Macro Commentary
Confidence is “tanking” in Japan. The so-called Tankan report from the central bank showed that business sentiment fell the most in a quarter since the end of 2012 (from plus 12 to plus 6). A “plus” means the optimists outnumber pessimists in the survey regarding business conditions. Expectations were for a plus 8. Clearly, Prime Minister Abe’s comments on Tuesday saying that the scheduled increase in sales tax due April 2017 from 8% to 10% sparked memories of the last time this happened in 2014. Consumption pulled forward before the increasing causing a spike in economic activity (Q1 2014 GDP +1.3%) followed by a vacuum. Efforts at fiscal stimulus failed to fill the gap and Japan’s economic trajectory sputtered (Q2 2014 GDP -2.0%, Q3 2014 GDP -0.6%). The Nikkei 225 index falling 3.5% on Friday as the report was released was not the first, or the last, time that we will see world’s third largest equity market cycle in its emotion as investors have difficulty maintaining confidence in Abe-nomics.
Meanwhile, the jobs report in the United States showed some good news. While the unemployment rate ticked up to 5.0%, it was due to an increase in the “participation rate” or the percent of the population that is in the workforce (either employed or actively looking). While it could be read that a strong employment report puts April back on the table for Fed action, we think the dovish comments by Yellen at the Economic Club of New York recently points towards further delays. While the Fed’s mandate is driven by what is best for the US, they cannot ignore that the impact of their policy is always relative to the policy of others. With the euro continuing to appreciate relative to the US (putting pressure on the ECB to act) and the June referendum on the UK staying within the European Union, there are reasons to wait and see.
Finally, the Saudis made headlines as Deputy Crown Prince Mohammed bin Salman gave a basic outline of strategy as the kingdom moves forward with an initial public offering (IPO) of Aramco, the state-owned oil enterprise, and then seeks to diversify its economy away from oil. It sounds like a great idea to reduce economic concentration, but it is no small task for the traditional society of Saudi Arabia to grapple with the shifting economics of sands to rebuild their future with what Bloomberg suggests may be a $2 trillion dollar sovereign wealth fund. Still, the commentary had elements that looked to today as he suggested that Saudi Arabia would only participate in freezing oil output if Iran joined the group. That certainly is not expected and oil prices showed it, falling $1.71 per barrel to solidly below $37 for WTI.