Morning comment: BoJ policy, China prices, German IP, before payrolls etc.

Chris Scicluna
Mantas Vanagas

After a solid session for European equities and bonds yesterday as investors responded positively to the ECB’s very modest amendment to its policy guidance and Draghi’s broadly dovish tone, Wall St. also moved higher after President Trump signed his promised tariff order, but indicated that there would be some flexibility in how the measures are applied to certain trading and military partners. Against that background, Asian bourses opened positively and that price action continued through the day, albeit markets closed off their intra-session highs. In Japan, where neither the BoJ policy announcement nor labour income data offered any surprises, the Nikkei rose a little less than ½%, paring an early gain of more than 2%. The earlier strength came after the White House confirmed that President Trump had agreed to meet North Korea’s Kim Jong Un before May – the first ever meeting between the sitting leaders of the these countries – with North Korea said to have agreed to suspend missile testing during the intervening period. This news caused USDJPY to rise to 107, before reversing 40 pips lower. Not surprisingly equity markets were also firmer in South Korea, with the Kospi rising a little more than 1.0%.

Another reasonably busy day in Japan saw the BoJ conclude its latest Policy Board meeting and brought more data on the labour market and household spending. Starting with the BoJ, as was widely expected, the Board made no changes to its key policy settings i.e. the -0.1% interest rate on banks’ marginal excess reserves and its pledge to keep 10Y JGB yields ‘at around zero per cent’. It also repeated that it would maintain its JGB purchases ‘at more or less the current pace’, which it still describes somewhat disingenuously as an annual increase in its holdings of about ¥80trn. And the Bank also re-committed to increase its ETF holdings at an annual rate of ¥6trn and its J-REIT holdings at an annual pace of ¥90bn.

In keeping with his stance since joining the Board in July last year, external member Kataoka continued to dissent in favour of the Bank pursuing an even more accommodative policy stance. According to him the Bank should purchase JGBs with the aim of lowering yields further for bonds maturing in 10 or more years. But he’s clearly an outlier – other members are evidently content with the current stance, likely heartened by yesterday’s positive GDP revisions and the recent marginally firmer trend seen in inflation indicators.

The post-meeting statement continued to describe the economy as ‘expanding moderately’, with the much-vaunted virtuous cycle from income to spending still operating. The statement noted positive trends for most key sectors of the economy, with the exception of a weakening picture for housing investment and a flat profile for public investment. Looking ahead, the Bank expects the economy to maintain a moderate expansion, supported by monetary and fiscal stimulus and firm growth in trading partner economies. As a result the Bank’s Board – with the exception of Kataoka – continues to expect that CPI inflation will trend higher towards 2%Y/Y. Looking ahead, with two new Deputy Governors about to join the Board, it will be interesting to see how the Bank’s forecasts and commentary evolves next month when the latest Outlook Report is released. Masazumi Wakatabe, at least, has been sympathetic to the views of Kataoka in the past, but was notably more guarded about his current policy prescription during his recent confirmation hearing. And in his post-meeting press conference today, Kuroda insisted again that there was a decent chance of achieving 2% inflation around FY19.

Moving to the labour market, today saw the release of the preliminary Monthly Labour Survey of employers for January. As usual we caution that these preliminary estimates can be subject to substantial revision in due course. But with that caveat noted, this report indicated that total labour cash earnings (per person) rose 0.7%Y/Y in January, unchanged from December. This outcome was in line with market expectations and leaves growth within its recent range. However, compared to December, growth this month was more reliant on special earnings (i.e. bonuses), which rose 9.3%Y/Y in January compared to just 1.0%Y/Y in December. In contrast, growth in contracted earnings slowed 0.3ppt to 0.3%Y/Y,  a notch below the average rate last year. Growth in scheduled earnings (i.e. ordinary time) slowed to 0.2%Y/Y from 0.6%Y/Y previously, while non-scheduled earnings (i.e. overtime) were unchanged from a year earlier.

