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Once again Japan has led the region, with talk continuing around potential changes to the government pension investment fund (GPIF). There has been plenty of talk around the possibility of lifting investment in domestic stocks and as well potentially pulling cash out of government bonds for investment in foreign stocks.
Additionally, Japanese leaders are also looking at a corporate tax cut as early as August, previous commentary had suggested this could come to fruition between September and October. This along with yen weakness has kept the Nikkei bid in Asia today with the index back above 15,000 for the first time since June.
Meanwhile, gains in China were slightly capped by a modestly weaker than expected final HSBC manufacturing PMI print. While iron ore had a minor bounce overnight, Dalian futures have been drifting in Asia yet again and perhaps that’s why a lot of the iron ore miners in Australia have since turned negative after having enjoyed a fairly encouraging start.
Greenback remains resilient
Another interesting dynamic this week has been the resilience of the USD in a key week of data. The US dollar index managed to trade back above 80 helped by some positive manufacturing releases and has managed to hold its ground in Asian trade. Yen and euro weakness has contributed quite significantly to DXY gains.
AUD/USD has been an interesting pair to watch today as it navigates a number of local releases. After a long period holding on to the 0.9300 handle, the pair has finally started to head south and this could actually be a bright spot for local equities.
Retail sales data released this morning came in at a slightly worse than expected +0.2% but current account data surprised to the upside despite still showing a 5.7 billion deficit. The current account surprise has been mainly attributed to a good feed from net exports which added to 1.4 percentage points to GDP which is more than double the previous quarter (0.6%) and well ahead of the expected 0.8%. This has seen analysts looking ahead to tomorrow’s Q1 GDP reading which is expected to come in at 0.9%. This strong net exports read could easily see tomorrow’s GDP data beat this consensus with a few brokers actually revising their calls up to 1%.
AUD/USD came off its lows following the data and managed to hold onto this even after the RBA minutes. As expected rates remained on hold and the statement didn’t offer much fresh insight. The only notable comment was that the exchange rate remains high especially given the decline in commodity prices. The view on global growth was also mildly upgraded and the RBA seems happy to be on hold. Perhaps cooling property prices give the RBA room to act if necessary.
European CPI in focus
Looking ahead to European trade, we are calling the major bourses modestly weaker. The recent moves in European equities have been choppy at best, with some nervous trading heading into the ECB meeting. Investors will continue to focus on a disappointing inflation picture after German CPI disappointed and ECB member Nowotny suggested higher inflation is necessary to prevent a Japanese model deflation. Everything is pointing towards ECB action on Thursday but the scope and form is keeping investors guessing.
Equities are likely to continue drifting higher heading into the meeting as many speculate the ECB will deliver comprehensive action. While this is a positive, it also increases the risk of disappointment and a ‘sell the fact’ response. On the economic calendar we have unemployment data for Italy and Spain. However, the highlight is likely to be the region’s CPI flash estimate which will deserve significant attention given inflation is the main concern at the moment.