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Traders focused on Paris, not markets, Japan’s economy falls back into recession again

- Japan back into recession, although we believe that, for the time being, these results will not trigger any additional policy stimulus at Thursday's meeting
- USDJPY, we remain bearish on the yen as fiscal and monetary arrows appear insufficient to boost the economy and structural reforms are largely awaited
- Fed's Rosengren told the FT that he favours gradual pace for tightening, while ECB Mersch reiterated that the debate around additional easing is still ongoing
- SNB's Maechlet stated that Switzerland is better off with negative interest rates
The weekend news flow was dominated by the Paris attacks, keeping FX trading in tight ranges today. AUDUSD traded between 0.7130 and 0.7100, while USDJPY was range bound between 1.0740 and 1.0687. S&P futures fell in the Asian session, putting pressure on regional equity indices. The Nikkei index and Hang Seng were both in negative territory, reflecting the weaker risk appetite across Asia, down -1.04% and -1.42% respectively. The Shanghai composite rose 0.73% the lone bright spot in Asia. US 10 year yields dropped to near pre-payroll levels at 2.24%. Boston Fed President Eric Rosengren suggested to the FT that he favors a gradual pace of Fed tightening. However, he indicated that a faster pace could be warranted should direction in commercial real estate and large syndicated loans continue. Over the weekend, ECB Mersch reminded the market that the debate around additional easing is still ongoing and that the ECB mandate was long term rather than focused on short term indicators. Finally, more rhetoric from the SNB indicated that additional negative rates are on the way, the SNB's Maechler stating that Switzerland is better off with negative interest rates.
In Japan, 3Q real GDP contracted by 0.8% q/q, marginally weaker than expectations at -0.2%. The 2Q read was revised slightly higher to -0.7% q/q from -1.2%, however the nation was still in a technical recession. Exports did improve in 3Q but CAPEX remained a noticeably soft spot. We anticipate today’s data will put further pressure on the BoJ to increase stimulus. That said, we do not expect that the BoJ will change its policy mix at Thursday meeting. 
***Yann Quelenn, Market Analyst: The preliminary figures for the third quarter Japan GDP were widely expected, printing below expectations at -0.8% year-on-year, marking the second consecutive quarter that the economy has contracted. Japan has fallen back into recession. This data is definitely not good news for Prime Minister Abe, who is still struggling with his arrows to stimulate the economy through wages as retail sales are still not at a strong enough level to provide with sufficient traction for the economy. We believe that, for the time being, these results will not trigger any additional policy stimulus. In addition business spending fell 1.3%, more than the anticipated 0.4%.
The pressure to ease will grow. Indeed the Bank of Japan’s official forecast of 1.2% for March 2016 seems impossible. As a result, major Japanese indices have dipped this morning at the opening session amid the atrocities in Paris on Friday night. The USDJPY is heading slightly upwards this morning. The fiscal and monetary arrows appear to be not sufficient to boost the economy. Structural reforms are largely awaited. We remain bearish on the yen.”***
In New Zealand, real retail sales 3Q climbed 1.6% q/q above the optimistic 1.4% and prior 0.1% 2Q read. Australia’s new motor vehicle sales fell 3.6% m/m in October (4.2% y/y) against upwardly revised improvement of 5.9% (7.8% y/y) in September. In Thailand, GDP growth 3Q increased 1.0% q/q, well above expectations of 0.6%. This solid read puts the annual number at 2.9% in 3Q from 2.8% in 2Q. Tourism remains a bright spot, adding 3.2% to the headline GDP number however, private investment remains soft.
We anticipate that trading will remain subdued today as participants continue to focus on Paris headlines. In the Euro-area, final inflation is anticipated to stay in line with the flash estimate of 0.0%y/y in October, although a slight rise in country reads increases the risk to a strong read.

Monday, 16 Nov, 2015 / 9:43

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