Household spending in Japan is fast becoming a problem after contracting 8% in May. With prices continuing to accelerate and wage growth remaining subdued, it’s not surprising to see a drop off in spending. National CPI ex food and energy showed a 2.2% rise and was up 3.4% ex-fresh food. Removing the impact of the consumption tax hike which the BoJ said is around 2%, CPI remains relatively sluggish at 1.4%.
Meanwhile unemployment ticked a touch lower with the amount of jobs to applicants rising. Retail sales were still subdued but recovered significantly from April. Presumably front-loading ahead of the sales tax hike is still at play. The real concern for Japan now is the failure to generate domestic demand particularly with household spending actually falling. Prices are accelerating according to plan which really limits the probability of seeing more stimulus.
USD/JPY breaches support
USD/JPY breached support in the 101.50 region and this set the Nikkei up for further losses. With USD/JPY trading at its lowest level since May, the Nikkei has dropped around 1.6%. This negative tone in Japan extended to the rest of the region, with markets in China and the ASX 200 all trading lower.
Out of China we had May industrial profits which actually showed a bit of a drop off in May. Expectations would have been for at least a steady reading consistent with the improvement in activity. The ASX 200 has had a choppy week but managed to hold on to its gains for the week. At current levels the ASX 200 is up around 0.6% for the week. Heading into the end of the financial year we were always going to see some unusual and disjointed moves as some window dressing and rebalancing takes place. This has been quite evident in the materials space where we are seeing some mixed moves.
Iron ore futures are firmer in Asia but this seems to be only benefitting FMG which is enjoying a 1.6% gain. The banks have broadly pulled back and have been the main source of today’s weakness.
Pound looking to extend gains
Looking ahead to European trade, I am calling the major bourses modestly firmer after having struggled yesterday. However there is a good chance we could see some of these gains wane given the weakness we are currently seeing in Asia.
GBP/USD has been bid higher in Asia and looks like it could be challenging June 20 highs soon. The financial stability report mainly focused on house prices and essentially suggested more stringent stress tests and limits to borrowing. Traders saw this as mildly hawkish and the sterling will remain in focus today with current account, GDP and revised business investment data due out. On the European front, German import prices, preliminary CPI, French consumer spending and Spanish flash CPI are on the docket.
The US is in for a fairly quiet session on the economic front, with only revised consumer sentiment and inflation expectations readings due out.