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US Economics Comment
The Japan natural disaster & the US
Event
The devastating earthquake and tsunami in Japan could affect the US economy
through several key channels.
Outlook
Our view that a weak US$ should persist is intact- we do not expect this event
to derail the broad, structural decline in the real trade-weighted value of the dollar
that we observe seems to have been underway for several years. Notably, history
suggests natural disasters do not necessarily preclude a weaker JPY.
Furthermore, our oil economist argues that the Japan events are bullish for oil in
the near-term. A weaker, trade-weighted US$ is generally associated with higher
oil prices (see “A weak dollar is high oil’s silver lining”, Macquarie Economics,
March 11th 2011). As a result, we expect any movement in the JPY/USD rate on
concerns on the impact of the natural disaster on growth, and on the injection of
sizeable new monetary policy support from the Bank of Japan, could be
overwhelmed by other macroeconomic forces. Indeed, the trade-weighted US$
index continues to hold around its fresh lows of early last week.
A competitive dollar should also be favourable for US machinery exporters in the
medium-term. This was the third largest US export category to Japan in 2009, and
shipments could ramp up as reconstruction efforts accelerate.
The Fed is on standby should long-term treasury yields rise sharply -While
stories are surfacing of a Japanese sell-off in US treasuries, our Japan economics
team do not expect substantial capital repatriation. At present, there is also little
evidence of sharply-rising long-term US borrowing costs, for example with 10-year
treasuries yields down marginally from their close last week.
Nonetheless, if interest rates were to ratchet up quickly, we expect the Federal
Reserve would err on the side of supporting growth and do more to keep
borrowing costs contained, if necessary. While our central case is not for QE3, we
expect policymakers will still maintain the flexibility to do more if a real risk to
growth materialises, and should reiterate this position in this week’s Fed meeting.
The nuclear catastrophe should drive some important shifts in the US
energy mix. In particular, we expect increasing policy emphasis on natural gas. In
our view, this would be a key positive for US growth.
Some supply disruptions - The read-through from the US semi-conductors
sector, arguably an important benchmark given the concentration of producers in
Japan, is currently for at least near-term supply chain disruption. This suggests
interruption to US production of some downstream durable goods, though the
share of US advanced technology imports from Japan suggests the impact on
total US output should not be disastrous. At the same time, temporary disruption
to auto production in Japan, the country’s largest export to the US, could be good
news for US auto producers, with underlying US domestic demand looking firm.
We note that US producers are already adding to market share, and this could
add to the momentum, particularly if the Yen were to rise from here.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
US Economics Comment
The Japan natural disaster & the US
Event
The devastating earthquake and tsunami in Japan could affect the US economy
through several key channels.
Outlook
Our view that a weak US$ should persist is intact- we do not expect this event
to derail the broad, structural decline in the real trade-weighted value of the dollar
that we observe seems to have been underway for several years. Notably, history
suggests natural disasters do not necessarily preclude a weaker JPY.
Furthermore, our oil economist argues that the Japan events are bullish for oil in
the near-term. A weaker, trade-weighted US$ is generally associated with higher
oil prices (see “A weak dollar is high oil’s silver lining”, Macquarie Economics,
March 11th 2011). As a result, we expect any movement in the JPY/USD rate on
concerns on the impact of the natural disaster on growth, and on the injection of
sizeable new monetary policy support from the Bank of Japan, could be
overwhelmed by other macroeconomic forces. Indeed, the trade-weighted US$
index continues to hold around its fresh lows of early last week.
A competitive dollar should also be favourable for US machinery exporters in the
medium-term. This was the third largest US export category to Japan in 2009, and
shipments could ramp up as reconstruction efforts accelerate.
The Fed is on standby should long-term treasury yields rise sharply -While
stories are surfacing of a Japanese sell-off in US treasuries, our Japan economics
team do not expect substantial capital repatriation. At present, there is also little
evidence of sharply-rising long-term US borrowing costs, for example with 10-year
treasuries yields down marginally from their close last week.
Nonetheless, if interest rates were to ratchet up quickly, we expect the Federal
Reserve would err on the side of supporting growth and do more to keep
borrowing costs contained, if necessary. While our central case is not for QE3, we
expect policymakers will still maintain the flexibility to do more if a real risk to
growth materialises, and should reiterate this position in this week’s Fed meeting.
The nuclear catastrophe should drive some important shifts in the US
energy mix. In particular, we expect increasing policy emphasis on natural gas. In
our view, this would be a key positive for US growth.
Some supply disruptions - The read-through from the US semi-conductors
sector, arguably an important benchmark given the concentration of producers in
Japan, is currently for at least near-term supply chain disruption. This suggests
interruption to US production of some downstream durable goods, though the
share of US advanced technology imports from Japan suggests the impact on
total US output should not be disastrous. At the same time, temporary disruption
to auto production in Japan, the country’s largest export to the US, could be good
news for US auto producers, with underlying US domestic demand looking firm.
We note that US producers are already adding to market share, and this could
add to the momentum, particularly if the Yen were to rise from here.
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