A contributing factor to the subdued picture was a drop in aggregate hours worked, which fell 1.6%M/M in January to be down 0.4%Y/Y (this compares with a 0.5%Y/Y increase in December) to re-establish the recent negative trend. A reduction in hours worked in the manufacturing sector contributed to this outcome, consistent with the sharp decline in IP reported that month. Meanwhile, part-time workers continue to benefit from the tightness of the labour market, with preliminary data suggesting that their scheduled earnings rose 2.7%Y/Y on a per hour basis (up slightly from 2.6%Y/Y in December) while those for full-time workers rose just 0.5%Y/Y in January (unchanged from December). After allowing for inflation, real total cash earnings in January fell 0.9%Y/Y, the softest reading since July last year. Needless to say, the BoJ will continue to hope that firms respond to the government’s enhanced tax incentives and employees’ expectations and deliver stronger earnings growth in this year’s coming spring pay round. Partly due to the government’s ‘work-style’ reforms promoting equal pay for equal work, the aims of which are shared by the unions, however, we expect the resulting stronger growth in earnings of irregular workers to act as a restraint on those of regular workers. And so, in aggregate, we think it would be optimistic to expect more than a slight improvement in the settlements of recent years.

 Among other details in the Labour Survey, the number of regular employees rose 2.6%Y/Y in January, unchanged from December and continuing to track substantially above the growth indicated by the more comprehensive Labour Force Survey. Growth in the number of full-time employees slowed to 2.1%Y/Y whereas growth in the number of part-time employees rose to 3.7%Y/Y (these figures are often revised substantially in the final report). By sector, strong growth continues to be seen in education and hospitality sectors (both up 6.4%Y/Y) and, somewhat surprisingly, in the construction sector (4.7%Y/Y). The number of regular employees in the finance and insurance sector fell 1.2%Y/Y.

Finally, the January MIC survey of household spending was also released today, indicating a 2.8%M/M rebound in real household spending in January following a 1.6%M/M decline in December. This outcome was much stronger than market expectations and lifted annual growth to 2.0%Y/Y from -0.1%Y/Y the previous month. The core measure of spending – which excludes expenditure on housing and certain other especially volatile items – rose 2.6%M/M in January following a 1.0%M/M decline in December. This index was up 2.9%Y/Y and is now 2.7% above the average level prevailing in Q4. By comparison, recall that the BoJ’s real travel-adjusted Consumption Activity Index rose 0.4%M/M in January to a level that was 0.1% above the Q4 average. The Cabinet Office Synthetic Consumption Index, likely to be released later next week, will provide the most accurate assessment of how consumer spending has evolved in January. Finally, we note that MIC’s survey also reported that real disposable income for workers’ households fell 1.7%Y/Y in January from 0.4%Y/Y in December and 2.0%Y/Y in November. This reinforces our view that it would be unwise to read much into what is often a very volatile survey.

China’s annual CPI inflation rose sharply in February, in large part reflecting base effects associated with the impact of the timing of the Lunar New Year holiday (which last year fell partially in January). The headline CPI rose 1.2%M/M in February, which is not atypical for a Lunar New Year month. This lifted annual inflation by a greater-than-expected 1.4ppts to 2.9%Y/Y (the market had forecast an increase to 2.5%Y/Y). Food prices rose 4.4%Y/Y in February, in sharp contrast to the 0.5%Y/Y decline reported in January. Annual inflation in the non-food sector rose 0.5ppt to 2.5%Y/Y, which is just a notch firmer than seen on average in the closing months of 2017. The core CPI (i.e. excluding food and energy) rose 2.5%Y/Y, up 0.6ppts from January. Annual inflation should ease somewhat next month once food prices normalise and so remain below the 3%Y/Y target that the Government has reaffirmed this week.

Meanwhile, China’s PPI fell 0.1%M/M in February, allowing annual producer inflation to ease 0.6ppts to 3.7%Y/Y. This outcome was 0.1ppt below market expectations. Producer goods prices rose 4.8%Y/Y, down 0.9ppt from last month, with lower inflation rates recorded across the mining, raw materials and manufacturing sectors. Producer prices of consumer goods rose just 0.3%Y/Y with food prices unchanged from a year earlier and consumer durables down 0.1%Y/Y. Meanwhile, China also reported that aggregate financing rose a slightly greater-than-expected CNY1.17trn in February, although growth the stock of credit still edged down to a new low of 11.2%Y/Y. Growth in M2 picked up slightly to 8.8%Y/Y from 8.6%Y/Y in January.

