Gross Domestic Product (3Q P) (03:50GMT; 18:50EST)
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Actual: 0.5% 2.0%
Expected: 0.2% 1.0%
Previous: 0.4% (R) 1.5% (R)
How Did the Markets React? <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Japanese markets were quick to react to the release of stronger-than-expected GDP growth in the third quarter, along with upward revisions to the second quarter results. The Japanese economy surged 2.0% vs. 1.0% expected, and given the fact that the market was anticipating a print even weaker than 1.0%, the news caused a sell off of JGBs and a flurry of yen and equity market buying. The strong GDP print reintroduces the possibility of Bank of Japan rate hike before year end, especially if the important Tankan survey (due to be released only 4 days before the final 2006 meeting of the BOJ monetary committee) were to confirm the Q3 GDP figures. Looking beyond the headlines, however, the GDP data was particularly mixed as most of the growth was driven by exports and residential investment, while personal consumption contracted 0.7% and the deflator dropped by -0.8% on quarter over quarter basis. Japanese fiscal authorities remain cautious of the possibility of slipping back into deflation and last nights data, as good as it was, hardly pacifies their concerns given the weak performance by the Japanese consumer.
Bonds Japanese 10-Year Government Bonds
Japanese fixed income markets sold off immediately upon the release of solid GDP data from the Land of the Rising Sun, leaving yields on 10-year JGBs to surge to a session high of 1.745%. Traders took advantage of the reintroduction of the possibility of a Bank of Japan rate hike before year end. However, yields eased slightly to 1.730% as a breakdown of GDP showed that consumer spending showed an unrelenting contraction. While a continuation of stronger data will likely help keep yields buoyant, JGBs may not be able to breach 2.000% again without a resurgence in inflation or the help of strong Tankan results in mid-December.
FX USD/JPY
Much like the equity markets, FX traders responded swiftly and correctly to a vast improvement in Japanese economic growth. Yen strengthened quickly as USD/JPY dropped from 118.12 to 117.52 as the possibility of a rate hike by the Bank of Japan before year end was revived. However the pairs decline was capped at 117.38 as a breakdown of the data showed that personal consumption continued to contract as GDP was kept afloat largely by exports and residential investment. With the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US now showing clear evidence of a slowdown, the question remains of how long Japan will be able to coast on its export driven growth if its second largest market curbs demand.
Equities Nikkei 225 Index
Japanese equities rallied at the Tokyo market open as economic growth in the country accelerated faster than expected at a rate of 2.0%. Although the gain was largely a result of residential investments and exports, with personal consumption dropping 0.7%, the Nikkei 225 ignored the breakdown and focused on the headline. As a result, the index rose 1.7% to close the session at 16,289.55. Shares reliant on domestic demand were broadly higher, with the banking sector skyrocketing 3.2. MUFJ, the worlds biggest bank by assets, was up 2.9% to 1.44 million yen while Mizuho Financial Group Inc. was up 3.5% to 864,000 yen. The real estate sector also picked up, gaining 4%. Shares of one of the countrys leading developers, Mitsubishi Estate, gained 4.2% to 2,750 yen while shares of Sumitomo Realty jumped 4.9% to 3,620 yen.
