18 May 2021
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Japan contraction exceeds expectations

Japan economy contracted by more than expected in Q1 as the number of coronavirus cases increased and restrictions were tightened.

By Khatija Haque

  • Japan’s economy contracted by more than expected in Q1 as the number of coronavirus cases increased and restrictions were tightened.  GDP contracted -5.1% annualized in Q1 21, against forecasts for a -4.5% decline, after recording growth of 2.8% in Q4 2020.  Private consumption, business investment and government spending declined in Q1 21, and net trade was drag on growth as well.  Japan’s vaccine rollout has lagged many other advanced economies’, raising the risk of another recession there this year.
  • The Empire Manufacturing Index slipped to 24.3 in May, but was still ahead of consensus forecasts of 23.9.  The index is a measure of general business conditions in New York state, and a reading above zero indicates growth. Order growth was the strongest in 15 years, but input costs continued to rise and were passed on through higher prices charged.  Employment also saw gains in May.
  • Consumer prices in Dubai rose m/m in April for the first time since June 2020.  The CPI rose 0.2% m/m on higher clothing and transport prices, but was still down -2.6% y/y.  Higher oil prices have contributed to increased transport costs this year, and prices of hospitality, recreation and cultural services are also recovering.  While there is evidence that housing costs are stabilizing and in some areas starting to rise, the CPI shows housing and utilities costs declining -0.6% m/m and -8.4% y/y in April, weighing on the overall CPI. 

Today’s Economic Data and Events

10:00 UK unemployment rate (ILO 3m) for March, forecast 4.9%

13:00 EZ GDP (2nd) Q1 21 forecast -1.8% y/y

16:30 US housing starts for April, forecast 1702k (-2.1% m/m)

Fixed Income

  • US Treasuries showed two-way movement throughout the day, rising in early sessions before pairing gains as the US markets opened. Yields moved higher across the curve with the 2yr UST yield settling at 0.1531%, up less than 1bp, while the 10yr UST yield closed at 1.6488%, up 2bps. The modest declines in government bonds echoed across the Atlantic with yields higher in bunds and gilts, although more marginally.
  • Several Fed speakers downplayed any imminent move to tighten policy as data from the US economy remains mixed. Vice chair Richard Clairda noted that the labour market had “not made substantial further progress” while Atlanta Fed president Raphael Bostic said it was “not the time” to consider moving on policy.
  • Emerging market bonds showed a mixed performance. Yields on Turkish government 10yrs were roughly flat on the day while Indian yields pushed further below the 6% level. However, yields on South Africa’s 10yr bond jumped 42bps to 9.513%.
  • Locally Fitch affirmed their ratings on Emirates Development Bank (AA-, stable outlook), Commercial Bank of Dubai (A-, stable outlook) and Sharjah Islamic Bank (BBB+, stable outlook)..


  • The dollar began the week on a softer footing with the DXY index off by 0.17% to 90.164 and has begun early trading by testing the 90 level. That has proven to be a barrier to moves lower so far in 2021 but the momentum of travel appears to be against the dollar at the moment.
  • Gains against the dollar were relatively limited though with EURUSD adding less than 0.1% at 1.2152 and USDJPY falling 0.13% to 109.21. The strongest move overnight was USDCAD, falling 0.3% to 1.2068. while GBPUSD continues to edge higher, up 0.26% overnight at 1.4134 and testing higher today.


  • Global equity markets started the week on the back front for the most part, although the losses were relatively minimal compared to some of the inter-day losses seen in recent weeks. Concerns over resurgent waves of coronavirus, or else the potential for new variants to slow reopening plans seemed to weigh on markets; in the UK, the FTSE 100 dropped -0.2% with travel and hospitality firms amongst those most affected, while in Japan the Nikkei dropped -0.9%.
  • In the US, all three major indices lost ground, with the Dow Jones, the S&P 500 and the NASDAQ losing -0.2%, -0.3% and -0.4% respectively. Only the Dow Jones now remains up m/m.
  • Within the region, the story was rather more positive. The ADX gained 0.8% to hit another record close after Monday’s strong gains, and is climbing further still this morning. The DFM gained 0.3% and the Tadawul 0.7%. In Egypt however the EGX 30 lost -0.9%.


  • Brent futures continue to dance around USD 70/b, adding more than 1% to settle at USD 69.46/b and up in early trade today. WTI is following a similar path, closing at USD 66.27/b, up 1.4% overnight. The market appears to be taking the potential of a diplomatic breakthrough between Iran and the US in its stride even as Iran could potentially bring substantial volumes onto the market in H2 2021.
  • The EIA estimates that production from shale basins in the US will rise to 7.73m b/d in June, up from 7.71m b/d in May. Rig productivity is running at an elevated pace as shale firms focus on higher quality resources. At the current pace of rigs being added, the US shale patch is on track to add 530k b/d by December 2021 compared with December 2020.

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Written By

Khatija Haque Head of Research & Chief Economist

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