Will economic data heighten fears of a recession in Japan?
The received wisdom on the state of the Japanese economy — that it was in weak, but not disastrous, shape before the coronavirus hit tourism and industrial supply chains — suffered a big blow last week when growth numbers for the final quarter of 2019 showed the economy shrank at an annualised rate of 6.3 per cent. The key question this week is whether that pounding will continue as a wave of economic data, mostly covering January, floods the market on Thursday.
The gross domestic product figures were so far below economists’ forecasts of a 3.7 per cent decline that they have had to accept they underestimated the impact on consumer spending of October’s VAT rise.
Japan is now on the brink of a technical recession, defined as a contraction in GDP over two consecutive quarters. Several economists have already cut their forecasts for the first quarter of 2020; the glut of data on Thursday, which includes retail trade and industrial production figures for January, will offer some guidance on whether that was the right call.
The January numbers will be nuanced, though, since during that month vague fears triggered by the coronavirus in China began to crystallise into a broader economic shock for the region. In January, for example, Chinese travellers were still heading in large numbers to Japan and spending at a pace that has helped support the country’s retailers for the past five years. By February, those numbers had plunged. January sales figures for large retailers are expected to show a low single-digit decline for the month.
For equity markets, the question is how far these economic shocks are going to hurt stocks. Tokyo’s Topix is down 2.8 per cent this year but traders say its performance would be worse were it not for the Bank of Japan’s stock-buying programme and the effects of companies’ share buybacks. This week may test whether those mechanisms can continue to offer support through worsening newsflow. Leo Lewis
Can the US dollar continue its strong run?
At the start of the year, strategists said the US dollar would weaken. But just two months into 2020, the greenback is defying those expectations, gaining around 4 per cent against the euro.
Analysts are now wondering how much longer the dollar can continue its run, with US growth figures for the final quarter of 2019 due this Thursday.
Global growth fears caused by the coronavirus are a key reason for the dollar’s surge this year. The greenback has gained more than 2 per cent against the two ultimate haven currencies, the Swiss franc and the Japanese yen, owing to the solidity of the US economy.
Analysts expect Thursday’s US GDP figures to show growth of 2.1 per cent in the final three months of last year and say that unless signs of a slowing economy emerge, the greenback’s rise can continue.
The other side of the strong dollar is a weak euro. Poor economic data in the eurozone, coupled with coronavirus effects, have driven the currency to its weakest level in more than two and a half years. The Dollar index, which measures the greenback against a basket of peers including the euro, has gained 1.9 per cent over the past month alone.
“So long as the global backdrop remains weak and the US economy’s prospects look brighter than those of its peers, we think that the dollar will remain strong,” said Jonas Goltermann, a senior markets economist at Capital Economics. Eva Szalay
Will the rush for Italian bonds continue?
Investors cannot seem to get enough Italian bonds this year. The market has rallied over the past month since a regional election failed to produce a breakthrough for the populist Lega party, pushing the 10-year yield close to its record low at 0.89 per cent.
An auction of up to €9bn of five-year and 10-year bonds on Thursday will provide the latest test of investors’ appetite. Demand has been particularly strong in the primary market, where investors can pick up big allocations of new bonds. Syndications in January and February successively broke the record for Italy’s biggest ever order book.
Barring the return of political risk to markets, the rush is likely to continue, according to Rabobank strategist Lyn Graham-Taylor. He points out that Italy accounts for roughly half of all the eurozone’s positive-yielding government debt, so avoiding it can leave fund managers lagging behind their benchmarks. At the same time, the European Central Bank’s bond-buying is supporting markets.
“If you think the central bank is going to buy everything, it makes sense to be long,” Mr Graham-Taylor said.
Enthusiasm for Italy’s bond has been mirrored in other eurozone markets offering an extra spread above Germany’s deeply negative-yielding debt. Junk-rated Greece, the only eurozone country with higher yields than Italy, has also had a strong run this year, with 10-year borrowing costs dropping below 1 per cent for the first time.
