August 28, 2014

Japan’s July Output Misses Estimates as Spending Slumps

• Industrial production in Japan ▲ less than expected in July while household spending slumped and the inflation rate remained unchanged
• Industrial production ▲0.2% (forecast ▲1.0%) MoM; compared with ▼3.4% in June
• Consumer spending ▼5.9% YoY (forecast ▼3.0%); compared with ▼3.0% in June
• Private consumption, which comprises almost 60% of the economy, fell 5% in the Q2 QoQ as people cut spending after increase in sales tax
• ▼0.2% MoM (forecast ▲1.6%); compared with ▲1.5% in June
• Overall inflation was ▲3.4% and ▲2.3% YoY excluding perishable food and energy; same pace as June
• Consumer prices excluding fresh food ▲3.3% YoY, the same pace as June
• Inflation generated by the BOJ’s easing and the sales tax are cutting into consumers’ spending power. Adjusted for rising prices, disposable incomes ▼5.2% YoY in July

Thought:

Industrial production is slowdown because consumers don't buy products after sales tax increased in April. In this situation, BOJ can't revoke its policy to promote consumers spending; it might cause stagnation.

Additional stimulus is not the answer; BOJ has already put tremendous amount of stimulus in the economy. The problem is a labor market. Income is not rising as much as consumer price increases, which decreases consumer spending. Japanese government needs to implement regulation on holding liquid assets like Korean government did.

Widodo Committed to Reducing Indonesia Fuel Subsidy After Rebuff

• ▼ the cost of the fuel subsidy will give Widodo more room to fund a policy agenda that includes improving infrastructure and access to health care and education
• A clause in the budget requiring parliamentary approval for a fuel price change has been deleted, meaning the decision is the governments. A price rise is inevitable
• Indonesia’s system of providing set gasoline prices leaves the country, a net oil importer, economically vulnerable. A sudden rise in prices, such as from tensions in the Middle East, widens the budget deficit, worsens the trade balance and can weaken the rupiah.

Thought

Indonesia's economy is growing at the slowest pace. The issue of cutting fuel subsidy is that it will boost inflation. As a new president, Widodo wouldn't want to take a political risk. Yes, he will certainly decrease fuel subsidy, but the question is how much he will cut it. If he fails to adjust the cutting, it will hurt the economy.

Economy Grows More Than First Estimated on U.S. Investment Gains

• The biggest gain in U.S. business investment in over two years helped it to expand more than previous forecast in Q2; business investment ▲8.1% annualize rate, the most since Q1 2012
• The ▲GDP in last quarter came from bigger gains in corporate spending on structures and equipment and a smaller trade deficit that was partly offset by more tepid inventory building
• Final sales ▲3.1% (previously reported ▲2.8%), which advanced the biggest in four years
• GDP ▲4.2% YoY (forecast ▲4%) after a Q1 contraction
• Outlook for home sales improved in July, fewer people filed claims for jobless benefits last week, and consumer confidence climbed
• Factory order ▲; a surge in demand for airplanes helped push orders for durable goods up at a record pace in July, boosting prospects for sustained growth in manufacturing
• Consumers’ purchasing power ▲, with disposable income adjusted for inflation ▲ 4.2% in Q2, after ▲3.4% in Q1
• Gross domestic income ▲4.7% YoY, the most since early 2012
• Payrolls in July marked sixth month of gains exceeding 200,000
• The longest such stretch since 1997

Thought

U.S. economy is recovering very well. The question is when the tapering will be implemented. Like Yellen said, there is a room for a improvement in labor market. But how much? How long is she going to wait for it? Payroll is increasing and jobless claim is decreasing. Of course, it is unlikely that Fed will implement tapering very soon, but be aware that it will be happened.

Europe Economic Indicators

• Spain GDP ▲0.6% QoQ (forecast ▲0.6%), compared with ▲0.6% in Q1
• ▲1.2% YoY (forecast ▲1.2%), compared with ▲1.2%
• Italy’s retail sale ▼2.6% YoY (forecast ▼0.9%), compared with ▲0.4% last month
• It is stagnated MoM (forecast ▼0.2%), compared with ▼0.6% last month
• E.U. consumer confidence is -10.0, which matches with the forecast
• E.U. M3 supply 1.8% YoY (forecast 1.5%), compared with 1.6% last month
• Domestic loan ▼1.6% (forecast ▼1.5%), compared with ▼1.8% last month

Thought

Increase in M3 is related with currency market. As E.U. economic indicator shows weakness, euro fell the most against Swiss fran since 2001. So as against dollar, it has depreciated about 3.4% from last three months. It means that investors are escaping from euro area and they are looking for safe assets, like Swiss treasury bond.

The question now is that whether ECB will implement QE. If it is implemented, then euro will continuously fall.

Korea Economic Indicators

• Industrial production ▲1.1% MoM (forecast ▲0.3%), after ▲2.6% in June
• ▲3.4% YoY (forecast ▲2.7%), compared with ▲0.6% in June
• Retail sales ▲0.3% MoM (forecast ▲0.4%), compared with ▲0.3% in June

Thought

It is good sign that industrial production increased. It means that consumer is more willing to spend, which will increase consumer consumption in GDP. Thing is, retail sales is not increased as much as industrial production. Yet, Korean biggest holiday, Chu-seok (thanksgiving day), is coming soon. Retail sales is most likely rebound and inventory problem will be solved.

S&P 500 stayed almost the same. Tensions in Ukraine rose again, which decreased the stock value but good economic indicators brought it up. As you see in trading volume, it is significantly low compared with other days. It indicates that investors are waiting.

Nikkei dropped as economic indicator weakens. Notice that trading volume is increased when the index declines. It may mean that investors are highly sensitive with the indicator; they panicked

Growth tension in Ukraine again increased the demand of gold, which increased the price. However, trading volume is low. Generally, today's market shows low volume of trading. Investors like to take more time for observation.