Is Japan’s Experiment Starting To Pay Off Already?

Overnight we may have seen the first real signs that the Japanese experiment with ultra-loose monetary policy may be starting to reap some rewards. Japanese manufacturing PMI rose to its highest level in 13 months, whilst retail spending, something the Japanese have had real trouble stimulating, rose by 5.2%. Unemployment also dropped by more than expected (4.1% from 4.2%) – you can bet that the boys and girls at the Bank of Japan will be patting themselves on the back tonight in Tokyo.

The promise of further monetary help from other central banks drove asset prices higher yesterday, with the S&P 500 hitting a new nominal record high overnight. This is once again a rally on the basis of the promise of more QE following poor US data. Yesterday’s Dallas Fed manufacturing missed dramatically and, combined with an improving inflation outlook, heralds more from the Fed printing presses sooner rather than later.

Tomorrow’s meeting of the FOMC cannot be overlooked but we estimate the chance of a shift in policy as miniscule. Language changes around the scope of growth and inflation may lead to further USD selling through Thursday.

Political pressure has once again kept the euro in check over the course of the past 24hrs. Italian PM Letta decided to cancel around EUR6bn of tax increases yesterday amid a speech railing against the pain of austerity. He meets with Angela Merkel in Berlin today – most of comedy is timing after all.

The conversation in Europe has definitely swapped to one of spending as opposed to austerity with the effects of latter only likely to be too clear in the Spanish GDP numbers due today. Markets are looking for a decline of 0.5% but with the recent record breaking levels of unemployment the risk is definitely weighted to the downside.

Overall unemployment in the Eurozone is also due today with a fresh high of 12.1% due following slackness in the German jobs market in the past month or so.

GBP finds itself lower overnight but we attribute this to a little bit of end-of-month flow movement and perhaps some steam running out of the move from the Thursday GDP surprise. The key to this week for the pound, as for most currencies, will be the PMIs that begin in earnest tomorrow.