Morning comment: Japan GDP, China trade & ECB policy

Chris Scicluna
Mantas Vanagas

While US equity futures had been down sharply during Asian time on Wednesday on news of Gary Cohn’s departure from the White House, in the event the S&P500 closed almost unchanged on Wednesday as the White House suggested the possibility of specific country carve-outs from the President’s tariff proposal. As a result, USTs also unwound their Asian-time gains with the 10-year yield returning to 2.88%.

The resilience seen in Wall Street saw Asian bourses rebound today. In Japan, the yen reversed most of yesterday’s appreciation and upward revisions to Q4 GDP growth proved larger than expected (more on this below). However, the Topix rose just 0.4% – a relative underperformer on the day – as an earlier larger gain was pared during post-lunch trade (a weaker-than-expected Economy Watchers survey arguably didn’t help matters). Solid gains were seen elsewhere, especially in Hong Kong where the Hang Seng rose 1.3%, while China’s stronger-than-expected trade report might have provided some encouragement. Looking ahead, today’s ECB announcement will be watched principally for possible changes to the Governing Council’s guidance on future policy, with the easing bias on its asset purchase programme potentially set to be dropped.

A busy day for Japanese economic data saw the domestic focus largely on the second release of the national accounts for Q4. This brought some good news, with real GDP growth revised up 0.3ppt to 0.4%Q/Q (1.6% annualised) – the second consecutive quarter in which the second reading has been revised up materially, reminding that the initial estimates are always to interpreted with caution. This revised outcome was also a little firmer than what the market had expected ahead of the disappointing first estimate, and means that the economy continued to grow at an above-trend pace – something that tallies with labour market developments and the upbeat business sentiment surveys. Revisions to growth in prior quarters didn’t greatly change the picture, but did mean that annual growth was revised up 0.5ppt to 2.0%Y/Y. Growth in real gross national income (GNI) – measuring residents’ effective purchasing power – was revised up 0.3ppt to 0.0%Q/Q in Q4, with annual growth revised up 0.4ppt to 1.7%Y/Y.

In the detail, growth in domestic demand was also revised up 0.3ppt to 0.4%Q/Q and growth in final sales was revised up 0.1ppt to 0.3%Q/Q. Growth in private consumption was unrevised at 0.5%Q/Q. But as seemed likely after last week’s MoF corporate survey, growth in private non-residential investment was revised up 0.3ppt to 1.0%Q/Q (and 3.5%Y/Y, 0.5ppt firmer than estimated previously). Growth was again led by non-transport machinery investment, which rose 1.6%Q/Q and 4.4%Y/Y. Transport investment fell 0.6%Q/Q and 0.4%Y/Y. There was little change in investment in either non-residential buildings or intellectual property in Q4, although these categories still grew 3.8%Y/Y and 1.8%Y/Y respectively. Public sector spending also contributed to the upward revision to domestic demand, with consumption revised up 0.1ppt to 0.0%Q/Q and investment revised up 0.3ppts to -0.2%Q/Q. Residential investment fell 2.6%Q/Q  in Q4, which was 0.1ppt less than first estimated. Finally, also contributing to the stronger overall growth outcome were private inventories, which are now estimated to have made a 0.1%ppt positive contribution to growth rather than the 0.1ppt negative contribution estimated previously. There were no revisions to estimates of exports (2.4%Q/Q) and imports (-2.9%Q/Q) and so in rounded terms net exports continued to make a zero contribution to growth in the quarter.

With respect to prices, the GDP deflator was unrevised at -0.1%Q/Q although annual growth was revised up 0.1ppt to 0.1%Y/Y. Nominal GDP growth is now estimated at 0.3%Q/Q in Q4, with annual growth revised up 0.5ppts to 2.1%Y/Y – the same pace of growth as recorded in Q3. The private consumption deflator rose an unrevised 0.4%Q/Q and the domestic demand deflator rose an unrevised 0.3%Q/Q. However, as in the preliminary estimates this price growth stemmed solely from higher import prices (up 2.7%Q/Q), reflecting past yen depreciation and higher commodity prices (especially the higher price of oil). Elsewhere in the accounts, compensation of employees rose an unrevised 0.2%Q/Q and 1.9%Y/Y in Q4.

