Most Asian regional markets got some colour back on Wednesday, despite the disappointing economic data from Japan. The country’s industrial production fell unexpectedly in August, raising concerns about Japan’s slowdown and building the case for additional monetary stimulus. Preliminary estimates showed that Industrial production contracted -0.5%m/m in August, lower than the market expected increase of 1%, but still above the -0.8% contraction in the previous month. On a year-over-year basis, the output of industrial establishments grew 0.2%y/y, lower than market estimates of 1.8%, but above the flat figure from July. Retail sales added to the disappointment, confirming that Japan’s economy is faltering. The data came in on the soft side, printing at 0.8%y/y in August, weaker than the market expected increase of 1.2% expected and revised increase of 1.8% in July. The Nikkei and the Topix index are up 2.46% and 2.59% respectively as the recent data are making investors reassess the prospects of an increase in BoJ’s monetary stimulus.
Elsewhere in Asia, Hong Kong’s Hang Seng climbed 1.62% while mainland China’s major stock index, the Shanghai Composite, climbed 0.72%. South Korea Kospi added 1.03% and India’s Sensex +0.78%. The yen’s response to the data was muted as USD/JPY continued to move sideways between 119.06 and 121.33.
Australia’s building approval rose 5.1% on a year-over-year basis in August, lower than the market’s median forecast of 7.4% and upwardly revision of 17.9% in July. Private sector’s credit surged 6.3%y/y in August, beating consensus of 6.2% and previous reading of 6.1%. AUD/USD is treading water around 0.70. A resistance can be found at 0.7043 (high from September 24th) while on the downside a first support lies at 0.6939 (low from September 29th), then a second one at 0.6896 (low from September 6th).
In New Zealand, business confidence improved in September and climbed from -29.1 to -18.9. Activity outlook (at 16.7 from 12.2), exports (17.9 from 11) and residential construction (28.6 from 12.1). NZD/USD continues to recover from its low from yesterday, up 1.25% to 0.6370.
In Europe this morning, future markets are pointing higher. The DAX is up 1.53%, the CAC 40 +1.66%, the SMI 0.96%, while the Footsie gained 1.10%. The pound sterling selling pressures are getting stronger and stronger due to the fading prospect of an increase in interest rates by the BoE. The cable is now testing levels last seen in May 2015 and nothing seems able to stop GBP/USD from moving lower.
***Yann Quelenn: “Here we are. After the important Fed decision to hold the rates two week ago, traders have been awaiting data which would support a further rate hike this year. Today, the ADP employment change will be released, which has often proved a good indicator of U.S. non-farm payrolls, despite a few spectacular misses over the last few years. The data is expected to remain unchanged from prior read of 190K.
Traders will closely scrutinize this data as discussions of a possible year-end rate hike keep going, although markets are now pricing a March 2016 first rate hike. We also consider that the Fed is clearly dovish, despite Fed members insisting that a rate will still come before year-end. By maintaining the zero interest-rate policy, the Fed has proven that the monetary policy divergence between central banks does not exist anymore. All central banks are dovish. The global outlook is negative, in particular, the lingering low commodities prices, which will increase downside, pressure on inflation.
Inflation is indeed the key issue if we read Fed minutes. Yellen in a recent speech admitted that: “nominal interest rates cannot go much below zero”. In other words, the FOMC won’t be able to push real federal fund rates below the maximum deflation level. Therefore, The Fed has no room to act. This may lead to a loss of confidence in the central bank. We are definitely awaiting a QE4 announcement.”***
Today traders will be watching unemployment rates from Germany, Italy and the euro zone; Q2 GDP from UK; inflation report from Italy and the euro zone; mortgage application, ADP employment change and Chicago purchasing manager index from the US.