Not Quite a Landslide

Not quite a landslide
But ‘nuf for Abenomics
To take the next step

The PIGS feel austerity stinks
More protests are coming methinks
The Portuguese pain
Is mimicked in Spain
How long before one of them blinks

The weekend brought two stories of note to light; the outcome of the Japanese Upper House election and the ongoing struggles within the European peripheral countries as they attempt to reinvigorate their economies. The broad based market response has been a slightly weaker US dollar, mixed equity markets and very modest gains in the bond market.

Let’s start with Japan. To no great surprise, the LDP in conjunction with their coalition partner New Komeito, have won a majority in the Upper House of the Diet, which now gives them control of both houses of government and a mandate to continue PM Abe’s attempts at jumpstarting growth there. One of the concerns with the election results was that the voting turnout was the second lowest on record at just over 52% of the eligible population. That hardly smacks of enthusiasm, but despite that, Abe now has the opportunity to relaunch his ‘third arrow’ and address structural changes that need to be made in Japan in order to enable future growth. I was disappointed in the FX market reaction where the yen has strengthened a bit, right back to 100.00, despite a modest rally in the Nikkei and the increased hopes for further action. I attribute this move to a ‘buy the rumor, sell the news’ effect and fully expect that the yen will weaken over the course of the summer. There was modestly encouraging news overnight as Supermarket Sales in Japan rose 2.7% Y/Y in June, up from a reading of -1.2% in May. This represents further progress on the economy, but the real news will come Thursday when we receive CPI data with current expectations for 0.1% Y/Y as a headline number and -0.3% ex food & energy. If those numbers print higher than expected, I would look for a USDJPY boost. However, until then, I imagine the yen will trade either side of 100.

The other news of note over the weekend was the failure of Portuguese President Anibal Cavaco Silva’s attempts to create a national unity government to help implement the necessary austerity measures still in store for that nation. The Troika is insisting on an additional €4.7 billion of spending cuts in the coming fiscal year and unremarkably the Socialists, who oversaw most of the descent into fiscal crisis, are not willing to go along with the demands. Austerity in Portugal, Greece, Spain and Ireland is becoming too great a strain on the national psyche and we continue to see an increase in the protests by ordinary citizens. This message seems to be getting through to the G20 leadership as their statement over the weekend was that they were committed to fostering growth with a secondary effort to insure fiscal responsibility sustainability. It appears that Lord Keynes continues to hold sway over the entire policymaking universe, at least the part of Keynes that said priming the pump was a good idea. In fairness to Keynes, he always called for fiscal prudence during strong economic periods, alas that part of his discussion gets short shrift from politicians of most stripes.

So in what is shaping up as a quiet start to a quiet week, the most likely catalyst for movement will come from Fed commentary or bond market gyrations. The data this week will tell us more about the housing market and its response to recently increased mortgage rates, as well as further manufacturing data in the form of Durable Goods.

Today Existing Home Sales 5.25M
Wednesday New Home Sales 485K
Thursday Initial Claims 340K
Continuing Claims 3022K
Durable Goods 1.1%
-ex Transport 0.5%
Friday Michigan Confidence 84.0

But it is to next Friday’s payroll data that the market is turning its eyes as that is the information most closely watched by Bernanke and his colleagues on the FOMC. Until then, I see little reason for substantial movements given the combination of a lack of news and summer vacation season. So leave orders at comfortable hedge levels and enjoy the lack of excitement for now. It will return, I promise!

Good luck