» The Global Markets Weekly – 5/2/16 Decision Economics

The Global Markets Weekly – 5/2/16

Posted May 2, 2016 by rvillareal

When, Not If[private]

The markets were surprised by the BOJ’s decision to stand pat, despite recent discouraging data. Still, Governor Kuroda’s press conference was dovish, as he said the BOJ was willing to wait and see if the January moves would finally work.  But he admitted that he was not willing to wait as long as six to twelve months, meaning that the June meeting was still “live.”

By the time the BOJ meets again in mid-June they will have Q1 GDP data and April CPI data under their belts.  The Q1 figures next month are likely to be stagnant after a decline in Q4.  No pickup is expected in the April CPI, thanks in part to a lagged impact of the yen appreciation.  The stronger yen is weighing not only on import prices (and the CPI) but also on corporate profits and exports, reducing the possibility of further wage gains and/or higher investment spending.

With little improvement in growth or inflation likely, DE still thinks it is a question of when and not if regarding easier BOJ policy.  We look for aggressive action at the June meeting with a further cut in already negative policy rates and sizeable increase in the asset purchase plan.  If Kuroda truly favors “bazooka” actions rather than more modest steps, then investors may be surprised at the size of the next policy move.

The Fed also stood pat, but that was not surprise to investors.  While they signaled less concern about international conditions, they were still willing to monitor it closely, which to some investors was a (mild) move towards hawkishness.  But they acknowledged the slower pace of economic activity which was confirmed in the dismal 0.5% gain in Q1 GDP.  Like most analysts, we are scratching our heads as to why consumer spending gains have slowed in the past six months, despite a strong job market and signs of rising wages.

Even if consumer spending and GDP growth recover nicely in the next few months, it might not be enough for sway the doves at the FOMC by June.  Given the asymmetric policy bias of the FOMC, they may defer action, given their preoccupation with downside risks.  Nonetheless, the Fed will at some point “adopt their inner Volcker,” as the economy is a lot closer to normal than policy is.

  • S.: The week is headed by ISM (Mon) and jobs (Fri). The ISM should consolidate its mild upswing and stay close to 51. Another solid jobs report seems likely but will mean little to investors unless it leads to some pickup in consumer spending growth.  Given the unusual stability of job growth, a downside surprise may be overdue and represent more “noise” than “news.”  Investors might not see it that way and worry that the expansion is caught in an even slower growth rut.  Fed-speak will reemerge, with Bullard (Th) the most likely market-mover.
  • Eurozone: There is not too much on the data schedule this week. The ECB Bulletin (Thu) is likely to paint a downbeat picture of the Eurozone economy, highlighting downside risks. It will certainly not reflect the better economic signs seen of late, most notably in the latest unemployment and Q1 GDP results.
  • UK: The PMI data this week may take on even greater market sensitivity to see whether any of EU uncertainty has started to spill over into the UK real economy or instead that reduced global financial market tensions may have caused the opposite. The latter may be the more important as the still-soggy manufacturing reading in March is likely to see some recovery in the Manufacturing PMI data on Tuesday, an outcome at least backed up given the results offered by alternatively-sourced survey data for the sector.
  • Japan: In a quiet week with no major indicators, investor will mull over the implications of the surprising move by the BOJ not to take action. DE continues to expect an aggressive move at the next meeting in June, with another drop in policy rates and a large increase in the asset purchase plan.
  • China: In a short week, the Caixin PMI survey (Tu) is expected to edge closer to 50, while the official one remains a touch above 50. The trade balance (Sun) will show some improvement, with stable exports and a drop in imports.

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