Talking Points
JPY GDP misses to the downside but internals look good
German CPI below 2%
USD Retail Sales main event of the day
USD/JPY rallied above the 115.75 level in early European trade after Japanese GDP release missed expectations printing at 0.2% versus 0.7% consensus. On an annualized basis GDP growth slowed to 0.8% in Q2 from 3.1% the quarter prior. Looking beyond the headline number however, the economic news out of Japan was not nearly as bleak as the report would suggest. The two primary factors for the downward surprise were the reduction in government spending and a drawdown in inventories - both positive signs of improving demand from the private sector. Indeed private consumption rose a healthy 0.5%, while domestic demand deflator (in contrast to the overall GDP deflator which continued to contract 0.8%) actually rose 0.1% indicating that at least in the private sector the decade long battle with deflation is definitively over. Currency traders sold the yen on the GDP news fearing that the BOJ will now stand down for the rest of the year after ending ZIRP by raising rates to 25bp in July. However, such speculation may be quite premature. If oil prices stabilize or recede from present levels, providing a spending boost to the Japanese consumer, the internals of todays report suggest that Japanese GDP could easily resume its prior pace of growth spurring the BOJ to act sooner rather than later as real interest rates in Japan continue to be negative. In the post announcement conference Governor Fukui was purposefully non-committal leaving open the possibility of further rate hikes should future economic data warrant such a move.
In Europe today, the EUR/USD floundered in quiet trade, pressured by persistent safe haven flows to the dollar and little meaningful economic news. French GDP rose a robust 1.7% versus 0.7% while German CPI printed in line with expectations at 1.9%. The figure was below the ECB target rate of 2.0% and may have tempered any expectation of aggressive monetary tightening from the ECB. US Retail Sales remain the key event on the calendar today and if they show a strong rebound from June, the greenback may see further buying as the day progresses.
