Wednesday 21 February 2018

Daily Market Update: Japan avoids recession but oil price slump continues

Tokyo, Japan - November 24, 2013: Crowd at Takeshita street Harajuku on November 24, 2013 in Tokyo, Japan. Takeshita street is a street lined with fashion, cafes and restaurants in Harajuku.
Tokyo, Japan - November 24, 2013: Crowd at Takeshita street Harajuku on November 24, 2013 in Tokyo, Japan. Takeshita street is a street lined with fashion, cafes and restaurants in Harajuku.

Richard Ramsey

Yesterday was a relatively quiet day for financial markets with a dearth of top tier economic data releases. Overnight attention has turned to Asia with the latest Japanese GDP and Chinese trade data.

Japan was thought to have been in technical recession, defined as two consecutive quarters of negative GDP growth. However, Q3’s 0.2% quarterly contraction has been revised up to growth of +0.3% q/q. As a result, the headline doing the rounds is that “Japan has avoided recession”. The Japanese PMIs for October and November suggest that this growth has continued into Q4. However, Asian economies remain sensitive to developments within its largest economy – China.

The latest Chinese trade data revealed this morning signalled a fifth successive month of export declines. Exports fell by 3.7% last month. Meanwhile the slump in imports (reduced demand) moderated from a 16% y/y drop in October to less than 6% y/y last month. Chinese imports have been posting year-on-year declines for a record thirteen months in a row.

This slowdown in demand was evident yesterday in Germany’s industrial output figures for October. An imbalance between supply and demand is also evident within global commodities markets. The price of oil continues to push lower amid speculation that the global oil glut will persist after OPEC abandoned any attempt to limit output to boost prices. The Brent crude benchmark has plunged by 9% since the start of last week with a decline of close to 5% within the last 24 hours. A barrel of oil dipped below $41pb yesterday having opened at $43pb. This represents a 6-year low.

This morning’s incoming UK economic data is distinctly lacking any signs of pre-Christmas cheer. Falling food and energy prices coupled with a return of pay rises have boosted disposable incomes. Indeed, real earnings growth has been rising at its fastest rate in a decade. However, the ‘noflation’ feelgood factor embracing households’ finances is not evident in the latest retail sales figures. According to the British Retail Consortium’s monthly sales monitor, retail sales grew at their weakest pace for any November since 2011 as Black Friday discounts failed to compensate retailers for poor trading earlier in the month. Retail sales grew at 0.7% y/y in November, down from 0.9% in October. Measured on a like-for-like basis, however, sales in stores and online fell by 0.4% in November. Quoted in today’s FT, David McCorquodale, head of retail at KPMG, which produces the figures for the BRC, said the data should come as a “reality check” for the sector “with consumers holding off for a Black Friday bargain pitted against retailers determined to hold on to their hardearned margins”.

Alongside falling retail sales figures, UK house prices are also on the slide. House prices fell unexpectedly by 0.2% m/m in November according to Halifax. This still represents a 9% increase year-on-year. Later this morning we have the latest UK industrial and manufacturing production figures for the October. Meanwhile the latest NIESR GDP estimate for the three months to November is due. If the latest retail sales figures are anything to go by it will be weaker growth.

The disappointing UK economic data has weighed on sterling sentiment this morning with EUR/GBP back above 72p at 72.3p. Meanwhile the pound is almost one cent lower against the dollar over the last 24 hours and is heading towards $1.50. There has been little price action with EUR/USD over the last 24 hours. This currency pair is currently changing hands at $1.0860. Today’s Eurozone and US economic releases are not expected to excite the markets and drive any notable price action. The Eurozone’s Q3 GDP growth rate is expected to be confirmed at 0.3% q/q.


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