Japan will remain the dominant theme in today’s session; this prompted a big sell-off in Japan that carried into Europe and will have a bearing on our markets today as well. With not much on the economic calendar and the Q3 earnings season slowly moving into the rearview mirror, this news risks bringing back the global growth fears that had become a big headwind for the markets a month back.
The sales tax changes that the government of prime minister Shino Abe of Japan put into place early this year pushed GDP growth into the negative territory in the June quarter. But everyone expected that to happen; the long-planned sales tax increase had brought forward consumer spending at the expense of the June quarter. But the hope was that spending will get back to ‘normal’ in the September quarter and start ramping up in the final quarter of the year, which will pave the way for the next round of sales tax increases. This is the context in which makes today’s GDP numbers from that country so surprising and disappointing.
Needless to say that today’s -1.6% GDP contraction for the September quarter was a negative surprise – the consensus expectation was for a positive number of +2.25 growth. With the Q3 GDP number coming after Q2’s much bigger -7.3% contraction, the country meets the minimum requirement of a recession: two back-to-back negative GDP readings.
[Watch: Japan Dips Back Into Recession]
Japan is used to recessions — the country hasn’t had much growth for almost two decades and the current downturn will be the 3rd recession in four years. The hope was that prime minister Abe’s economic policies (the so-called Abenomics) had broken the cycle and put the country on a new growth trajectory. The Bank of Japan’s (BoJ) monetary policy shocker of a few weeks back now starts to make sense, with this data increasing the likelihood that BoJ will likely have to double-down even more going forward.
Coming after last week’s soft growth numbers out of Europe, these Japan numbers put the global growth question back in the spotlight. The October pullback resulting from this issue turned out not to have much staying power, but it did provide a big dose of volatility to the markets. On the flip side, the U.S. Fed had considered the global growth questions while deliberating its monetary policy course. Market bulls will likely see growth readings like these as ensuring an accommodating Fed than would otherwise be the case.
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In corporate news today, the Halliburton (HAL) – Baker Hughes (BHI) deal is now official, with the transaction resulting in an oilfield services powerhouse that will better compete with Schlumberger (SLB). One could debate the appropriateness or otherwise of the price Halliburton is paying for the company (they will pay a 31% premium), but size and scale are big competitive advantages in the oil patch. If executed properly, the combined company will be a formidable operator with a global footprint.
