The Week In Hindsight; 30 June 2014

The NIKKEI 225 fell from a five month peak last week as the index tracked developed market equities lower. Following strong gains previously, equities began the week by grinding lower despite a steady flow of positive economic data emerging from the US.

Much of the good news came in the form of better than expected home sales and confidence numbers from the US, which proved insufficient to prevent the wave of caution that washed over investors ahead of, and after, Final GDP numbers emerged on the Wednesday.

The actual figures for Q1 GDP emerged at -2.9% Vs a forecast of -1.8%, which sent equity markets tumbling throughout the remainder of the week and into the Friday close. The takeaway from this is that initial projections for US growth in 2014 now, at first glance, appear wildly ambitious and have consequently been revised downwards.

Given the steeper than expected contraction in Q1 it is likely that any rebound in growth throughout Q2 has now been negated, which leaves full year expansion looking set to come in at, or around, the 2% level as opposed to the previously anticipated 3%.

While such a sharp reduction was felt across global equity markets, the long term implications of last week’s figures are likely to be less noticeable. This is given that much of the contraction has been attributed to output lost through the 1/100 year polar vortex which swept through North America between January and late February.

Away from the realms of US economic data, and looking back closer to Asia Pacific; Japanese economic numbers offered up some encouraging signs to investors throughout the week. This was as CPI inflation rose modestly from 3.2% to 3.4%, its sharpest monthly increase (adjusted for tax hike) since the December reading last year.

In addition to gradually rising price pressures, the Japanese unemployment rate also fell to a sixteen year low during May, according to figures released on Friday morning. The reduction in unemployment bodes well for the economy over the coming quarters as an increase in consumer spending and eventual wage increases would be likely if the improvement is sustained.

Nevertheless, the road ahead is not without risks to the recovery as well as equity markets. So far, consumer price pressures have far outstripped those of wage inflation, while a broad base of investors and observers have noted a lack of action relating to the implementation of Shinzo Abe’s Third Arrow of policies.

If investor perceptions of lacking action within the halls of government were to become persistent then confidence in the recovery could become damaged. In addition to this, further rapid increases in inflation, if unaccompanied by wage growth, could also harm consumer confidence and further constrain spending within the economy; which would once again threaten the recovery.

In relation to the immediate future; the week ahead sees the latest reading from Japan’s Tankan  manufacturing and nonmanufacturing indices announced. Present expectations see a minor decline in both barometers for the second quarter.

Later on, on the same morning, the most recent changes in average cash earnings for Japanese consumers are expected to be announced. Present estimates see a minor uptick from 0.7% to 0.8% for the month.

In addition to Japanese data, the latter half of the week also sees June employment & unemployment numbers emerge from the US economy. Current estimates see a minor improvement in the unemployment rate accompanied by steady growth in non farm payrolls.

Should this arrive to be the case then the NIKKEI 225 would be expected to track its developed market counterparts toward a higher close on the week. If, on the other side of the coin, US numbers were to perform badly then the outcome for global indices on the week would most likely be negative.

Official Bureau of Labor Statistics data indicates an unemployment that remains flat with the previous month, with NFP jobs added at a pace of 211K.

Other estimates from across the financial services industry suggest a slightly brighter picture;

Barclays Capital: 6.2% Unemployment // 250k Jobs added
Commerzbank: 6.2% Unemployment // 220k jobs added
Standard Chartered: 6.2% Unemployment // 190k jobs added
Deutsche Bank: Unemployment rate <6% year end