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Takeaway: The latest econ data releases are very much in support of our theses. No change to either fundamental view for now.

SUMMARY BULLETS:

  • As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).
  • That the Shanghai Composite Index closed down -0.1% on today’s positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.
  • Turning to Japan, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.
  • As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.

CHINESE EQUITIES: IN “DO NOTHING” MODE FOR NOW

As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).

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That the Shanghai Composite Index closed down -0.1% on these positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.

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For more details on the latter of the aforementioned outlooks, as well as our latest risk management decision-tree, please refer to our 3/28 deep dive titled: “IS CHINA CAREENING TOWARDS FINANCIAL CRISIS?”. For reference, the Shanghai Composite Index is up +7.2% since we outlined the thesis back on 12/10 (vs. a regional median gain of +7.4%), but down -3.4% since we reiterated the view in our Best Ideas Call back on 2/27 (vs. a regional median gain of +1.7%). If it sounds at all like our patience is running thin on the long side here, it’s because that is precisely the case.

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JAPANESE YEN: ALL EYES ON KURODA’S FIRST CUT

The USD has appreciated +20.3% vs. the JPY since we got bearish on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Six months into currency combustion, the Japanese economy remains largely on the outside looking in from an economic growth perspective.

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While sequentially improved, this morning’s highly disappointing 1Q Tankan Survey results only amplify the previous claim that Japanese officials simply aren’t getting it done in the growth department:

  • Large Manufacturer Confidence: -8 from -12 vs. a Bloomberg consensus estimate of -7;
  • Large Non-Manufacturer Confidence: 6 from 4 vs. a Bloomberg consensus estimate of 8;
  • Large Manufacturer Outlook: -1 from -10 vs. a Bloomberg consensus estimate of 1; and
  • Large Non-Manufacturer Outlook: 9 from 3 vs. a Bloomberg consensus estimate of 11.

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In addition to these disappointing headline figures, large Japanese corporations from all industries plan to decrease capital spending by -2%  in the fiscal year through MAR ‘14, compared with a revised +5.2% increase in the fiscal year ended MAR 31.

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Ahead of the BOJ’s APR 3-4 meeting (Kuroda’s first as BOJ governor), sentiment in the forex market is still not bearish enough on the yen, as many believe expectations are so stretched in favor of monetary easing that Kuroda & Co. can only disappoint from here – an event that would be bullish for the yen in the short-term.

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For example, Japan’s large manufacturers forecast on average that the yen will trade at 85.22 per dollar in the fiscal year through MAR ‘14, according to today’s Tankan Survey results. Bloomberg consensus forecasts call for the currency to be at 96.5 per dollar by the end of the same period.

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All that being said, however, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.

 

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To that last point, a recent BOJ survey showed that nearly three-quarters of Japanese households expect consumer prices to rise a year from now (74.2% in 1Q13 from 53% in 4Q12), the highest ratio in ~4.5 years!

As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.

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Our updated quantitative risk management levels for the USD/JPY cross are included in the chart below. Happy hunting out there, this week!

Darius Dale

Senior Analyst

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