While the start of the new trading week has been relatively quiet from a tier-one economic data perspective, the overnight Asian session saw a few key pieces of data released which has influenced overall market sentiment ahead of the opening bell in North America. China released trade balance numbers for the month of February overnight, and even with the distortion from the Lunar New Year holiday, the figures were much worse than had been expected. Given that the Lunar New Year fell later in February this year, export figures were expected to be soft, on the basis that exporters have a natural tendency to front-load their activities before the festival; however, in USD terms exports fell by 25.4% on a year-over-year basis, down from the -11.4% print in January, and missing the estimated -12.5% figure by a wide margin. Demand for imports was also lower than expected with the data set falling by 13.8% in dollar terms, though with exports falling at such a rapid pace, the trade surplus collapsed to $32.6bln, much narrower than the $50.1bln that had been expected. On the basis that January trade balance numbers were also very weak, it makes it hard to explain away the disappointing number by way of the Lunar New Year holiday, yet the March numbers will solidify whether the growing concerns that GDP growth in the first quarter of 2016 will be on the weak side of estimates holds any water. The Shanghai Composite finished its session essentially flat, but risk appetite has faded midway through the European session and assets traditional correlated with risk appetite are struggling to find a bid.
Looking to Japan, fourth quarter GDP was revised higher than originally estimated, contracting by only 1.1% as opposed to preliminary release of -1.4%. For the full year growth came in at 0.5%, which is right around trend growth for the Bank of Japan, higher than what had been initially anticipated from the preliminary reading 0.4%. While the size of the contraction was reduced from original estimates in the fourth quarter, the likelihood of a contraction in Q1 2016, which would define a technical recession, is still quite high, considering the sharp rise in the yen and the risk the appreciating currency has in regards to derailing export growth. The good news from the GDP report was that business investment was revised higher, however the mitigating factor was that personal consumption remained sluggish, as Japan struggles with tepid wage growth that is not keeping pace with inflation. Given the attention during the G20 meeting on negative interest rates, we would expect that given the upwardly revised GDP figures this moves the goal posts slightly further back as to when further adjustments to monetary policy from the Bank of Japan can be expected. The most likely course of action would be to expect additional monetary policy in the form of additional interest rate cuts if macroeconomic conditions deteriorated beyond the current state; however, Kuroda’s credibility with following through on his statements to the media is wafer-thin, and thus we wouldn’t completely rule out any additional action at the next meeting on March 15th. The yen is gaining strength against the greenback this morning, which is sapping risk appetite and putting downward pressure on S&P futures ahead of the opening bell in North America.
As we get set for the North American open, the loonie has witnessed some profit taking which is likely a function of both position-squaring ahead of the Bank of Canada tomorrow, along with a slight softness in WTI and equity futures. The most probable outcome of tomorrow’s monetary policy meeting will be for interest rates to be kept on hold with a slightly dovish steer from the language within the central bank statement. The fat tail risks are either a surprise rate cut that prompts an elevated level of loonie selling pressure, or a more optimistic view on the outlook for the Canadian economy given the recent stabilization in oil prices and the green shoots being seen in export data, which would throw more gas on the smouldering remains of USDCAD.