cross markets data reaction

Japanese Yen And Equities Hold Off On Risk Aversion For Tankan Numbers

Saturday, 31 March 2007 01:30:50 GMT  |  John Kicklighter and Terri Belkas, Currency Analyst

Tankan Lg Manufacturers Index (1Q) (23:50GMT; 19:50EST)	Tankan Lg All Industry Capex (1Q) (23:50GMT; 19:50EST)
Expected:                  24	Expected:                    1.7%
Previous:                   25	Previous:                   12.4%

How Will The Markets React?

 

The most closely watched business sentiment gauge from the Japanese economic arsenal, the various Tankan surveys will be a mixed bag for traders that have largely shunned data in favor of the flashy carry trade. Scheduled to print early Monday morning in Tokyo (typically a period of low volatility and thin liquidity), both the key Large Manufacturers and All Industry Capital Expenditures indices are expected to print lower as economists grow concerned over tepid export and production levels. Key to the manufacturing report’s strength is US demand over the same period. The largest consumer of Japanese exports, the United States has shown holes in demand on both the consumer and producer level. The more noticeable drop in bookings will be from firms though as higher energy prices and monthly contractions in the American manufacturing sector trims orders at the Japanese door step. Another factor to take into account is the second rate hike from the Bank of Japan last month. With these broad economic concepts considered, perhaps the more tangible guide to speculating on the Tankan data is the previously-released Business Sentiment Index for the first quarter. The substantially more volatile indicator reported a sizable pullback over the first three months of the year from a 7.1 print to 0.1, which was the lowest read since the second quarter of 2005. Taking all the aforementioned aspects into consideration, the market may unofficially aim a little lower than the market’s consensus of a single point drop to 24. What may end up even more market moving is the Tankan’s capital expenditures gauge. In the fourth quarter report, business leaders revealed they planned to increase spending by 12.4 percent over the coming months, the most since 1991. Should production slow though, there seems little to support outsized spending.

 

Bonds – 10-Year Japanese Government Bond Futures

 

Japanese Government bonds have fallen into a period of consolidation recently, mirroring the congestion in the Japanese yen and ultimately defining the uncertainty surrounding the carry trade. Now, with the Tankan report on the horizon, investors in JGBs are heading into one of the top economic releases the market has to offer with definable support and resistance levels to break. Should sentiment plunge and planned fixed investment fall more than expected, economic projections will take a considerable hit and lead capital into the safe confines of government debt. At the same time, a manufacturing sector slump would redouble politicians resolve to knock the BoJ off of its course to ‘normalize’ interest rates – and offer yet another boost to JGBs.

FX – USD/JPY

 

The Japanese Yen seems to be just waiting for some piece of data to ignite a wave of price action. Mounting tensions in Iran nor disappointing CPI nor tepid wage growth moved the USDJPY pair significantly, as price has remained contained to an ascending triangle formation with solid resistance just above at 118.50. However, the release of the Bank of Japan’s Tankan survey could be just the spark to lead USDJPY to breakout. Indeed, confidence among the country’s largest manufacturers declined from the highest level in two years amid concern the US economy may slow, curbing exports of cars and electronics. Furthermore, the All Industry Capex component is anticipated to show that business investment plans by firms have slowed markedly. With spending by corporations one of the main drivers of Japanese growth, a decline in both confidence and capital expenditure plans could prove to be extremely Yen bearish as expansion may suffer as a direct result. Moreover, consumer price reports have started to indicate that the economy may not have, in fact, beaten deflation, which severely damages the case for a further rate normalization by the Bank of Japan. As a result, Tankan readings at or below expectations may send USDJPY rocketing through resistance towards February’s highs.

Equities – Nikkei 225 Index

 

Japanese stocks rose mildly on Friday as traders indulged in last-minute buying of domestically focused stocks in the final trading session of the fiscal year, with the Nikkei 225 ending up 0.1 percent to 17,287.65. Despite a slight weakening of the Yen, the export sector failed to get a boost, as machinery maker Komatsu down 1 percent to 2,480 yen. By contrast, the heavily domestic real estate sector jumped 1.9 percent in response to recent government figures showing that Japanese property growth continues to accelerate. Mitsui Fudosan, Japan’s biggest property company, climbed 2.1 percent to 3,460 yen. Sekisui House, Japan’s biggest home builder, surged 4.9 percent to 1,834 yen after Sony, the consumer electronics and entertainment giant, said it would sell part of its former headquarters site to Sekisui.

The Nikkei 225 Index  could ease back from resistance on the release of the Bank of Japan’s Tankan survey, which is expected to show that confidence among the country’s largest manufacturers declined from the highest in two years amid concern the US economy may slow, curbing exports of cars and electronics. Furthermore, the All Industry Capex component is anticipated to show that business investment plans by firms have slowed markedly. Should both releases meet or fall below estimates, shares could easily start to decline towards triangle support as corporate spending may no longer be strong enough to fuel growth and pick up the slack of consumption.

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