While a positive development, the revised national accounts will have little impact on the BoJ’s message at tomorrow’s Board meeting. That said the revisions do mean that the median FY17 growth forecast of 1.9%Y/Y contained in the BoJ’s January Outlook Report can now be plausibly retained in April.  And together with the very slight firming seen in inflation data of late and a new 25-year low for the unemployment rate, today’s data will help Kuroda defend the Board’s consensus view that the current policy stance is sufficient to allow the BoJ to achieve its inflation target sometime in FY19, albeit while maintaining a watchful eye on global developments and the behaviour of the yen.

Separately, the Economy Watchers survey for February was somewhat less encouraging, pointing to a further moderation in sentiment over the past month. This is perhaps not too surprising in light of ongoing financial volatility, a stronger yen and perhaps concerns about the direction of US trade policy (although this survey was in the field before Trump’s tariff announcement last week). The overall current conditions index fell 1.3pts in February to 48.6, the lowest since last April. The business sector index fell 2.3pts to a barely expansionary 50.3, with the manufacturers ‘index falling a further 2.9pts to 49.4 – a cumulative 7.2pt decline in just two months, also to the lowest since last April. By contrast the household index fell just 0.8pt to 47.0, although this is still the softest in eleven months. A little more encouragingly, as was the case last month, respondents’ assessment of the outlook showed greater resilience. The overall expectations index – which tries to gauge the direction of conditions over the next month or so – declined just 1.0pt to 51.4, thus remaining expansionary and well above the average of recent years. Here too the largest loss of confidence was among manufacturers, with that index declining 2.1pts to 51.6. The non-manufacturers index fell just 0.5pt to 52.2.

Today also saw the release of bank lending data for February, which continued the trend seen since the middle of last year. Total bank lending grew 2.1%Y/Y, slowing for a seventh consecutive month from what had been an 8-year high of 3.3%Y/Y. As in previous months the slowdown was led by lending at the major city banks – now up just 0.6%Y/Y, which is the slowest rate of growth recorded since August 2016. As before, we think that to some extent the slowdown may reflect continued above-average levels of corporate profitability and retained earnings. Growth in lending at regional banks was unchanged at a comparatively robust 3.4%Y/Y and that at shinkin banks was unchanged at 2.5%Y/Y.

Finally, Japan recorded a seasonally-adjusted current account surplus of ¥2.02bn in January, up from an upwardly-revised ¥1.68bn surplus in December. The improvement this month was largely due to a larger trade surplus. On a 12-month running basis, the surplus rose to an almost 10-year high of ¥22.4trn, a little bit more than 4% of GDP, helping to underpin recent firmness in the yen.

The focus in China today was on the trade report for February, albeit with analysis complicated by the uncertain impact of the Lunar New Year holiday. Perhaps not surprisingly, therefore, China’s trade surplus was far away from market expectations for a third consecutive month – in this case recording a surplus of USD33.7bn (or CNY224.9bn in local currency terms), when a small deficit had been expected. All of the surprise was on the exports side or the ledger, with growth in exports rising to 44.5%Y/Y from just 11.1%Y/Y last month. Taking the last three months together, exports rose 24.4%Y/Y, which remains much firmer than seen during 2017. Meanwhile growth in imports slowed to 6.3%Y/Y in February from 36.8%Y/Y in January – an outcome that was only slightly weaker than market expectations. Again taking the last three months together, imports rose 21.7%Y/Y, which is a little firmer than last year’s trend.

As for what China’s trade data means for other countries, we note that its imports from Japan fell 10.5%Y/Y in USD terms in February. While they were up 9.0%Y/Y for the three months to February (or about 4.5%Y/Y after allowing for a stronger yen), this is nonetheless a much slower pace of growth than seen through the middle of last year. China’s imports from the EU rose just 0.4%Y/Y, while imports from the US fell 4.5%Y/Y. It is probably advisable to await the release of March data before drawing strong conclusions, however.

Euro area:
The main event will be the conclusion of the ECB’s latest Governing Council meeting. While the accounts of recent policy meetings flagged the possibility of a change in the first half of this year to the ECB’s forward policy guidance – including at a minimum the removal of the easing bias on the net asset purchase programme (APP) – the Governing Council might yet again choose to err on the side of caution and leave its policy statement broadly unchanged. Softer readings of the February economic surveys might have provided a warning against complacency on the Governing Council, all the more so given that GDP growth has not been quite as strong as recent confidence indices suggested. More importantly, recent inflation data have remained disappointingly weak. Indeed, with headline CPI in February at its lowest level since end-2016 and core CPI just 1.0%Y/Y, the ECB’s long-sought uptrend in underlying inflation remains elusive. Moreover, further euro appreciation – which might result from a sudden substantive change of policy guidance – could have an adverse impact on the economic outlook. So, if there are changes made to the policy statement, we suspect that they will be relatively modest and aimed at a low market impact. Certainly, we do not expect to see a clear steer on future policy until the June meeting.

