Tuesday Morning Cheat Sheet: 3 Stories Moving Markets

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Markets advanced in Asia on Tuesday. Japan’s Nikkei climbed 2.57 percent following the release of the minutes from the last Bank of Japan meeting and news that Prime Minister Shinzo Abe is considering a corporate tax cut. The Hang Seng climbed 1.21 percent while the Shanghai composite closed the day up 0.23 percent. The S&P/ASX 200 climbed 0.96 percent.

European markets also advanced in midday trading. Germany’s DAX was up 0.76 percent, London’s FTSE 100 was up 0.45 percent, and the STOXX 50 index was up 0.36 percent. U.S. stock futures climbed as well.

At 8:30 a.m.: DJIA: +0.22%, S&P 500: +0.17%, NASDAQ: +0.15%.

Here are three stories to keep an eye on.

1. Small Business Optimism: “In an attempt to ‘make lemonade’ from the lousy bushel of lemons the administration has handed the small-business community,” National Federation of Independent Business’s Bill Dunkelberg said in July’s Small Business Optimism Index report, “owners gave the July optimism Index the great distinction of being the fourth highest reading since December 2007 — when the economy slipped into official recession.”

The index climbed 0.6 points to 94.1, with gains in plans to increase employment, job openings, and capital outlays.

nfib-optimism-index-201308

Source: National Federation of Independent Business

2. Japanese Economy and Monetary Policy: The Bank of Japan released minutes from its July 10-11 policy meeting. Policymakers indicated that overall economic conditions in the country continue to improve, though modestly. The minutes indicate that exports, fueled by a weaker yen, have marginally increased. However, imports rose much faster in the first half, and Japan logged a record deficit in the first half of the year.

Consistent with Prime Minister Shinzo Abe’s stimulus program, public investment continues to increase. Business-fixed investment has “stopped weakening and shown some signs of picking up as corporate profits had improved,” according to the Bank of Japan’s minutes, although relatively low business investment weighed on second-quarter gross domestic product. A separate report released Monday showed that second-quarter GDP increased 0.6 percent on the quarter, below expectations.

“The employment and income situation remained severe,” the minutes report says, “but supply and demand conditions in the labor market had been improving moderately.” Price pressures remained low, with inflation at 0 percent on the year but “likely to turn positive,” fueled in part by improving consumer sentiment — and with that, improved demand. There is little to no pressure in the pipeline, as the corporate goods price index declined “against a backdrop of movements in international commodity prices and foreign exchange rates.”

As far as the actual conduct of monetary policy in the country is concerned, BoJ policymakers decided it was appropriate to continue to increase the monetary base at a rate of 60 trillion yen to 70 trillion yen per year via money market operations. Policymakers also agreed to continue purchasing JGBs, ETFs, J-REITs, and corporate paper and bonds in an effort to stimulate business activity and achieve price stability.

3. The U.S. According to the Bank of Japan: China, Europe, and the United States are the loudest voices in the global economic chorus outside of Japan. As a result, economic conditions and monetary and fiscal policy in these countries — particularly in the U.S. — are critical to Japan’s economy, which is highly sensitive to international trade. Investors may find it valuable to see U.S. from the viewpoint of the BoJ. From the minutes:

“In terms of global financial markets, members shared the recognition that the further heightening of speculation that the Federal Reserve would reduce the pace of its asset purchases earlier than expected had led to a rise in longer-term interest rates worldwide, particularly in the U.S. and European economies, and to outflows of funds from emerging economies. Some members expressed the view that the Federal Reserve’s intention — namely, to decide on a possible reduction in asset purchases depending on economic developments — might not have permeated the markets sufficiently. They continued that it was therefore possible that speculation about the direction of U.S. monetary policy would continue to have an impact on global financial markets. One of these members noted that, while the Federal Reserve emphasized that the stock (the amount outstanding of assets purchased) would be maintained at a high level, the markets were instead responding to a possible reduction in the flow (the amount of assets to be purchased).”

and

“Members agreed that the U.S. economy had been on a moderate recovery trend against the backdrop of steady private demand, such as private consumption and housing investment, despite downward pressure from the fiscal side. One member noted that the mechanism for a self-sustained recovery appeared to be strengthening on the whole amid solid improvement in such areas as the employment situation, disposable income, and the personal saving rate. As for the outlook, members concurred that, although there would be downward pressure from the fiscal side for the time being, the economy was likely to continue recovering at a moderate pace supported in part by accommodative financial conditions.”

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