Tags: japan | tankan | sentiment | economy

'Sentiment' Indexes Are Flawed Indicators of Economic Activity

'Sentiment' Indexes Are Flawed Indicators of Economic Activity

(Dollar Photo Club)

By    |   Monday, 03 October 2016 07:28 AM

For the markets, the most important news came from the UK over the weekend.  Prime Minister Theresa May told the Conservative Party's annual conference that Article 50 will be enacted before the end of March next year.

Mrs. May said: “We have voted to leave the European Union and become a fully independent, sovereign country ... We will do what independent, sovereign countries do. We will decide for ourselves how we control immigration. And we will be free to pass our own laws.”

Mrs. May said she wanted the “maximum” scope for British companies to trade inside the EU’s single market, but added that Britain would not accept the right of EU law to trump national legislation. 

It is worth emphasizing for investors that, as things stand at present, once Article 50 is triggered there are no second thoughts as from thereon the UK’s departure is certain and all that remains to be decided are the terms of the departure.

That said, we have already European Union governments that are complaining U.K. Prime Minister Theresa May’s plan to begin Brexit negotiations by April still lacks detail and signaled she will not get the informal talks she’s seeking before then.

One thing seems to be sure, and that is that Prime Minister May has kept the risk of a “hard” Brexit alive with little agreement on trade by emphasizing the importance of restrictions on labor mobility. 

Unsurprisingly, the British pound has weakened on the news and further weakening over the median term is in the cards.

Politics is also a feature of the United States with the noise of the Presidential campaign. However, the tendency to look to financial markets as predictors of the race needs to be resisted. 

The typical financial market professional is unlikely to share identical demographic characteristics as the typical Trump supporter, for instance.

Besides all that, one important country that did release economic data today, though probably wishes it didn’t, is Japan.

The quarterly Tankan survey, which is the Bank of Japan’s short-term economic survey of enterprises in Japan, was weaker than expected.

It must be said that Japan’s Tankan survey has more credibility than other Purchasing Managers style surveys (PMI) because there is generally a higher response rate. 

In the Tankan there is one point of support. The small business sector was less negative than had been anticipated albeit only marginally. 

It’s a fact that Japan’s small business sector is less impacted by the swings of the currency markets and so may give a sense of underlying economic performance. Nevertheless it’s down, but it could have been worse. 

Maybe, investors could take notice that the large manufacturing enterprises expect at present, and for what it’s worth, a weaker yen (higher number means weaker yen) in the foreseeable future and point at 107.92 yen per dollar, as shown in the Tankan, when the current yen/dollar rate stands at about 101 yen per dollar 

Besides that, and this could become important for investors, Nobuyuki Nakahara, advisor to Shinzo Abe, told Bloomberg that the Bank of Japan (BOJ) Governor Haruhiko Kuroda has ruined his chances of getting a second full term. Nakahara said, “They are trying to clean up the mess of negative rates. It’s impossible to do a stupid thing like keeping the yield curve under government control ... They changed the regime to rates from quantity, meaning those who support quantitative easing were defeated. Reflationists on the BOJ policy board lost. An exit from deflation is going to be far away.

In the U.S., today we’ll have the ISM survey of U.S. manufacturing sentiment for September that could excite investors somewhat. Reuters consensus forecast is 50.5, against the previous that came in at 49.4.

However, investors could do well not forgetting that it is completely wrong to interpret an above 50 reading as manufacturing growth. An above 50 reading is a signal that people are reporting growth not that growth is actually taking place, or indeed not taking place. 

The declining reliability of sentiment measures means that they remain flawed indicators of possible economic activity and not direct measures of economic activity itself.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
The declining reliability of sentiment measures means that they remain flawed indicators of possible economic activity and not direct measures of economic activity itself.
japan, tankan, sentiment, economy
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2016-28-03
Monday, 03 October 2016 07:28 AM
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