- While we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.
- The USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.
- In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18: http://docs.hedgeye.com/InflationAccelerating_GrowthDivergences_FEB2014Update.pdf.
Please note that the analyses below build upon the views we introduced last week in our FEB 12 strategy note titled, “KURODA VS. YELLEN: WHO BLINKS FIRST?”. To the extent you have yet to review that piece, we strongly encourage you to do so prior to digging into the analytics below.
Yesterday we returned back from holiday with two major pieces of GIP-related news out of Japan: the 4Q13 GDP report and the BoJ’s monetary policy decision. In our view, both are supportive of incremental consolidation in the Abenomics Trade (i.e. short JPY/long Nikkei). We purposefully wanted to give the foreign markets some time to absorb the news, given their dominance in determining the direction of this now ultra-consensus trade:
- The JPY has declined -19% vs. the USD since Abe came into power in DEC ’12 in overseas trading while gaining +3.4% vs. the USD in Tokyo trading… it has declined a cumulative -15.3% on a correlation-weighted basis in aggregate
- Foreigners acquired a net ¥15.1T of Japanese equities in 2013 (new record) vs. a net -¥8.8 of sales by Japanese individual investors (also a new record)… the Nikkei 225 and TOPIX indices finished 2013 up +56.7% and +51.5%, respectively
- Foreigners sold a net -¥1.2T of Japanese equities in JAN ’14… the Nikkei 225 and TOPIX indices finished JAN -8.5% and -6.3%, respectively
If recent price trends weren’t enough confirming evidence, you’re actually seeing increasing foreign jitters reflected in a widening divergence between FX forecasts (banks) and FX forwards (investors and corporations). Note the respective deltas in these figures from when consensus [likely] piled into the world-beating Abenomics Trade at the end of last year (portfolio window dressing, anyone?), as evidenced by the net short position of speculators (futures + options) dropping from -56.8k in early OCT ’13 to -143k in late DEC ’13. The latter figure was the largest net short position since JUL ’07 and represented a -3.1x standard deviation move on a trailing 1Y basis (vs. +0.7x for the former print).
Fast forward to today, the USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.
As we outlined in the aforementioned strategy update, we don’t really have a ton of conviction in the direction of this trade with respect to the intermediate term (~3-6M). That being said, however, we are increasingly of the view that we’re likely to see incremental consolidation as consensus is forced by data to converge towards our view that:
- Japanese growth is slowing (see 4Q13 GDP report highlights below)
- The BoJ is likely to be slow to respond with a material degree of incremental easing – specifically relative to the Federal Reserve
Highlights of the 4Q13 GDP Report:
- 4Q Real GDP: 1% QoQ SAAR from 1.1% prior vs. a Bloomberg consensus estimate of 2.8%
- YoY: 2.7% YoY from 2.3%
- Domestic Demand: 3.2% YoY from 2.3%
- Private: 2.3% YoY from 1.5%; 3% QoQ SAAR from 2%
- C: 2.4% YoY from 2.3%; 2% QoQ SAAR from 0.9%
- Durable Goods: 15.1% YoY from 4.9%; 17% QoQ SAAR from 15%... can you spot the pre-consumption tax hike pull forward?
- Semi-Durable Goods: 4.1% YoY from 5.7%; flat QoQ SAAR from -0.3%
- Nondurable Goods: -0.1% from 2.3%; -1.4% QoQ SAAR from -1.8%
- Services: 1.9% YoY from 2%; 1.5% QoQ SAAR from 0.4%
- I-Residential: 10.5% YoY from 8.6%; 17.8% QoQ SAAR from 13.9%
- I-Nonresidential: 1.8% YoY from -0.8%; 5.3% QoQ SAAR from 0.8%
- Public: 5.8% YoY from 4.9%; 3.6% QoQ SAAR from 6.3%
- G: 2.1% YoY from 2.2%; 2% QoQ SAAR from 0.9%
- Public Investment: 20.9% YoY from 19%; 9.3% QoQ SAAR from 31.9%
- Net Exports: -18.6% YoY from 3.3%
- Nominal: 2.4% YoY from 1.9%
- GDP Deflator: flat at -0.4%
- QoQ SAAR: 0.4% from -0.4%
Highlights of the BoJ’s decision to expand its loan facility:
- The BOJ doubled the core portion of the growth funding facility, which was established in 2010 to provide banks with funds at an interest rate of 0.1 percent, to 7 trillion yen ($68 billion)… Bloomberg
- The loan facility is nearing its ceiling, with about 4 trillion yen dispersed so far, according to the BOJ. Banks use the funds to lend to industries from environmental technology to tourism and disaster prevention that are seen by the BOJ as having growth potential… Bloomberg
- Borrowing costs for the nation’s lenders averaged 0.97 percent in the six months ended September, according to the latest data by the Japanese Bankers Association… Bloomberg
- The three-month euro-yen Tokyo interbank offered rate, the price at which banks in the country’s capital are willing to lend to each other, held at about 0.22 percent in the past four months… Bloomberg
- The BoJ maintained its outlook and assessment of the economy, saying that it "has continued to recover moderately."… StreetAccount
While Japanese credit growth has certainly benefitted from the BoJ’s easy monetary policy in recent quarters (as evidenced by Japanese banks’ holdings of JGBs shrinking -17% from the pre-Kuroda’s Casino era), the “Yotai Gap” (i.e. spread between bank deposits and loans) remains just shy of an all-time peak of ¥189.1T. Indeed, as we’ve been saying all along, it’s going to take a lot more than monetary policy cocaine for Japanese corporations and consumers to believe in the sustainability of the LDP’s economic agenda.
All told, while we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.
In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18: http://docs.hedgeye.com/InflationAccelerating_GrowthDivergences_FEB2014Update.pdf.
Keep the questions coming,
Associate: Macro Team