-    Nikkei should receive a boost from renewed yen weakness

-    Euro-zone industrial production probably expanded again in June (10.00 BST)

-    US retail sales should have increased slightly in July (13.30 BST)

 

Key Market Themes

The Nikkei fell and the yen strengthened slightly on Monday in the wake of disappointing Q2 GDP data from Japan (see below). However, we expect any recovery in the yen to prove temporary and the Nikkei to regain some of the ground it has lost since May as the Bank of Japan once again steps up its asset purchases.

 

Fading expectations of more aggressive monetary easing by the Bank of Japan have been perhaps the most important factor behind the recent partial recovery in the yen and associated weakness in the Nikkei.

 

One way to illustrate this is to look at the spread between the yields of Japanese government bonds (JGBs) and the overnight interest rate swap rates of the same maturity. This spread essentially disappeared in April in anticipation of the substantial additional purchases of JGBs then announced by the Bank of Japan to help keep yields low. But more recently the spread has begun to widen again as the Japanese economy has continued to recover and even begun to edge out of deflation, dampening expectations of further monetary easing.

 

However, we continue to expect Japan’s central bank to step up its asset purchases, perhaps not long after the US Fed begins to move in the opposite direction. For a start, Q2 GDP data were disappointing. Furthermore, while prices may no longer be falling, nor are they yet rising at anywhere near the desired pace.

 

A further recovery in the yen is one possible trigger for additional easing, although the Bank of Japan will be wary of any suggestion that it is targeting the exchange rate (which would go against G7 commitments). Other (perhaps more plausible) triggers include the persistent weakness of inflation and a desire to help mitigate the impact of the planned consumption tax hikes.

 

With the US Fed on course to start to taper its asset purchases later this year, most likely from September, we continue to expect the yen to fall to 105 against the dollar by end-2013 and to 110 by end-2014. Although the backdrop for risky assets globally will be challenging, a renewed boost from currency weakness should help the Nikkei to regain the 15,000 mark. (Julian Jessop)

 

What to watch for today: North America

The improvement in consumer confidence over the first half of the year and the marked gains in retail employment suggest that retail sales growth (13.30 BST) will soon accelerate. In July specifically, however, we calculate that sales increased by a moderate 0.4% m/m. The already-reported drop back in the number of motor vehicles sold by dealers last month should translate into a similar sized 0.6% m/m fall in the autos component of retail sales values. After a 2.2% m/m slump in June, we anticipate a partial 1.0% m/m rebound in building materials sales. The slight rise in weekly gasoline prices last month should translate into a 0.7% m/m increase in the value of gasoline station sales. Excluding gasoline, autos and building materials, the latest stronger chain store sales figures point to a 0.3% m/m increase in underlying retail sales. (Paul Ashworth)

 

Continental Europe

Greece’s GDP fell in Q2 by 4.6% compared to a year earlier (data published on Monday), which was a little better than Q1’s contraction of 5.6%. No seasonally adjusted data are published, but we estimate that GDP may have expanded by 0.1% on an adjusted basis, compared to Q1’s fall of 0.7%. This would be the first quarterly rise in over three years. But while the recession is easing, we are still sceptical that the economy will experience a full-blown recovery next year, as assumed in the forecasts which underpin the Greek adjustment programme. Accordingly, we still think that Greece will need another major debt restructuring to restore its public finances to health. (See our European Economics Update, “Troika’s Greek economic forecasts still look too optimistic”, 12th Aug.)

