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TTN Asian Market Update
- Pressure on Japanese PM after elections: Japan's Prime Minister Shinzo Abe said he won't resign after his LDP party suffered defeat in the upper house elections. Abe's refusal to step down means that the impact on monetary policy is limited, with his coalition maintaining a strong grip on the more influential lower house. However, failing his first electoral test since taking office 10 months ago will increase the pressure on him to stand down. Although the market has largely priced-in the coalition's defeat in Sunday's elections, if Prime Minister Shinzo Abe is forced to step down to take responsibility for the loss, the stock market could fall further. Morgan Stanley's chief Japan economist pointed out that the defeat of the LDP will lead to more speculation on who will succeed BoJ governor Fukui, as the LDP's recommendation need to be passed by the upper house. Fukui's term expires next March. While the uncertainty over Japan's political situation may see some JPY weakness early in the week, the consensus seems to be that carry trade unwinding will continue to be the main driver of currency markets this week. - Japanese Industrial Production rebounds: (JP JUNE PRELIMINARY INDUSTRIAL PRODUCTION MOM: 1.2% V 1.0% expected, -0.3% prior; YOY: 1.0% V 0.9% expected, 3.8% prior) Industrial Production has been the Japanese economy's weakest link, and today's improving data suggests that the Bank of Japan could still be on track to hike rates. Industrial production had fallen in four of the previous five months, but manufacturers output forecasts for July and August are quite strong (which show that there is no change in the upward trend in output). Going forward, industrial production is expected to remain firm despite the recent earthquake ("For July, even if we subtract the negative impact of the recent earthquake on output, which is estimated at around 0.8 percentage point, it would still be 1.0 percent and this is pretty firm" - Takehiro Sato at Morgan Stanley) - Housing data could make RBNZ feel nervous: (NZ JUNE BUILDING APPROVALS MOM: 15.8% V 5.5% prior; EX- APARTMENTS +1.4% v 2.8% m/m) RBNZ governor Bollard has repeatedly said that he wants to see a slowdown in the housing market, and stronger than expected building approvals data could make him feel nervous (especially after he hinted that the tightening cycle has ended). Nevertheless, the data series is volatile and the consensus is that the RBNZ is watching house sales and borrowing figures more closely than building approvals. - Aussie business confidence data suggests August rate hike is likely: (AU Q2 NAB BUSINESS CONFIDENCE: 12 V 10 prior, highest reading for index since December 2003) Markets currently price in a 72% chance of a RBA rate hike at the August meeting, and the NAB business confidence data adds credibility to this consensus. **** TTN analysis: Will the USD weaken this week? - The USD gained last week as investors sold equity positions overseas and repatriated funds to the U.S. Several analysts suggest that this trend could run out of steam very quickly, especially if the Fed affirms the market's expectation to cut rates amid the subprime meltdown. - Now that inflationary pressures have settled, the Fed seems to have more room to cut rates in order to support the market. Despite rising oil prices, the TIPS (Treasury inflation-protected securities) market is saying right now there is no inflation risk the next six to twelve months. Yields on TIPS due in January are lower than those on similar-maturity Treasuries by about half a percentage point. The main risk to this idea is rising oil prices. If oil prices remain this high it would add to inflationary pressures, reducing the chance of a Fed rate cut (providing some support for the USD) - We've started seeing signs of spillover, and this is a USD negative, since spillover could force the Fed to cut rates. From the FT: American Home Mortgage Investment said it is delaying paying dividends on its common stock and may delay payments on its preferred shares because banks demanded it put up more cash after the mortgage lender wrote down the value of its loan and security portfolios significantly. The move represents one of the first indications that the crisis facing sub-prime mortgage lenders in the US is expanding to affect lenders like American Home Mortgage whose borrowers tend to have higher 'prime' ore 'near prime' credit ratings. - How much downside remains for stock markets? Pimco's Bill Gross believes the market could become more volatile. He recently said that "there's no doubt this recent upward movement in yields justifies a 5%-10% correction in stock markets." The DOW lost about 4.0% last week, suggesting we could see more downside if Gross is correct. - This week's data: This week's U.S. inflation data (on 7/31) will be key to the near-term USD direction. A soft inflation reading will mean that the Fed has room to cut rates in order to support the markets, and the USD could be hammered if we had to see more signs of spillover (rates seem to be going higher in Europe and the UK). A strong inflation reading will likely provide some support to the USD. As always, traders will likely sit tight ahead of the NFP report on Friday. A Merrill Lynch analyst recently suggested that jobs data is more important than subprime news. People do not tend to give back the keys to their homes while they have jobs. (by Eben Esterhuizen)