Japan retreats on CPI data

Asian equities have remained directionless heading into the weekend and the end of the month with mixed performances across the board. 

After a solid start to the week, the Nikkei has finally lost its grip with a strong set of CPI data driving some yen strength. With the consumption tax hike kicking in in April, CPI jumped along with the headline CPI coming in at +3.4%, more than double the previous month’s reading of +1.6%. Ex-fresh food CPI was up 3.2% and ex-food/energy  showed a 2.3% rise.  Reports have suggested this is the fastest acceleration in prices in 23 years.

The yen strengthened modestly on the news and this resulted in USD/JPY dropping to 101.50. At the same time, the Nikkei dipped into negative territory not long after open as the stronger yen weighed. Regardless of today’s drop, the Nikkei is still well in front for the week. The strain of the price appreciation in Japan is quite evident given the 4.6% fall in overall household spending. Just the previous month household spending was up 7.2%. Industrial production also fell well short with a 2.5% contraction.

Analysts have blamed the effect on lack of wage growth while prices rise. This will probably force households to dip into their savings just to keep up with prices. With all these complications, it’ll be interesting to see how Prime Minister Abe looks to proceed, particularly as he announces his economic strategy in June. In the near term I expect to see USD/JPY find some support in the 101.50 region where it has managed to find buyers in the past.

Miners drag the ASX 200 lower

The ASX 200 hasn’t managed to mirror the strength seen in US trade today with the deteriorating iron ore price picture continuing to dog the local market. Materials are once again on the losing end, with all the major iron ore names losing ground. Iron ore is down around 9% for May and the moves in the pure iron ore names have been even worse. Just looking at what the Dalian futures contract has done in Asia, it seems iron ore is headed for yet another drop tonight. FMG is around 12% lower this month while AGO has declined around 23%.

Not only does this poor sentiment impact the miners, but also extends to the mining services names and overall sentiment around some cyclical names. While the materials names have mostly struggled this month, the ASX 200 is still marginally higher for the month, thanks to yet another strong performance by the banks. I use the term banks very loosely, but CBA has actually been mostly responsible for the gains with nearly a 4% rise. Out of the big banks it’s the only one that hasn’t traded ex-div this month, which probably also explains why investors have been piling into the stock and driving it to record highs.

With investors unsure of how growth concerns are going to play out then it seems the hunger for dividend yield is growing. Another concern in the near term remains as the resilient AUD. AUD/USD extended its gains in Asian trade in a move that was triggered by yesterday’s encouraging capex numbers. This morning we had private sector credit data which showed a 4.6% rise year-on-year, better than an expected 4.6% rise. The pair seems to be consolidating its position above 0.93 heading into the weekend.

Mixed open for Europe

Looking ahead to European trade, the calls are very mixed with a degree of caution likely as we head into next week’s key ECB meeting. Data is limited on the European economic calendar with German retail sales and Italian CPI being the only major readings to look out for. It’s all about the ECB at the moment and this is likely to keep some investors at bay just in case next week’s stimulus plan is not as aggressive as the market anticipates.

In the emerging market space, India GDP, China manufacturing and non-manufacturing PMIs will be the key readings to look out for over the next few days. In the US, the fact that the S&P closed at its highs of the day will be positive for today’s session. On the calendar though, there isn’t much to really drive sentiment, so perhaps traders will just be looking to buy the dips.

The calendar is quite light heading into the weekend with the notable releases being personal income and spending along with consumer sentiment and inflation expectations. Perhaps another round of Fed speak will offer some insight on the US economy and what to expect going forward.

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