Originally published by Rivkin Securities
US equities are now in the thick of earnings season with 29% of S&P 500 companies now having reported fourth quarter results. Of those 69% have so far surpassed earnings estimates, with actual growth of 9.9% year-on-year and overall earnings growth is expected to settle around 7% for all companies. Both the Dow Jones Industrial Average and Nasdaq 100 gained +0.16% and +0.11% respectively to close at new all-time highs while the S&P500 pulled back after touching 2,300 to finished -0.07% lower for the session.
The US dollar gained +0.43% after the Federal Reserve of Atlanta raised its fourth quarter GDP estimate to +2.9% from +2.8% citing increased inventory investment following the US census bureau’s advance economic indicators. Tonight we will get the official reading for fourth quarter growth due out at 12:30am AEDT.
The stronger dollar weakened the yen, which traded -1.04% lower at the time of writing ahead of CPI data released at 10:30am AEDT. Expectations for the headline figure are for a slight decrease from +0.5% in November to +0.2% (YoY Dec) while the BOJ’s preferred measure which excludes fresh food is expected to decrease at a slower rate of -0.3% compared with -0.4% in November.
The headline figure has improved recently, being at -0.5% only back in September thanks to the rebasing effect of oil prices. However the core measure remains significantly below the BOJ’s 2% target which is unlikely to be reached anytime soon. Despite the BOJ’s best efforts to promise to be a bit silly when it comes to targeting inflation and a so successful attempt to control the yield curve, the problems behind weak inflation in Japan cannot be remedied by monetary policy alone.
Such problems predominately relate not only to demographic issues such as a declining & aging population but also the inflexible nature of the workforce resulting in weak wage growth and labour being allocated to less productive sectors such as healthcare and retail. Another key factor is the deflationary mindset. It is very difficult to change which compounds the problem, after all if prices are expected to be lower tomorrow, why buy today? Regardless of the reading today, it’s going to be a long road ahead for the BOJ before they achieve their target.
For investors that’s not such a bad thing, the weaker yen has boosted the Nikkei 225 index into a bull market in 2016 shown on the chart below. This is thanks to the heavy exposure to overseas earnings by the constituents of the index, with the weaker currency translating into higher profits.
Locally the S&P/ASX 200 is expected to open flat after finishing trade -2 points lower overnight after the market was closed on Thursday.
Data releases:
· Japanese CPI (YoY Dec) 10:30am AEDT
· Australian Producer Prices (QoQ & YoY Q4) 11:30am AEDT
· U.S. GDP (QoQ Q4) 12:30am AEDT
· U.S. Personal Consumption Expenditure (MoM Dec) 12:30am AEDT
· U.S. Durable Goods (MoM Dec) 12:30am AEDT
Chart 1 – USDJPY (Blue) & Nikkei225 (Purple)