Euro area:
After yesterday’s ‘dovish tightening’ of the ECB’s forward guidance, the focus in Europe today shifts back to data with the latest industrial production figures, the first releases of which look soft. Broadly consistent with yesterday’s manufacturing orders and turnover data, German IP figures, released this morning, showed a small decline of 0.1%M/M in January. The decline was driven by declines in energy and construction output of 3.3%M/M and 2.2%M/M respectively, while manufacturing output rose by 0.6%M/M, reversing a drop of a similar magnitude the previous month. Looking through the monthly volatility, however, total IP was up by a solid 1.5%3M/3M, the strongest such rate since last June, despite the fact that both energy and construction sector output declined by around 1.0% on this basis. The weakness in those two categories is likely to be temporary: very cold weather in recent weeks is set to have pushed energy production higher, while a surge in construction orders at the end of last year also points to a higher pace of growth in construction output in due course. And manufacturing sector momentum is likely to maintained, not least given that Germany continues to reap the benefits of strong global growth momentum.

On that score, the latest German trade data, also released this morning, saw the trade surplus unchanged in January at €21.3bn, bang in line with its six-month average. Both exports and imports fell by around ½%M/M, but that likely reflected payback for recent strength. Indeed, the increases on a three-month basis of 3.6% and 3.7% were particularly strong, representing respectively the highest and the second highest readings since mid-2011.  

Elsewhere, the latest French figures showed a fall in output of 2.0%M/M, the steepest since June 2011. Manufacturing output declined by 1.1%M/M, while mining and quarrying and energy output dropped 6.7%M/M. Construction output also plummeted, down 7.6%M/M, to more than fully reverse a rise of 5.2%M/M in December.

Today also brings the publication of the UK’s industrial and trade indicators for January. Industrial production should see something of a bounce-back from December’s 1.3%M/M drop. That fall largely reflected the temporary shutdown of a key North Sea oil pipeline, which led to a massive 24.2%M/M decline in oil and gas extraction. Stripping out that distortion, manufacturing expanded by 0.3%M/M in December, and 1.4% Y/Y. But the PMIs signaled a subsequent deceleration in output in the sector. With regard to construction, after a 1.6%M/M rise in December, which was the steepest in 2017, we are likely to see payback in January, which should take the annual rate of growth further into negative territory. Finally, having reached a 15-month high of £13.6bn in December on the back of a notable rise in imports, the goods trade deficit is expected to narrow in January. However, it is likely to remain at a historically very high level, relatively impervious to the weakening of sterling after the EU referendum, as is the overall trade deficit, which widened to £4.9bn at the end of 2017. Relatively robust external demand from the UK’s key trading partners, however, should be reflected in firmer growth in goods export volumes after a dip in Q4.

All eyes today will be on the February labour market report. Against the backdrop of a further decline in unemployment insurance claims and a larger-than-expected rise in the ADP employment figure seen earlier this week, the market consensus is for an increase in non-farm payrolls of 200k or so, close to its solid reading in January and a touch above the six-month average. With regard to other major labour market indicators, after four consecutive months at 4.1%, the unemployment rate is expected to inch lower to 4.0%, which would be the lowest level since late 2000, while growth in average hourly earnings is expected to be a touch softer than in January, at 0.2%M/M and 2.8%Y/Y. 

New Zealand:
After rising 1.4%M/M in January, electronic payments data indicated that total spending in retail stores retraced 0.3%M/M in February. That still, however, spending up 3.3%Y/Y. Core spending, which excludes spending on fuel and autos, rose a further 0.3%M/M after rising 1.0%M/M in January, lifting annual growth to 4.3%Y/Y. As a result, total monthly spending for the first two months of Q1 is running a substantial 2.0% above the Q4 average, while core spending is up a sturdy 1.3%.

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