Japan And China Just Closed February On A Sour Note

Well it was a tough day for some Asian markets.

Between Jerome Powell’s “hawkish” testimony on Capitol Hill and some not-so-inspiring data out of Japan and China, conditions were ripe for a lackluster session to close out what was a truly tumultuous month.

You can’t depend on this Chinese data because it’s likely distorted by the Lunar New Year holiday, but to the extent you can depend on it, the following numbers weren’t great

  • February manufacturing PMI: 50.3 (Est. 51.)
  • February non-manufacturing PMI: 54.4 (Est. 55.0)
  • February composite PMI: 52.9

That manufacturing print was down from 51.3 in January, so that m/m drop is the largest in half a decade – obviously that’s not ideal. The internals weren’t great either – a further deterioration in new export orders was particularly vexing.

And then there was Japan where industrial production missed everything. “Wednesday’s big miss on Japanese industrial production data spells trouble on several fronts for the nation’s equities,” Bloomberg’s Yoshiaki Nohara wrote, before clarifying as follows:

The steeper than forecast drop in factory output prompted the government to cut its assessments for production. Every single sector suffered, with the key auto sector particularly hard hit. Furthermore, the outcome adds to volatility, something equity investors are very wary of just now.

Right and then on top of that, the BoJ did this:

If you recall, one of the factors that contributed to the bond selloff in January (and thus helped set the stage for the turmoil in February) was the BoJ cutting purchases of 10-25Y JGBs. The FX market reacted rather violently to that, forcing the bank to step up purchases of shorter-dated JGBs later in the month. So that news was sure to reverberate in USDJPY and it did:


“Foreign investors are buying yen in reaction to the Bank of Japan’s super-long bonds purchases cut,” David Lu, director at NBC Financial Markets Asia in Hong Kong told Bloomberg. “The Bank of Japan’s cut in purchase of bonds maturing in over 25 years is probably in response to a recent drop in super-long yields, which were pushed lower by seasonal demand from investors,” Daiwa’s Keiko Onogi added.

So basically, the BoJ was responding to the curve flattening. Whatever the case, given the yen reaction in early January when the bank trimmed purchases, this was no surprise and it only adds to speculation about the BoJ possibly stepping back from stimulus.

Later in the Asian session, Kuroda said some funny things when pressed by lawmakers on his “powerful easing”.  The BoJ “won’t continue its current powerful monetary easing once inflation hits its 2% inflation target in a stable manner, even if the government puts pressure on the bank to keep interest rates low,” he said, adding that “the BOJ isn’t responsible for financing the government.” That first bit is particularly amusing because given how far they are from hitting their inflation target, he can say that with aplomb.

In any event, Japanese and Chinese equities suffered overnight. The Nikkei fell 1.4% for its worst day since February 9:


H-shares underperformed the Hang Seng in Hong Kong:


On the mainland, the SHCOMP fell 1% although other benchmarks managed to shake off the poor data.

Ultimately, foreign investors were net sellers of mainland shares for the first time since December 2016 (when the Shenzhen link was opened) in February. It was the worst month for the SHCOMP since January 2016.

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