Japanese Trade Deficit At Highest Point in 2-Years

Daily Analysis - 20/02/2017

Import Growth Outstrips Export Increase

Although the headline figure was not as positive as some market participants would have preferred, amid slowed export traction during the Chinese Lunar New Year holiday and weaker sales to the US, the gains in imports could be a very positive development for Japanese inflation.

Japanese Imports Climb to 16-Month Highs

While most analysts projected sustained growth for the Japanese export economy, trade encountered headwinds during January after exports grew by a meager 1.30% compared to the consensus estimate of 4.70% expansion. This contrasts sharply with the 5.40% annualized pace of increase in December while growth in trade came from the import side of the equation.

During the same annualized period, imports rose by 8.50%, surging beyond projections of 4.70% and well above the -2.60% contraction reported a month earlier. Import growth outpacing the rise in exports brought the trade deficit to JPY -1.087 trillion for the period, marking the lowest point in the figure in 24-months. However, import growth is positive and may be a strong catalyst for inflation gains in the coming months if the trend persists. After sliding on Friday, USDJPY is back on the climb following the data.

German Producer Prices Trend Higher

In another sign that the base effect of lower energy prices is gradually fading, the latest figures pertaining to German producer price inflation came in stronger than forecast. The headline PPI results showed that prices rose by 2.40% on an annualized basis, beating expectations of 2.00% by a significant margin and rising significantly above the prior figure of 1.00%. During the period, energy costs rose by 4.00%, predominantly due to the 19.70% climb in oil-related costs over the time frame.

On the whole, this is a positive sign for both the German and Euro Area economy. As producers deal with higher prices, these rising costs are likely to be passed along eventually to consumers, helping to lift consumer prices towards the 2.00% price stability targeted by the European Central Bank. After gapping higher following the weekly reopening, the German DAX 30 equity benchmark is currently nearing session lows.

Number of Active US Drill Rigs Rises Further

Capping off a fifth straight week of gains, US oil services giant Baker Hughes reported that active oil drill rigs rose by 6 last week, bringing the total number of operational rigs to 597 last week. Gains in production lag upside in the rig count, suggesting that further upside in US output is likely over the coming weeks absent another steep slide in energy prices. Nevertheless, crude oil prices remain range-bound as OPEC reaches its own goals.

However, there is a chance that after 6-months the deal is abandoned, with certain members signaling they have little intention of extending the terms. Furthermore, the risk of US onshore inventories filling after last week’s record print indicates that producers may be forced to dump surplus output on the open market, driving prices lower. Brent futures are trending slightly higher on the session following a flat close on Friday.

UK FTSE 100 Hits One Month High

With the holidays in North America, activity in financial markets is a little more tepid that normal, causing equities in particular to drift until futures turnover picks up after the President’s day holiday ends. UK shares are already reflecting lower volumes, rising to the highest point since January 16^th on the back of commodity producers listed in the index.

Besides the commodity producer component, financials are also trending higher while the main drag is Unilever. Shares of Unilever have fallen by nearly -8.00% following the rejection of $143 billion takeover bid from Kraft Heinz to build a company that would rival Swiss food and beverage company Nestle in terms of size and scale. After a positive open, the FTSE 100 is near the bottom of the daily range after hitting session highs earlier this morning.