Market Shrugs Off Poor Japanese And UK Data

The US dollar remains on the defensive even after both Japan and the UK disappoint. Japan reported an unexpected 1.9% decline in March retail sales. The UK's initial estimate of Q1 15 GDP was 0.3%, below expectations for a 0.5% expansion, and half the pace of Q4 14 growth.

The market's response has been limited. The USD/JPY has been confined to a little more than 10 pips around JPY109.00. Sterling initially fell about half a cent on the disappointment but quickly resurfaced back above the $1.5200 level.

While Japan's markets are closed tomorrow, the BOJ meeting concludes on Thursday. Only 2 of the 34 analysts polled by Bloomberg expect the BOJ to expand its QE operations this week. Most expect such a decision to come toward the start of the second half of the fiscal year.

March completes the 12-month period following the sales tax increase. Retail sales have fallen 13.0% over the past year. The 1.9% decline in March (consensus was for a 0.6% increase) follows a 0.7% rise in February after a 1.9% decline in January. The weakness in consumption in Q1 warns of softer overall growth. The consensus is for 2.2% Q1 GDP. We see the risks for a sub-2% number when it is reported on May 19.

The preliminary estimate of Q1 UK GDP lacks details and is based on less than half of the information that will ultimately go into the final estimate. ONS indicated the slowdown was led by the service sector, which expanded by 0.5%, the least since Q2 13. Production fell 0.1%, and construction output fell 1.6%. The 2.4% year-over-year growth compares with a 2.6% expectations and 2.7% growth in 2014. Although the knee-jerk reaction was to consider the implications for the May 7 national election, we would be surprised if it really affected the polls. The polls continue to make a majority government look unlikely.

Nor will the data impact policy. The Bank of England is on hold. Since mid-April through last week, the implied yield of the June 2016 short sterling futures contract rose 18 bp and has recovered a third of it over the last few sessions. However, despite the disappointing GDP figures, the yield has not fallen through yesterday's lows.

Many are dismissing the personnel change in Greece's negotiating team as purely cosmetic, and a number of observers think it is a bad-cop good-cop game, the fact is that it appears to have breathed fresh life into what appeared to be a moribund process. Greek bonds and stocks are building on yesterday's recovery. The 10-Year yield peaked in the middle of last week just below 14.0%. It finished last week near 12.7%. Yesterday it was 100 bp lower and now another 32 bp lower. Over the last five sessions, Greek stocks have rallied 17.5%. The Greek stock market is struggling to maintain the momentum today, but the financial sector is up a little more than 1% in early afternoon turnover.

Tomorrow Greece is expected to present to parliament legislation to enact various reforms, including fiscal issues, taxes, public administrative reforms, television media licenses and tax on TV advertisement. It is expect to clear the remaining hurdles for the Piraeus Port and the leasing of 14 regional airports. It appears to have compromised by abandoning its pledge to hike minimum wages.

The euro has returned to yesterday’s highs above $1.0920. A stack of offers is thought to lie around $1.0950. Since the euro bottomed in mid-March, it has traded above $1.10 on six different sessions and has not finished the North American session above it. The euro’s downtrend began in earnest last May. Since then the 50-day moving average has contained rallies and although it was tested in mid-December, it has not closed above this average since last spring. It moved above it on an intraday basis yesterday. Today it is found just below $1.0890.

The Australian dollar is the strongest of the majors, rallying 0.75% to approach the late-March high near $0.7940. The reluctance of RBA Governor Stevens to talk down the currency ahead of the May 5 policy meeting pushed the market further in the direction it was moving, which was to downgrade the likelihood of a rate cut. Ironically, the appreciation of the Australian dollar makes a rate cut more rather than less likely. The Aussie has rallied 5% off the April 13 test on the multi-year lows near $0.7550.

The US calendar is light with only Case-Shiller house prices, the Conference Board’s measure of consumer confidence and the Richmond Fed’s Manufacturing Index. The data pales in comparison to the Q1 US GDP estimate due tomorrow, a few hours before the conclusion of the FOMC meeting. We expect the Federal Reserve to recognize the weakness in recent data, but retain their confidence that this is due to transitory factors and that stronger growth will resume.

Although Q2 data is fairly light, we do think there is no reason (yet) to abandon ideas that the recent pattern of weakness in Q1 followed by a significantly stronger Q2 remains intact. Yesterday’s Markit service PMI showed the second highest activity in seven months, and the highest employment reading since last June. New orders rose as did input prices.