No William Tell

No William Tell he
Abe’s ‘Third Arrow” misses
The mark by a mile

Shinzo Abe was the major newsmaker last night, giving a speech outlining how his government would be addressing key problems in Japan in order to help achieve his oft-stated goal of 2% inflation alongside firmer GDP growth within two years.  Alas, while the programs he outlined are all positive; deregulating the energy, health and infrastructure sectors amongst others, they are not slated to begin until the Autumn.  This is conveniently after the Upper House elections in July, where an LDP victory is forecast, and which will help him consolidate his power.  But the market is an impatient observer, demanding immediate action if it is to be satisfied.  The outcome was market disappointment leading to further weakness in the Nikkei (-3.8%), strength in the yen (+0.6%) and a small rally in JGB’s.  It seems pretty clear at this point that the Japanese are not going to be able, or at least willing, to do anything else to weaken the yen for the next several months.  Does this mean it will strengthen?  Not necessarily, for remember, there is the US side of the equation.

So let’s look at the US side for a moment.  Today brings ADP employment (exp +165K), as well as Nonfarm Productivity (0.6%), Unit Labor Costs (0.5%), Factory Orders (1.5%) and ISM non-mfg (53.5).  Overall, lots of new information, though the ADP and ISM numbers are the only ones that matter.  And let’s not forget that Friday is the non-farm number.  Now, for the past two years, the pattern has been fairly strong growth in Q1 and Q2, with the employment picture brightening, and then depressing summers where the numbers tailed off and growth flattened through year end.  Today is the first real look at whether 2013 will break away from that pattern.  Remember, two months ago, the payroll data disappointed dramatically, lowering expectations for last month which were met.  Those diminished expectations remain in place as, despite all the talk that over the past 6 months job gains have averaged 200K, economists are looking for a lower number.  The ISM data Monday was very disappointing, and recent US data has been underwhelming as a whole.  Will this picture encourage the Fed to ‘taper’?  I don’t think so, unless we see surprisingly strong data this week.  And right now, the only data that remains consistently strong is the housing recovery.  Everything else seems to be back to a modest growth picture.  Winding up this thought, it seems like we are in for a summer of lackluster growth, no change in Fed policy (although plenty more discussion of the eventual change) and a dollar that remains stable at current levels.  Now that 100 has been breeched on the down-side, my guess is we are going to trade either side of that level for a while.  Figure a 98/102 range for the summer, or at least until the Japanese elections in July.  If the LDP does win a large majority there, that can be the catalyst for the next attempt to break higher in USDJPY, but until then, it will probably be fairly dull.

A brief look at the euro shows continued weak data, with the PMI Services numbers disappointing this morning, and the euro continuing to tread water.  Despite all the spin attempts by EU officials to make things seem like the crisis is over and all is well, the peripheral nations remain in dire straits and continue to drag down the overall Eurozone.  This is why regardless of the US situation, I have trouble seeing the euro rally substantially from current levels.  I maintain we will see 1.25 before 1.35.

Finally, in the UK, things are starting to pick up a bit.  The PMI Services release this morning was a surprising positive, 54.9, much better than the 53.1 expected.  The UK data run this week has been uniformly better than expected and has encouraged a rally in the pound of about 2.5% in the past several sessions.  Today begins the monthly MPC meeting, the last under the guidance of Sir Mervyn King, as next month Mark Carney takes over.  Don’t look for any policy changes here, as further ease would be unseemly given the recent data, but there is certainly no room to tighten yet.  I like the pound to test its April highs of 1.56 this month, but don’t see much beyond that.

Good luck
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