The end of a horrendous quarter of equities and emerging markets is generating a sigh of relief that is helping lift those battered markets. The MSCI Emerging Market is up almost 1.75% prior to the open of the Latam markets. Its Asian-Pacific Index is up 2.1%. The Dow Jones Stoxx 600 is up 2% near midday in London led consumer staples and materials. Core bond yields are firmer, including US 10-year Treasuries, which are back at 2.09% after testing 2.04% yesterday.  

Emerging market currencies are mostly higher today. The dollar-bloc currencies have also turned higher. The Australian and New Zealand dollars are the strongest of the majors, gaining about 0.6% against the greenback. The Scandis are also recovering.  

The yen is weakest of the majors. It is off 0.4%. The two drivers, equities and US yields are weighing on the yen. The economic data was disappointing. Industrial output fell 0.5% in August. The consensus was for a 1.0% rise after the 0.8% decline in July. Contracting output was reported in 10 of the 15 industry groups. The year–over-year rate stands at 0.2%. The consensus was for a 1.8% increase. Retail sales were flat in August, defying expectations for a 0.5% increase. Inventories are rising (0.4% in August and five of the past eight months). This understood as a headwind on output. 

The Tankan survey is out first thing in Tokyo on Thursday. Sentiment is expected to have deteriorated across the board, and capex plans pared.  Friday sees employment data. The unexpected weakness in today’s data, leaving aside housing starts, which rose 8.8% year-over-year, besting expectations for a 7.6% pace, has spurred concerns that Japan’s economy may have contracted for the second consecutive quarter. We note in every year since 2005, Japan has experienced at least one quarter a year of contraction. In four years, there were at least two quarters of negative growth.  

Investors are focused on the likely policy response. The risk of a recession (defined as two quarters of contraction) is heightening speculation of a supplemental budget, though Prime Minister Abe has played this down, and changes in the BOJ’s asset purchases. A recent Bloomberg about a third of the respondents expects the BOJ to step up its efforts (from JPY80 trillion a year) as early as next month.