Market Shrugs Off Poor Japanese And UK Data

The US dollar remains on the defensive even after both Japan and the UK disappoint.  Japan reported an unexpected 1.9% decline in March retail sales. The UK’s initial estimate of Q1 15 GDP was 0.3%, below expectations for a 0.5% expansion, and half the pace of Q4 14 growth. 

The market’s response has been limited. The dollar has been confined to a little more than 10 pips around JPY109.00. Sterling initially fell about half a cent on the disappointment but quickly resurfaced back above the $1.5200 level. 

While Japan’s markets are closed tomorrow, the BOJ meeting concludes on Thursday. Only 2 of the 34 polled by Bloomberg expect the BOJ to expand its QE operations this week. Most expect such a decision to come toward the start of the second half of the fiscal year.  

March completes the 12-month period following the sales tax increase. Retail sales have fallen 13.0% over the past year.  The 1.9% decline in March (consensus was for a 0.6% increase) follows a 0.7% rise in February after a 1.9% decline in January. The weakness in consumption in Q1 warns of softer overall growth. The consensus is for 2.2% Q1 GDP. We see the risks for a sub-2% number when it is reported on May 19. 

The preliminary estimate of Q1 UK GDP lacks details and is based on less than half of the information that will ultimately go into the final estimate. ONS indicated the slowdown was led by the service sector, which expanded by 0.5%, the least since Q2 13. Production fell 0.1%, and construction output fell 1.6%. The 2.4% year-over-year growth compares with a 2.6% expectations and 2.7% growth in 2014. Although the knee-jerk reaction was to consider the implications for the May 7 national election, we would be surprised if it really affected the polls. The polls continue to make a majority government look unlikely. 

Nor will the data impact policy. The Bank of England is on hold. Since mid-April through last week, the implied yield of the June 2016 short sterling futures contract rose 18 bp and has recovered a third of it over the last few sessions. However, despite the disappointing GDP figures, the yield has not fallen through yesterday’s lows.