JPY GDP better at 2.0% vs. 1.0%
German GDP lower q/q but higher y/y
Wellink reaffirms hawkishness irrespective of inflation level
UK core CPI softer at 1.4%
ZEW prints 28.5 vs. 24.5 but present conditions better
US PPI and Advanced Retail key event risk on tap
Japanese GDP surprised to the upside by printing at 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 flurry of yen buying with many players caught wrong footed in early Asia trade. The pair slid from 118.12 to 117.40 before bids reappeared. The strong GDP print reintroduces the possibility of BoJ rate hike before year end especially if the important Tankan survey which is due to be released only 4 days before the final 2006 meeting of the BOJ monetary committee were to confirm tonights GDP figures.
Looking beyond the headlines, however, the GDP data was decidedly mixed and in fact was rather lopsided. Most of the growth was driven by exports and residential investment while personal consumption collapsed by -0.7% and the deflator dropped by -0.8% on quarter over quarter basis. Japanese fiscal authorities remain petrified about the possibility of slipping back into deflation and tonights data, good as it is, hardly pacifies their concerns given the weak performance by the Japanese consumer. With the US consumption now showing clear evidence of slowdown the question going forward is how long will Japan be able to coast on its export driven growth if its second largest market curbs demand? Little wonder then that by early London open USD/JPY retraced most of its losses as traders reconsidered the data in more sober light. Nevertheless the pair may plumb its early morning lows later in the day if the US data proves weaker than expected in which case the focus may shift to the notion of US rate cuts rather than Japanese rate hikes.
Meanwhile the data out of Europe was ambiguous as well. Eurozone GDP printed slightly softer at 0.5% vs. 0.6% expected dragged lower by the weak French print, but hawkish comments from ECB member Nout Wellink that rates are damned low trumped any hesitancy on the part of traders to take the euro higher as the December rate hike now appears to be a near certainty. The ZEW survey which has been consistently pessimistic and wrong about the prospects of German and EZ growth once again printed lower than expected at 28.5 vs. 24.5 consensus, hitting a 13 year low. The present expectations component however, registered a much better reading of 53 versus 44 forecast and offset some of the gloom and doom of the report.
With Japanese and European data out of the way, trading should now settle down and await US economic releases. The market expects only a minor rise in core PPI to 0.1% and relatively large decline in Retail sales of 0.4%. Given the weakness of Walmart numbers, and weekly retail sales as well as a sharp contraction on consumer credit, there is chance of a downward miss in the Retail sales number. One possible scenario however that could confuse the market would be higher PPI readings and lower Retail sales. Such news would connote the worst of both worlds stagflation - as prices continue to climb while demand contracts. Ultimately such a scenario would not be favorable to the greenback putting further selling pressure on the unit should it occur.
