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Daily Agenda: IMF Warns Global Economy Remains Fragile

IMF cuts global growth forecasts; JPMorgan beats analysts’ estimates; Chinese exports unexpectedly rebound; Peabody files.

The International Monetary Fund downgraded forecasts yesterday for the global economy with gross-domestic-product growth of 3.2 percent for 2016, down 0.2 percent. With downgrades for growth projections of primary developed economies, IMF economists warned against political forces in the U.S. and Europe calling for protectionist policies. The report also concluded that British exit from the European Union would create short-term instability in financial markets and weigh on growth prospects for the region in the longer term. With earnings season underway, the prospect of fragile global-growth prospects will weigh heavily on investors’ minds as they sift through guidance from corporations.

JPMorgan earnings top forecasts. Financial results for the first quarter released this morning by JPMorgan Chase & Co. were stronger than consensus analyst estimates with net income of $1.35 per share versus $1.45 in the same period in 2015. Although trading revenues slipped for fixed income and equities, the bank’s recent annual report reiterated a commitment to trading operations as a core business. Capital-markets rivals Morgan Stanley and Goldman Sachs report next week.

Chinese exports rebound. Data released by the China’s General Administration of Customs today revealed strong export figures for March at a growth rate of 11.5 percent year-over-year for the headline index versus consensus forecasts for less than 3 percent. Steel shipments were particularly strong at a 30 percent increase to March 2015. Imports were also better than anticipated, contracting 7.6 percent versus the same period last year.

Peabody files for bankruptcy. In a widely anticipated move, coal producer Peabody Energy Corp. filed for Chapter 11 bankruptcy protection on Wednesday. The St. Louis-headquartered company is the largest U.S. coal producer and struggled with debt obligations even before the prolonged period of low energy prices. Peabody reported four consecutive annual losses prior to this year.

OPEC cuts demand projections. In a report issued today, the Organization of Petroleum Exporting Countries lowered global-demand estimates for 2016 citing sluggish growth in developing economies. Members of OPEC will meet with non-member Russia over the coming weekend to discuss production caps.

Portfolio Perspective: The Psycho-yen — Sean Darby, Jefferies

A confluence of interacting factors are presently affecting Japanese equities. A virtuous circle of a weak yen, loose monetary conditions and higher inflation expectations have reversed, creating a destabilizing disinflation environment, pushing the authorities into a corner ahead of April’s Bank of Japan meeting. Equity investors seeking a coincident investment indicator should simply follow the rate of change of implied inflation expectations.

The unexpected reaction to January’s surprising introduction of negative deposit rates has given Bank of Japan officials cause to reassess their tools. For example, yesterday the BOJ made a subtle change to the calculation of macro-add on balances in the current account balance to 2.5 percent from 0 percent. This reduced the amount of funds to which a negative rate is implied. However, the yen’s ongoing strength, alongside disappointing inflation data, raises the bar for the Bank of Japan, particularly following the weak Shunto wage negotiations and the forthcoming decision on the consumption tax hike in October.

Japanese officials are in a difficult position. Since the Bank of Japan announcement of negative rates, the yen has appreciated around 10 percent on a trade-weighted basis. Admittedly, the yen was extremely cheap based on REER measures, hence it was prone to a rebound at some stage. While the Japanese government bond yield curve has slipped into negative territory, thereby easing policy, the yen’s strength has meant that overall monetary conditions have tightened. This has forced a number of popular carry trades to unwind, undermining the wealth effects created from an ever-rising Nikkei.

The bottom line for equity investors is that with low inflatin and weak growth and in the absence of any meaningful supply-side reforms, the authorities are likely to move towards a nominal GDP target.

Sean Darby is chief global equity strategist at Jefferies in Hong Kong.

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