It’s been a long time since Japan’s economy has produced the type of growth it did in 2015 Q1, with GDP growth coming in at a better than expected +2.4% vs. an upwardly revised growth pace of +1.1% in 2014 Q4 and consensus estimates of +1.5%. A combination of fiscal expansion and monetary easing, coupled with reformist regulatory changes — generally referred to as Abenomics — had helped get the economy out of its deflationary spiral. But a sales tax increase a year back chilled consumer and business spending and pushed the economy back into a recession.
While today’s positive numbers are showing that the country is back on its growth trajectory, the GDP report’s internals show that the growth pace will be hard to sustain to the current period. Inventories were a big contributor to the Q1 growth, which means that less will need to be produced in the current period to keep them in-line with sales trends.
Exports have also become another major growth contributor, thanks in large part to the weak Yen as a result of Bank of Japan’s easy policies. But one could reasonably question whether the export growth momentum could be sustained given the less than clear growth outlook for Japan’s two major markets, the U.S. and China.
[Read: Prelude to a Japanese Revival]
The U.S. economy’s Q1 stumble was largely blamed on weather, with consensus expectations looking for the growth pace to rebound with the Spring thaw. Those growth hopes have not materialized, with recent economic data for the current period showing at best a mixed picture. Some data is showing a rebound – the labor market has bounced back and housing seems to be back on a growth trajectory as well – but other areas of the economy still remain anemic.
Market participants see this mixed economic landscape as a best of both worlds – that growth has resumed but it is weak enough to keep the Fed on hold for longer than would otherwise be the case. It is these expectations of a dovish Fed that has eased the dollar rally and pushed stocks into record territory in recent days. Investors will be looking for confirmation of this hope in minutes of the last FOMC meeting coming out later this afternoon.
In corporate news, Target (TGT) came out with better-than-expected Q1 results and raised guidance, which is in contrast to Tuesday’s soft numbers from Wal-Mart (WMT). Along the lines of the divergent TGT-WMT Q1 results, we have even more contrast in the results from two other big-box retailers – Home Depot (HD) and Lowe’s (LOW). Home Depot came out with a beat-and-raise Q1 report on Tuesday while Lowe’s report this morning came short of estimates.
