How Did the Markets React?
The
release of Japanese retail trade today highlighted the resounding weakness of
consumer spending in the economy. The seasonally adjusted monthly figure slipped
0.2% while the annual figure (not seasonally adjusted) held in positive
territory at 0.1%. This has become a problem, as consumption placed a
considerable drag on Q3 GDP. Some analysts have blamed unseasonably mild October
weather for delaying retail sales of winter clothing, just as wet summer weather
had been blamed for contributing to weak sales in Q3. However, stagnant wage
growth is much more likely to be the culprit. Although the Japanese labor market
has remained tight, payrolls have yet to grow significantly, despite booming
corporate profits. Corporate investment made up for much of the slack earlier in
2006, but now that exports look to slow amidst a rising yen and weaker demand
out of the US, the fragility of the retail sector will only become
clearer.
Japanese 10-Year Government Bonds
Fixed income trading in
Japan has remained very light, as
yields on 10-year JGBs have held in a two to three basis point range during the
past three trading sessions. Today, prices on JGBs gained somewhat on Japanese
economic data, as dismal retail sales look to severely limit the ability of the
Bank of Japan to hike rates in December. Prices on 10-year JGBs closed out
today’s session .128 higher at 101.393 with a yield of 1.635%. Price action for
the rest of the week could be highly dependent on the results of Tokyo and National CPI due
out on Thursday at 23:30GMT, with both headline reports anticipated to show
inflation holding steady on an annual basis, but weakening for the month. As a
result, yields could decline further as the potential of a December hike by the
BOJ continues to diminish.
FX –
USD/JPY
USD/JPY has maintained a thin range
over the past 24 hours after the pair dropped to three-month lows of 115.37 on
Sunday night. As we said yesterday, “The USD/JPY pair has also encountered
significant support from the 200 SMA, which currently sits at 116.17. A close
below that level today may indicate further yen appreciation, but given the
recent weakness in economic data, gains for the Japanese currency could be
limited.” The 200 SMA is only a point lower today and seems to be a sticking
point for price movement on the daily charts. Yen has weakened since the release
of dismal retail sales growth, which highlights the overwhelming weakness of
consumer spending in Japan. Additionally, Bank of
Japan Governor Toshihiko Fukui has
been very reluctant to place any sort of time frame on monetary policy action.
Given the tepid data released as of late, traders are considering the
possibility of a December hike off the table. Additionally, EUR/JPY has surely
been taking its toll on the USD/JPY pair, as the euro cross continues to push to
record highs of 152.94 against the yen. However, with dismal US economic data
due out today, yen may have a chance of appreciating against the greenback
today.
Equities – Nikkei 225
Index
Japan’s benchmark equity index, the Nikkei 225, gapped lower
at the market opening today in response to yesterday’s decline in
US share prices. While the Nikkei
made back some of its losses, the index still closed out the day down 0.2% at
15,855.26. Export focused sectors such as carmakers and electronic producers led
the declines, as the combination of a stronger yen and a slowdown in US looks to
hurt international sales of Japanese products. Additionally, today’s decline in
retail sales means that export growth is needed for economic expansion, as
consumer spending in Japan is essentially at a standstill.
Toyota, Japan’s biggest carmaker, dropped
0.7% to 6,830 yen while Sony, the consumer electronics and entertainment giant,
fell 1.7% to 3,970 yen. Retailing shares also racked up losses as Aeon,
Japan’s biggest retailer by store
count, declined 0.8% to 2,660 yen.
