Japanese Growth Misses Estimates

Daily Analysis - 13/02/2017

Preliminary Fourth Quarter GDP Reading Prints Below Expectations


Measures of growth in Japan continued to decelerate as evidenced by the first reading of fourth quarter growth.  Expansion during the last three months of 2016 totaled just 0.20% compared to forecasts of 0.30% growth, supported primarily by government spending and exports.

Japan Records Fourth Straight Quarter of Growth

Following a dramatic weakening of the Yen over the course of the fourth quarter, the latest figures pertaining to gross domestic product showed that the move helped buoy economic activity for the period.  Exports rose by 2.60% quarter over quarter as external demand rose while import managed to climb for the first time in a year.  Aside from trade, a major contributor to the latest growth figures was also government expenditures which increased by 0.40% during the period.

However, the latest figure is not without some concerning developments, evidenced by flat consumer spending and falling public investments.  Private non-residential investments managed to show some upside, but it was not enough to thwart a slowing pace of expansion after fourth quarter growth tapered to 0.20% from 0.30% a period earlier.  The Yen retreated after the announcement, with USDJPY briefly retaking 114.000 before pulling back.


US January Surplus Beats Estimates

Despite coming in below levels reported a year earlier, the US Government’s budget surplus for the month of January totaled $51 billion, rising above expectations of $40 billion.  While well shy of 2016’s $55 billion figure, it does highlight growing tax receipts, which rose by 10.00% during the period.  However, the one concerning aspect of the figure was the fact that spending growth continued to outstrip tax receipt expansion, rising by 13.00% during the period.

The ongoing deficit will likely present challenges for the Trump administration at a time when it is pushing tax reform that will likely push the annualized deficit even higher from current levels.  Nevertheless, US assets continued to gain ground on Friday, with stock indices pushing to new records and extending gains following the weekly reopening.


Yuan Hits One-Month Lows

Ahead of data related to inflation set to be delivered during the Tuesday overnight session, the Chinese Yuan is once again finding itself under pressure as financial market activity normalizes following the end of Golden Week.  The People’s Bank of China added liquidity to the system overnight after draining liquidity for 6-straight sessions.  Additional liquidity sent financial assets higher, with stocks and bonds surging in spite of the Yuan falling to its lowest point in a month versus the US dollar.

However, this weakness may find itself reversing following the upcoming inflation readings, with expectations for consumer and producer prices to remain on the rebound.  Should inflation continue to rise, it could inhibit further monetary easing, sending the Yuan higher versus peers over the medium-term.


US Drill Rig Count Continues to Climb

In another challenge to the OPEC output freeze deal, US producers continued to activate additional drill rigs last week, adding 8 rigs to bring the total to 591, well above the 439 rigs actively producing 12-months ago.  Besides marking the 14th week of gains in the last 15, the results come amid crude oil production hitting cycle highs earlier in the month, trending just shy of 9.000 million barrels per day in output.

With production typically lagging changes in the rig count, the latest figures from Baker Hughes could foreshadow additional gains in drilling over the coming months, especially as US banks begin pouring funds back into oil exploration and production firms.  After climbing last week following the US inventory figures from the Energy Information Administration, Brent crude oil remains mostly unchanged from Friday’s close ahead of the forthcoming OPEC report due later in the session.


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