet office diverged with the view of the current situation rising slightly to 41.9 from 39.7 in December while the future outlook fell to 41.8 from 45.5 in December and 45.7 in November, the best scores for six months. Both indexes are near the bottom of their 10-year range.
The Tertiary Index for December from the Ministry of Economy, Trade and Industry, the once famous METI, arrived at 0.2%, well under the 0.52 forecast and much lower than the upwardly revised 1.4 score in November. This index tracks the domestic service sector and plunged sharply to -5.2 in October.
Japanese statistics February 17-21
Depending on which side of the dateline one resides fourth quarter GDP will be issued by the Cabinet Office on the weekend or on Monday. Annualized GDP is expected to be -3.7% down from 1.8% in the prior quarter. Quarterly GDP is forecast to be -0.9% from 0.4% in the third quarter.
Industrial production for December is forecast to be -3% on the year the same as in November. This would be the third loss in a row following -8.2% in November and -7.7% in October, which were the largest declines in six years.
Machinery orders are projected to drop 9% in December partially reversing the 18% gain in November. Imports are forecast to fall 1.3% on the year in January, an improvement over the 4.9% drop in December but still the ninth decline in a row. Exports are also projected to decrease 6.9% in January after the 6.3% drop in December. They have fallen for 12 straight months.
National CPI is expected to remain under 1% falling to 0.7% Y/Y in January from 0.8% in December. Core Annual CPI is predicted to be unchanged at 0.9%.
Japan statistics summary February 10-21
This week’s information did nothing to improve the general view of a moribund Japanese economy unable to generate any internal dynamism and beholden to external developments for growth.
The data due in the week ahead is likely to confirm that prescription. Japan has not had a negative quarter of GDP since the final three months of 2018 but the economy has suffered two recessions in the last decade. With declining exports and imports and the partial paralysis of China’s economy the prospects for Japan in the first quarter are darkening rapidly.
US statistics February 10-14
On Monday the National Federation of Independent Business whose optimism index polls its membership for their outlook rose slightly to 104.3 in January from 102.7 in December.This puts it near the middle of the tight 101.2 to 105.0 range for 2019.
Chairman Powell's Semiannual Monetary Policy Report appearance in the House on Tuesday and the Senate on Wednesday featured his upbeat assessment of the US economy.
“We find the US economy in a very good place…wages [are] moving up most at the bottom end of the wage scale…it’s great to see, ”he said on Tuesday. “We have learned that unemployment can be lower than many had thought without increasing inflation.”
Under questioning by the Representatives he observed that the risk of recession is low. “There is no reason why the expansion can’t continue. There is nothing about this expansion that is unstable or unsustainable.”
Trade concerns have diminished. “The signing and implementation of the USMCA agreement will be a positive for the economy, in that it removes some uncertainty on trade.” The Chairman has in the past observed that the US-China trade pact had reduced tensions between the nations.
Several members mentioned the potential economic effect of the corona virus in China and Mr. Powell temporized.
“We will be watching this carefully. What will be the effects on the US economy? …Will they be material?” “We have to resist the temptation to speculate on this.” The impact on the US economy would have to be “persistent” for the Fed to contemplate a policy change. It is “very likely” that there will be some spillover on the US economy but China’s Asian neighbors and major trading partners in Europe have greater risks.
The Chairman noted that that the global decline in rates has reduced the central bank’s ability to affect the economy. “The current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens,” he said.
He also observed that the bank had learned from the recent turmoil in the overnight funding market that the size of its balance sheet needed to ensure smooth function was larger than it had thought. However, “The repo-market spike...doesn't appear to be a symptom of deeper financial problems,” he said.
Mr. Powell’s comments offered a number of interesting points on central bank policy and global economics but in the main arena, the status of the US economy and potential Fed policy it had all been said before.
On Thursday January headline CPI was stronger on the year at 2.5% from 2.3% in December and as came in expected in the core rate at 2.3%. Initial jobless claims for the February 7th week were 205,000 leaving the four-week moving a 212,000 near its 50 year low.
Retail sales for January on Friday were as forecast, 0.3% with the ex-autos category at 0.3% as well and the control group slipping to flat and missing it 0.3% prediction. December was weaker than initial post with the overall reading revised to 0.2% from 0.3%, ex-autos to 0.6% from 0.7% and the control group to 0.2% from 0.5%.
US statistics February 17-21
Monday is a holiday in the US markets are closed.
Housing starts and building permits for January on Wednesday are expected to be within recent parameters for a healthy housing sector. Permits are to rise to 1.45 million annualized from 1.42 million in December while starts should return to trend at 1.39 million in January from 1.608 million the prior month, which was the highest total since the housing bubble.
The FOMC minutes for the January 28-29 meeting at 2:00 pm on Wednesday will provide detail for the Fed’s current neutral stance and positive view of the US economy but will not offer any new insights to policy.
Thursday’s initial jobless claims is of historical and econometric interest as the US labor market continues its record setting run but unless it is wildly out of kilter, markets will pass notice.
Market Economics of London issues its February PMI reports in manufacturing, services and a composite on Friday. They serve as a second to the better known and far older ISM report. This manufacturing index has consistently read higher than the ISM never dropping into contraction with a low of 50.3 last August. In January manufacturing PMI was 51.8, services 53.4 and composite 53.3.
US statistics summary February 10-21
The slightly weaker US retail numbers on Friday, especially for December may shave 0.1% or less from fourth quarter GDP, but a much more pronounced and prolonged drop would be needed to affect perception and rate policy. The Fed’s confidence is not misplaced.
American statistics in the coming week are will not have major market impact. Housing has ceased to be a concern, the FOMC minutes will not separate from public policy and Markit’s PMI figures are an appetizer not the main course.
USD/JPY technical outlook
The divergence in moving averages remained this week with the 21 and 100-day in firm uptrends, though the 21-day planed with the lack of movement, and the 200 day resolutely lower.
The breach of 110.00 moved the first resistance up to 110.25 , the January high. Beyond that the lines are unchanged: 110.70, 110.00. The head and shoulders formation in April and May last year provide strong lines at 111.70 and at 112.15.
Beneath current levels the support lines are weaker as the rapid movement in the second half left few strong markers.
The line at 108.40 sets the recent low and a number of bottoms from mid-November to mid-December. Below that there is a thin line at 108.00 and another at 107.50. The August to September lows would function more as caution signs than stops if the USD/JPY drops to those levels. Support exists at 107.00, 106.75 and 106.50.
USD/JPY sentiment poll
Despite this weeks inaction, sentiment predicts an end to the stalemate. Considering the number of potential market moving events available, that is probably a safe assumption.
The one week view became both strongly bullish, 67% from 33% and more bearish, 33% from 21%. Neutral fell to zero, an unusual occurrence. It is a clear indication that the current stasis is not expected to last. The forecast drifted higher to 109.85 from 109.68.
The one month outlook was similar to last week, bullish at 35% from 31%, bearish at 46% from 42% and sideways to 19% from 27%. Here also the bias is for movement. The forecast is just four points lower, 109.41 vs 109.45.
The one quarter view is identical for bullish at 31%, stronger for bearish at 55% vs 50% and weaker for neutral, 14% from 19%. The forecast fell 20 points to 108.98 from 109.18.
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