Nothing to Fear from Friday the Thirteenth

Nothing to Fear from Friday the Thirteenth

  • As a whole, the eurozone grew 0.3% in Q3, slightly less than the 0.4% seen in Q2
  • Some observers will play up what is wrongly called a technical definition of a recession regarding the Q2 contraction of the Japanese economy
  • Malaysia, Czech Republic, Hungary and Poland all released their latest GDP figures, which were either on expectations or slightly higher
  • We note that the PBOC fixed the dollar higher for the ninth consecutive session today

Price action:  The dollar is mostly firmer against the majors ahead of US retail sales data.  The Aussie and the Loonie are the exceptions, up on the day and outperforming.  The Swedish krona and the euro are underperforming.  The euro is trading back below $1.08 after disappointing Eurozone GDP data, while sterling is trading just above $1.52.  Dollar/yen is trading around 122.55.  EM currencies are mostly weaker too.  INR and ZAR are outperforming, while PLN and KRW are underperforming.  MSCI Asia Pacific fell 1%, with the Nikkei down 0.5%.  China markets were lower, with the Shanghai Composite down 1.4% and the Shenzen Composite down 2.4%.  The Dow Jones Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 2.29%, while European bond markets are mostly firmer.  Commodity prices are mostly higher, with oil up modestly on the day but copper making new cycle lows.

  • The US dollar has stabilized after yesterday’s flurry that shook out some weak short euro and yen positions.  The push through $1.08 was seen as a new opportunity to short the euro by short-term traders.  Disappointing eurozone GDP data provided mode fodder for the euro bears and the single currency has retreated nearly 3/4 of a cent from yesterday’s highs.
  • Since Monday, the dollar has been recording lower highs against the yen.  Today’s low of JPY122.50 is the low for the week.  The pullback remains modest given that the greenback was near JPY120 at the start of the month and JPY118 in mid-October.  The 38.2% retracement of the advance from November 2 (~JPY120.25) is found near JPY122.30.
    As a whole, the eurozone grew 0.3% in Q3, slightly less than the 0.4% seen in Q2.  The consensus expected the Q2 pace to have been maintained.  To put the region’s output into a larger perspective, consider that it is about half a percent lower than it was in Q1 08.
  • German GDP rose 0.3% in the first estimate, which disappointed, but it did not really tell investors anything it did not already know.  The European locomotive has been hampered by the slowing of China and the sanctions on Russia.  Industrial output in Germany fell in August and September.  It has contracted in three of the past four months.  The forward looking factory orders fell every month in Q3 for a cumulative decline of almost 6%.  Next week’s ZEW survey is likely to show the continued deterioration in sentiment.
  • France expanded by 0.3%.  That is spot on the consensus forecast and compares with a flat Q2 reading.  The inventory cycle explains much of the vagaries of the swings.  In Q2, inventory liquidation reduced growth by 0.4 percentage points while in Q3 the restocking added 0.7 percentage points.  Household consumption also contributed.  Italy’s recovery continues, but it is anemic.  EMU’s third largest economy expanded 0.2% in Q3 after 0.3% in Q2 and 0.4% in Q1.  Still, Italy will snap the three year contraction here in 2015.  Last week, ISTAT forecast the economy to grow 1.4% next year, which seems optimistic.
  • Early Monday in Tokyo, Japan will report Q3 GDP.  The consensus looks for a small negative print, but an increase in the GDP deflator to 1.7%.  A Reuters poll found nearly half expect the BOJ to ease in January.  We remain skeptical.  In any event, the BOJ meets next week.  It is expected to stand pat.  There is no reason to expect Governor Kuroda has changed his views over the last couple of weeks.
  • The contraction in the economy is not desirable, and some observers will play up what is wrongly called a technical definition of a recession as the Japanese economy contracted in Q2 as well.  This is not a technical definition of a recession.  It is a vague rule of thumb, which incidentally, the US does not even use.  There is no technical definition that separates recession from depression.  It is political (ideological?) jargon to denote the end of a business cycle.
  • Japanese officials persuasively argue that with trend growth around 0.5%, normal vagaries of GDP in the world’s third largest economy can see occasional negative prints without signalling the end of an expansion cycle.  In addition, while Japan’s economy may contract, its population is contracting faster.  This means that on a per capita basis, things may not be as bad as the empty glass crowd says.
  • The highlight from the North American session today will be US retail sales.  The headline may be checked by the minor sequential gain in auto sales and lower gasoline prices.  The GDP component is expected to have risen by 0.4% after soft August and September reports, which includes a small outright decline in September.
  • PPI will be overshadowed by the retail sales.  Moreover, the Fed’s Fischer noted just yesterday that inflation is expected to rebound next year.  This does not mean that it will, but simply that a soft PPI figure will not move the Fed one way or the other.  The University of Michigan’s survey may attract some attention.  This is not so much from the headline of consumer confidence, which may have ticked up, but from the long-term inflation expectations.  In September, it broke down to 2.5%, which has not been seen since 2002.  A recovery could give the dollar a lift and weigh on debt instruments.
  • We note that the PBOC fixed the dollar higher for the ninth consecutive session today.   The dollar is trading at its best level against the yuan since late September.  This may be encouraging speculative sales of the offshore yuan.  The spread between the two has risen.  It would not be surprising to see China’s policy banks sell dollars for the offshore yuan next week.  However, we suspect that the short-term fluctuations in the yuan will not have much impact on the IMF’s decision whether to include the yuan in its SDR basket.
  • There have been a number of press reports playing up the MSCI decision to include more China ADRs into its indices starting December 1.  This is further elaboration on what MSCI had already indicated.  More Chinese ADRs will be included in the spring as well.  Note that the MSCI re-jig also will include more Israeli and Indian exposure.
  • Malaysia’s Q3 GDP came in right on expectations at 4.7% y/y from 4.9% in Q2.  The central bank left rates steady last week, but it noted that “Downside risks to growth remain high.  The performance of the Malaysian economy continues to be affected by the weak external environment” and it added that private consumption is expected to moderate.  We think it will lean more dovish and perhaps ease in 2016 if the slowdown continues.  The weak ringgit is a constraint on cutting rates near-term.  The last move was a 25 bp hike to 3.25% in July 2014.  The country’s Q3 current account surplus came in on the weak side at MYR5.1 bln, down from MYR7.6 bln in Q2.
  • Both Q3 GDP and September current account out of Czech Republic surprised on the upside.  GDP rose 4.3% y/y, against 4.2% expected and 4.6% in Q2.  The current account unexpectedly flipped to a surplus of CZK6.6 bln, much better than the -CZK17 bln deficit expected.  The central bank altered its forward guidance slightly at its last meeting.  It now sees current policies maintained until “around” the end of 2016.  Previously, it said until “at least” H2 2016.  Deflation risks continue, with October CPI coming in at 0.2% y/y vs. 0.4% expected.  If the data turn down again, we would not rule out an adjustment to the floor itself, rather than just the forward guidance.
  • Hungary’s Q3 GDP came in right on expectations at 2.5% y/y vs. 2.7% in Q2.  With deflation risks still high and the economy slowing, central bank officials have turned more dovish recently.  Forward guidance was extended to 2017 (perhaps even longer) and the possibility of unconventional measures was raised.  Meanwhile, Poland’s Q3 GDP came in at 3.4% y/y, and was expected to remain steady at 3.3% y/y.  It also reports September trade and current account data later today.  Like the rest of the CEE region, Poland is facing continued deflation risks and headwinds to the economy.  We see the central bank on hold through the end of 2015, but expect easing to resume when virtually the entire MPC will be replaced by incoming Law and Justice.