Editor's Note: This research note was originally sent to subscribers on April 30, 2014 by Hedgeye Macro analyst Darius Dale. Follow Darius @HedgeyeDDale.
- We reiterate our call for continued consolidation in the “Abenomics Trade” (i.e. short JPY/long Japanese equities) with respect to the intermediate term. We continue to think both the fundamentals and the crowded nature of positioning in this trade warrant said consolidation.
- Specifically, our models call for Japanese economic growth to slow sharply here in 2Q (in line with official estimates), which should weigh on structural inflation expectations and risk appetite among Japanese investors – effectively underpinning a domestic bid for the JPY.
- Externally, we continue to pound the table on the non-consensus view we’ve held all year: accelerating inflation will slow domestic economic growth, at the margins, throughout the balance of 2014. Furthermore, we anticipate that this catalyst will result in decidedly easier monetary policy out of the Federal Reserve – which may manifest in particularly dovish forward rate guidance, or an outright “un-taper” by the mid-to-late summer. Refer to our 4/16 note titled, “10 Scary Charts on US Growth; 5 Not-So-Scary Charts on Chinese Growth” to review this thesis in more detail.
- The catalysts outlined in point #3 should continue to result in global selling pressure on the USD – which continues to careen to the downside as a leading indicator for this fundamental backdrop. That’s directly bullish for peer currencies, including the JPY; what’s bullish for the JPY continues to be bearish for the Japanese equity market given the tight inverse correlation that remains in place (YTD r² = 0.70).
- Long-term/low-turnover investors should continue to remain in the trade or remain on the sidelines in advance of what we anticipate will be far better entry prices on the short side of the JPY and long side of the Nikkei/TOPIX at some point over the intermediate term. When analyzed in the context of our forecasts for Japanese GDP and CPI, the BoJ’s downwardly revised growth forecasts and stagnant inflation forecasts at today’s non-event BoJ meeting lead us to believe that they are likely to expand their QQE program sometime in mid-to-late 3Q – well after it has become clear to consensus that the Yellen Fed isn’t the hawkish institution consensus currently assumes it is.
JAPAN GIP MODEL
US GIP MODEL
RECENT JAPANESE HIGH-FREQUENCY
Industrial Production trends cooling off:
Retail Sales pull-forward ahead of the April 1st consumption tax hike:
Manufacturing PMI tanking as Abenomics fails to deliver the necessary structural reforms that can sustain Japan’s economic recovery:
Consumer Confidence tanking as rising inflation takes a healthy bite out of the consumer’s wallet:
Business Confidence following suit as the consumption tax hike is spread throughout the supply chain:
Export growth mirroring the dollar/yen rate to some degree:
Import growth surprisingly cooling in the YTD, but ripping alongside global energy prices in the most recent month:
Inflation continues to accelerate and is poised to gap up as the consumption tax is largely passed on to consumers:
Real wages are feeling the pinch of stingy Japanese corporations and policies to tax & inflate out of Tokyo: