Daily Agenda: Here Comes Abenomics 2.0

Abe unveils a new economic plan; Norway central bank surprises markets with rate cut; German media now questions BMW’s emissions standards.

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Since Japanese Prime Minister Shinzo Abe first returned to power in 2012 after a period on the sidelines, his message has been consistently one of structural economic reform to complement the Bank of Japan’s herculean easing measures intent on driving prices higher. Despite a weaker yen, a combination of low global inflation and intransigence on the part of deeply entrenched parliamentary forces have kept both the Abe administration and central bank from fully achieving their goals. Abe addressed parliament on Thursday as he was officially reinstalled as leader of the ruling Liberal Democratic Party, after securing a second term earlier this month. The prime minister used the opportunity to unveil new proposals that he hopes will drive gross domestic product to 600 trillion yen ($5 trillion) annually from the current pace of 500 trillion yen. Many analysts question whether such a target is achievable without a huge increase in domestic demand that appears to have few likely catalysts.

Norway cuts rates. A surprise 0.25 percent cut to the benchmark lending rate by Norway’s central bank sent the krona to a 13-year low versus the U.S. dollar and a multi-month low against the euro in foreign exchange Thursday morning. Faced with mounting economic pressure due to low oil prices, the Norges Bank left the door open for further cuts even as rates in Norway remain at historic lows.

German sentiment mixed. IFO business sentiment indices for September released today indicate a mixed mood among Germany’s business leaders with gains in business conditions and expectations but a contraction in the assessment of current conditions. Meanwhile, the mood among German shoppers was considerably gloomier with the GfK consumer confidence index levels at 9.6, the lowest reading since February and below consensus forecasts.

German automotive contagion spreads. After a stunning fall from grace, which saw the world’s largest car manufacturer Volkswagen lose more than 20 percent of market value in a single trading session and forced CEO Martin Winterkorn to step down, another German automotive icon has come under scrutiny. This morning German media reports indicated that independent tests of a BMW sport utility vehicle resulted in emissions levels far higher than officially reported, causing the company’s shares to drop by more than 7 percent in early trading.

U.S. economic data meets expectations. Weekly initial jobless claims released by the Department of Labor this morning registered an increase of 3,000 to a total of 267,000, marginally better than consensus forecasts for the period. Meanwhile, durable goods orders slipped by 2 percent in August versus July, roughly in line with forecasts.

Portfolio Perspective: Asian Growth May Slow Further Still

Optimists will argue that local interest rates in most Asian economies haven’t backed up as much as one might have feared given the recent depreciation in exchange rates. True: given the FX turmoil, local fixed income and credit markets have proven remarkably stable so far. However, financial conditions, strictly speaking, are a function of credit flow, not the level of interest rates. The former, almost certainly, has been impacted more than the relatively muted rise in benchmark rates would imply. Financial conditions, after all, are a product of risk appetite. And it’s hard to argue that this hasn’t been dented by this summer’s turmoil. Looks like growth will slow further still.

Frédéric Neumann is co-head of Asian economic research for HSBC Hong Kong

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