Tankan survey shows optimism in the Japanese economy
(Yann Quelenn, market analyst)
The last quarter Tankan survey of business sentiment issued by the Bank of Japan was released last night. The report highlighted improving market business conditions from big manufacturers. The Tankan large Manufacturing Index hit a one-year high, going from 6 to 10. This positive reading indicates optimism on the economic outlook. According to the survey, Japanese companies are likely to keep their spending plan alive which is a good indicator for the Japanese economy. Indeed, big firms should increase their capital expenditure by 5.5% before the current fiscal year ending in March 2017. This definitely supports market expectations that monetary stimulus will not be added in the medium-term. In our view, we believe that there is an ongoing recovery in global trade and that should support Japanese exports.
Next week, the Bank of Japan will review its monetary policy and we believe that it should remain steady. It is also clear that the ongoing yen weakness is providing some relief to Japanese policymakers.
FOMC meeting to take centre stage
(Arnaud Masset, market analyst)
The US dollar tumbled during the Asian session on Wednesday, losing ground against all G10 currencies, as investors across the globe prepare for the second interest rate hike in the US since the Federal Reserve started its normalisation process exactly one year ago. The euro stood out as the best performer this morning as it rose 0.32% against the greenback, while the New Zealand dollar gained 0.30%. Asian equities were mostly trading in negative territory with Chinese stocks sliding 0.78%, while the Japanese Topix was off 0.10%. European stocks were no exception with the Euro Stoxx 600 falling 0.40% as the DAX and the CAC were off 0.30% and 0.39% respectively. Such market reaction is quite normal as investors typically prefer to scale down the risk of their portfolio ahead of a FOMC rate decision.
Even though today's rate hike sounds like a done deal and there is almost no doubt that the Fed will push the button and increase its benchmark rate by 25bps, which would lift the target band to between 0.50% and 0.75%, there is much more at stake in fact. Indeed, the only thing the market will care about is the dots plot (FOMC members' own projections for future policy) and any insight into Janet Yellen’s thinking during the press conference. We do not expect Janet Yellen to mention the upcoming Trump presidency as the Fed has reiterated many times that the Committee does not talk about politics during the meeting. However, she may suggest that the upside risk to inflation has recently increased, but she will most likely not mention the fact that it is linked to rising inflation expectations amid Trump’s fiscal stimulus plan.
In our opinion, the market has been overly optimistic regarding the potential positive effects of a Trump presidency. Many of his promises would take time to be implemented, in addition to the fact that a few of them will be difficult to pass at congress. Therefore, we do expect a correction of the US dollar as the current strength is overdone in our opinion.