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The yen fell after Japan’s economy fell into recession in the first quarter as production and consumer spending were hit by the March earthquake and tsunami.
Gross domestic product fell by an annualised 3.7% in the first three months, after a revised fall of 3% in last quarter of 2010. Analysts had expected the economy to contract by just 1.9%.
A further contraction is expected in the second quarter before the economy rebounds as reconstruction spending kicks in, although the Japanese economy has suffered more than a decade of low growth and weak consumer spending.
“Encouragingly there have already been signs that supply disruptions are easing and with household confidence set to remain depressed in the near-term, Japanese investor demand for foreign assets should remain weak, helping the yen to remain firm,” said Lee Hardman at Bank of Tokyo Mitsubishi.
The sell-off was tempered by news that China bought Y234.5bn ($2.9bn) in long term Japanese government bonds in April, its biggest single-month purchase of Japanese debt in more than six years.
The pound remained under pressure against both the dollar and the euro as investors continued to rein in their expectations for the next rise in UK interest rates.
Although inflation was shown on Tuesday to have jumped to an annualised 4.5%, investors scaled back their assessment of when the Bank of England was likely to deliver any policy response after minutes from its May meeting were more dovish than expected.
Today's focus is on Jobless claims, Existing home sales and Philadelphia Fed index.
Almost as expected, initial jobless claims fell by 44k to 434k in the week ending 7 May. But they have remained elevated, partly because of production disruptions related to the Japanese disaster. We expect initial jobless claims to have fallen to 425k in the week ending 14 May.
Existing home sales rose a stronger than expected 3.7% mom in March, and given that forerunning pending home sales increased by almost 6% in the previous two months, we predict that existing home sales will have gone up again to 5.22m in April. However, the annual rate would still deteriorate from -6.25% to -10%.
Philadelphia Fed index plunged from an extraordinarily high level of 43.4 to a mere 18.5 in April. As manufacturing is still leading the upswing, we expect the index to recover to 22.0 in May.
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