We also expect the Governing Council to continue to express concern about forex market risks. Indeed, the ECB’s updated forecasts will need to take account of the significant appreciation of the euro against the dollar (albeit not so significant in trade-weighted terms) since the last projections (which had assumed an average exchange rate of just $1.17/€ this year). And the new forecasts will also have to reflect the increased oil price (previous assumption $61.6pb in 2018), while the impact on prices of domestic energy and food (and indeed GDP) of the recent harsh winter weather represents a further complication. Overall, we expect to see little change from the ECB’s previous set of forecasts for GDP growth (2.3% in 2018, 1.9% in 2019 and 1.7% in 2020) or inflation (averaging 1.4%Y/Y in 2018, 1.5%Y/Y in 2019 and 1.7%Y/Y in 2020).    

Data-wise, German factory orders data for January, released this morning, posted a larger-than-expected decline of 3.9%M/M, the most in a year, following (downwardly revised) growth of 3.0%M/M in December. Of course, this series is highly volatile. And given the solid growth trend throughout last year, as well as the weak base a year earlier, the annual growth rate was still strong at 8.2%Y/Y, broadly in line with the recent average. German industrial turnover fell 0.2%M/M, a guide to what to expect from Germany’s IP data for January due tomorrow.

In addition, the latest Bank of France business sentiment survey suggested that French economic conditions were little changed in February. The manufacturing index moved sideways at 105, below the levels seen in Q4 but still significantly above the long-term average. Order books in this sector remained ample and so companies expect that production in March will maintain the growth of the past two months. Meanwhile, construction sector sentiment was also unchanged at 104, but service sector activity slowed, with the sentiment indicator for this sector down from 104, a level last seen in March 2011, to 103. Nevertheless, the Bank of France continues to expect French GDP to grow by 0.4%Q/Q in Q1, a pace that matches our own forecast.

The UK housing market outlook remains subdued, according to the RICS Residential Market Survey released overnight. Indeed, the headline indicator for house prices fell in February from 7% to 0%, marking a ninth consecutive reading in the range of 0 to 9%. New buyer enquiries, an indicator of demand, continued falling for an eleventh consecutive month. Moreover, against a backdrop of weak demand, sellers were not very keen to enter the market either. Indeed, the new vendor instructions indicator fell to the lowest level since the wake of the Brexit referendum leaving the average inventory levels on agents’ books at the lowest level on record. Looking ahead, survey respondents continued to expect little change in house prices over the coming few months, although longer-term expectations turned slightly more positive and were the strongest since last May. Certainly, we expect little change in the market sentiment throughout this year. Further ahead, the housing market should be principally driven by the strength of the economy, wage growth and the nature of Brexit, as well as the extent to which the BoE will tighten monetary policy.

In the US, a relatively light data calendar will bring the usual weekly jobless claims numbers, February Challenger job cuts numbers, and the Fed’s Q4 flow of funds.

The focus in Australia today was also on trade data, in this case for the month of January. After surprising with a large deficit in December (now revised slightly lower to A$1.14bn) which weighed on GDP growth in Q4, payback was seen this month with a larger-than-expected surplus of A1.06bn. Exports jumped 4.3%M/M and 3.2%Y/Y in January despite a second-consecutive decline in exports from rural sector and a sizeable decline in exports of iron ore. Meanwhile, after rising a 6.2%M/M in December, imports fell 2.4%M/M lowering their annual growth to 4.7%Y/Y.

New Zealand:
Ahead of next week’s Q4 GDP data, Statistics New Zealand reported that the volume of manufacturing sales rose a solid 1.0%Q/Q in Q4 and was up 1.8%Y/Y. Excluding meat and dairy products, sales rose 0.8%Q/Q and 3.2%Y/Y. Together with a rise in inventories of finished goods, this suggests that the manufacturing sector will make a solid positive contribution to Q4 GDP, with growth shaping up to be at least as strong as the 0.7%Q/Q outcome forecast by the RBNZ last month. Last but by no means least, the ANZ Heavy Traffic Truckometer – a measure of traffic flows that is correlated with economic activity – fell 2.5%M/M in February but the 3-monmth average was still up 3.7%Y/Y.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at