 

Meanwhile, June’s industrial production figures (10.00 BST) will probably show that production in the euro-zone expanded for the fifth time in seven months. The national data available for June have been a mixed bag. Production plunged by 1.4% in France and inched down slightly in Spain. But production in Italy rose by 0.3%, while Germany recorded a substantial rise of 2.5%. Based on these figures, we expect a rise of 0.8% on the month in the euro-zone as a whole. This would raise the annual growth rate from -1.3% to about zero. (Ben May)

 

We expect German investor sentiment (10.00 BST) to be barely changed at a pretty high level in August. A continued moderate recovery in global demand, the strength of June’s industrial production data and the rise in the timely Sentix index of investor sentiment all bode well for the ZEW. But growing fears that both Greece and Portugal will soon need more bail-out money and doubts about the ECB’s commitment to a long period of very accommodative monetary policy might have tempered optimism about Germany’s outlook. On balance, then, we forecast no change in the ZEW at 36.3, leaving it roughly consistent with a continued moderate recovery. (Jennifer McKeown)

 

UK

While July’s producer prices data (09.30 BST) are likely to show a pick-up in factory gate prices, the bigger picture is one of subdued pipeline inflationary pressures. Accordingly, we’re pencilling in only a small 0.2% monthly rise in output prices in July, which would leave the annual change at 2.1%, a relatively subdued rate. And note that core output prices are a long way from pointing to higher consumer price inflation.

 

July’s consumer prices (09.30 BST) figures look set to mark the start of inflation’s downward trend. Indeed, we think that there’s a good chance that inflation will fall to about 2% by the end of the year. Accordingly, we forecast a fall in CPI inflation to 2.7% – a slightly bigger drop than expected by the consensus. (Vicky Redwood)

 

Japan

Core machinery orders (00.50 BST) tend to follow a see-saw pattern from month-to-month and it would be little surprise if they dropped back sharply in June after May’s 10.5% m/m surge. But even the 6.0% m/m drop that we have pencilled in (or the 7.0% decline expected by the markets) would leave orders on a gradual upward trend, raising hopes that investment spending will start to contribute to GDP growth in the third quarter.

 

Meanwhile, though, the Q2 GDP data have only added to the uncertainty over whether or not the government will press ahead with the doubling of the consumption tax planned for 2014 and 2015. The 0.6% q/q (2.6% annualised) growth in Q2 was significantly weaker than most had expected, although close to our own estimate (Bloomberg consensus 0.9%, CE forecast 0.7%). What’s more, Q1’s 1.0% q/q gain was revised down to 0.9%. Growth in the first half of the year was almost certainly stronger than in any other major advanced economy. However, the slowdown between the first and the second quarter and the continued dependency on consumer and government spending both argue against aggressive fiscal tightening.

 

For now, we continue to assume that the government will press ahead with the first consumption tax hike in April 2014, given the threat to credibility if it does not. However, we expect the government to mitigate the risks to the recovery in one or more of three ways: providing some partially offsetting fiscal stimulus (including cuts in corporate taxes), making the second hike (due in October 2015) conditional on a rapid recovery from the first, or phasing the doubling of the consumption tax over a longer period. The Bank of Japan is likely to provide additional monetary stimulus too. (Julian Jessop)

 

China

No major data or events scheduled for today.

 

Other Asia-Pacific

No major data or events scheduled for today.

 

Other Emerging Markets

The Central Bank of Chile is due to make an interest rate decision tonight (23.00 BST). By all accounts, this month’s meeting is set to be a close call; the consensus is evenly split between a 25bp cut and no change. On balance we suspect that, having laid the ground for a rate reduction, policymakers will come down in favour of a 25bp cut to 4.75%. (Michael Henderson)

 

Key Data and Events

Tue 13th    00.01  UK   RICS House Price Balance (Jul)

            00.50  Jpn  Core Machinery Orders

            07.00  Ger  CPI (Jul)

            08.00  Spa  CPI (Jul)

            08.30  Swe  CPI (Jul)

            09.30  UK   Producer Prices (Jul)

            09.30  UK  

            09.30  UK  

            09.30  UK   Consumer Prices (Jul)

            09.30  UK  

            09.30  UK  

            10.00  EZ   Industrial Production (Jun)

            10.00  Ger  ZEW Survey (Aug)

            12.30  US   NFIB Small Business Optimism Index (Jul)

            13.30  US   Retail Sales (Jul)

            13.30  US   Core Retail Sales (Jul)

            13.30  US   Import Prices (Jul)

            15.00  US   Business Inventories (Jun)

            23.00  Chl  Interest Rate Announcement (Aug)

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