Forex traders were hit with a wealth of Japanese data overnight. The headline Consumer Price Index figure printed at 2.3%, the highest in 11 years. Preliminary estimates of July’s Industrial Production saw a sharp improvement on buoyant Chinese demand, but the labor continued to show signs of weakness. Today’s helping of European data will again challenge Jean-Claude Trichet and the European Central Bank to cut interest rates and support economic growth.
Key Overnight Developments • Japanese headline inflation prints at 11-year high • Industrial production rebounds sharply in Japan on Chinese export demand Critical Levels The Euro pushed higher overnight, testing above the 1.4750 level. DailyFX Senior Currency Strategist Jamie Saettele expects the Euro to correct to 1.4980-1.5080 area before the down trend resumes. Support is seen at 1.4645, with resistance at 1.4785. Sterling followed the Euro higher, breaking above the 1.83 level. Support is found at 1.8233 while resistance stands at 1.8394. Asia Session Highlights Forex traders were hit with a wealth of Japanese data overnight. The headline Consumer Price Index figure printed at 2.3%, the highest in 11 years. More notably however, the metric comes to just 0.2% after excluding food and energy costs. This suggests the figure is being overstated by commodity prices and is likely to moderate in the second half of the year as lower global resource prices filter through the broad economy. For their part, the Bank of Japan is unlikely to raise interest rates in the near term. Japan’s economy shrank in the second quarter and is on track to post another negative GDP growth reading in the third, formally putting the world’s second-largest market in recession. Bank officials have repeatedly said that their focus is to support economic growth because higher headline prices have not produced the dreaded “second-round” effects (such as wage inflation) and are expected to moderate as the global economy slows down. Bond yields reveal the market is pricing in no change in Japanese borrowing costs until at least the fourth quarter of next year. A softening labor market has been indicative of the dire state of the Japanese economy. While the Jobless Rate printed little-changed at 4.0% in July (versus 4.1% last time), the Job-To-Applicant Ratio fell for the sixth consecutive month to the lowest since 2004, printing at 0.89 in July versus 0.91 in the preceding month. A falling ratio means there are fewer jobs for every applicant, suggesting disposable incomes will grow at a sluggish pace and deter consumption. Indeed, Household Spending fell again in July, shrinking for the fifth consecutive month to register at an annualized -0.5%. The effects of higher commodity prices also made a strong showing in July’s Retail Trade figure. The metric rose for the 12th consecutive month, printing at an annualized 1.9% versus 1.3% expected and 0.3% in June. Food and fuel receipts drove the headline figure, with the former rising 3% while the latter jumped 3.6%. Preliminary estimates of July’s Industrial Production saw a sharp improvement, with the annualized figure printing at 2.0% versus expectations of 0.6% and a flat result in the previous month. Overseas demand drove the metric higher as Japanese firms ramped up production to meet demand China and other emerging Asian economies. A favorable result was to be expected: last week’s Merchandise Trade Balance report saw exports surge 8.1% in July. As we noted then, “The top question going forward will be whether Japan can sustain such favorable trade results as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Japanese goods will remain as robust after the Olympic Games are over.” Euro Session: What to Expect Today’s helping of European data will again challenge Jean-Claude Trichet and company to cut interest rates and support economic growth. Italian Retail Sales are expected to shrink -0.5% in the year to June as consumers tighten their belts for what could soon be confirmed as a recession in the 15-nation bloc. To that effect, Euro Zone Consumer Confidence is expected to stay at -20 in August, the lowest in 5 years. This makes sense: yesterday saw Germany, the Euro Zone’s largest economy, lose four times more jobs than was expected while EZ-wide Retail Sales fell -0.7% in July and is likely to do to so again in August. Meanwhile, the Consumer Price Index is expected to fall -0.2% in August, the second consecutive decline. Yesterday saw Italy’s Producer Price Index slow to 0.5% in July following a near-20% drop in the price of crude oil. Slowing growth and easing inflation point to a simple question: “When will the ECB cut rates?” The market is pricing in at least one cut in the next 12 months, with initial expectations calling for the move to come in the second quarter of next year. Although this suggests monetary easing is far from imminent, the Euro has remained under considerable selling pressure. As we had mentioned yesterday, “This dynamic could suggest that forex traders are attempting to guide the ECB, acting as if the bank will soon be compelled to change the game plan and cut rates sooner.” To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.