Week ahead: Scandal returns to haunt Abe's Cabinet

Chris Scicluna
Mantas Vanagas

Overview:
A combination of a stronger-than-expected lift in payrolls but a weaker-than-expected pickup in wages brought back talk of a ‘Goldilocks’ expansion and thus gave Wall Street a substantial fillip on Friday, with the S&P500 closing up 1.7% to end the week with a very solid 3.5% gain. With that background, Asian equity markets made a positive start to the week with solid gains seen across the region. The Topix was one of the better performers, rising 1.5%, even as the Moritomo school scandal – which relates to the sale of some public land to a school with connections to PM Abe’s wife – re-emerged to haunt Japan’s government.

Indeed, a survey published yesterday by the Yomiuri newspaper suggested that, on account of the affair, Abe’s Cabinet approval rating has plummeted 6ppts over the past month, to 48%, with a separate Fuji News survey suggesting that about 70% of respondents thought that Finance Minister Aso should step down due to his Ministry’s involvement in the alteration of documents associated with the issue. While Aso did indeed apologise today, with an investigation ongoing it remains to be seen whether he will eventually be forced to go the same way as the former head of the tax administration, Sagawa, who resigned on Friday. Should the scandal continue to burn, speculation could well mount of a meaningful challenge to Abe’s authority at September’s LDP leadership election.

Japan:
A reasonably quiet week for Japanese data kicked off today with the release of the MoF/Cabinet Office Business Outlook Survey for Q1, which casts some further light on the expectations of the business sector in advance of next month’s more comprehensive BoJ Tankan survey. On balance, we would characterise the survey as being little less optimistic than that conducted three months ago, which is consistent with the tone of other recent sentiment surveys. And not surprisingly, the detail suggested that this softening was driven by factors unrelated to the domestic economy – likely a firmer yen, global financial volatility and concerns about the direction of US trade policy.

Amongst large firms, only 3.3% of respondents reported an improvement in overall business conditions in Q1 (fewer than in the prior two quarters), even though 8.6% of firms cited an improvement in domestic economic conditions. Looking ahead, large firms are, on balance, expecting little change in business conditions Q2, but firms are uniformly optimistic about an improvement in business conditions in Q3. On balance firms expect domestic conditions to improve across both quarters, with greater optimism evident amongst non-manufacturers.

Amongst medium-sized firms a small net balance of manufacturers reported softer overall business conditions in Q1, again despite a net 8.1% of firms reporting improved domestic conditions. Firms in this sector were optimistic of an improvement in overall business conditions over the next two quarters, and also confident that domestic conditions would continue to improve. As is usually the case, small firms painted a less positive picture than their larger brethren, with a net 9.9% of firms reporting weaker business conditions in Q1. These firms also reported slightly weaker domestic economic conditions in Q1. Looking ahead, a slight net proportion of small manufacturers expected overall business conditions to improve in over the next two quarters, whereas on balance non-manufacturers expected that conditions would weaken a little further. As in other recent surveys, firms of all size and in both the manufacturing and non-manufacturing sectors signalled that they have insufficient staff for their needs, which is not surprising given that the unemployment rate is at an almost 25-year low.

Elsewhere in the survey, firms forecast that their sales would rise 2.7%Y/Y in FY17 (led by 4.4%Y/Y growth amongst manufacturers), slowing to 1.5%Y/Y in FY18 (also led by 2.8%Y/Y growth amongst manufacturers). Ordinary profits are forecast to rise 5.2%Y/Y in FY17 (with manufacturing profits up 11.2%Y/Y), although this is thanks solely to growth achieved in the first half of the year, and they are forecast to decline a modest 1.2%Y/Y in FY18. For all industries, firms forecast that spending on plant and machinery and software will have risen 5.0%Y/Y in FY17 (up from a forecast of 3.4%Y/Y in the prior survey). However, such investment spending is forecast to decline 6.5%Y/Y in FY18, with a 13.2%Y/Y decline in spending amongst non-manufacturers more than offsetting a further 5.7%Y/Y increase in spending amongst manufacturers.

Looking ahead, a relatively quiet week for Japanese data will continue with the February goods PPI and January Tertiary Industry Index. On Wednesday, the machinery orders report for January will be of interest, especially after the disappointing 11.8%M/M slump in core orders reported last month. And the week will end on Friday with the release of the final IP report for January. In the bond market, the MoF will auction 5Y JGBs tomorrow and 20Y JGBs on Thursday.

Euro area:
In a relatively quiet week for euro area data releases, speeches by top ECB officials, including Draghi, Praet and Cœuré on Wednesday, might attract more attention than usual. Data-wise, the most notable day will also be Wednesday, when we will receive euro area industrial production figures for January alongside employment data for Q4. Meanwhile, the final euro area inflation figures for February are due on Friday. Currently, there is no major reason to expect any revisions from the preliminary estimates of 1.2%Y/Y headline and 1.0%Y/Y core inflation, but we will learn more about the balance of risks to those figures throughout the week when the large member states release their estimates. Also notable on Friday will be Q4 labour cost data, while the day before new car registration figures will indicate whether the autos market remained buoyant in February. In the markets, Italy will sell a range of bonds tomorrow, Germany will sell 30Y bonds on Wednesday, and France and Spain will sell a range of bonds on Thursday.

US:
Turning to the US, as the focus begins to turn to next week’s FOMC meeting, most interest in the coming week will centre on tomorrow’s CPI report for February, especially following the upside surprise reported last month. Surveys suggest that that the market expects a 0.2%M/M lift in the core index, which would leave annual inflation steady at 1.8%Y/Y. A day later attention will turn to February producer price and retail sales data (a rebound in sales seems likely after poor weather weighed in January). On Thursday, the February New York and Philadelphia Fed manufacturing surveys will be released, together with the NAHB housing index for the same month. A busy week ends on Friday with the release of the preliminary University of Michigan consumer survey for March, together with IP, housing starts and building permits for February, and the JOLTS report for January. In the bond market the Treasury will auction 3Y and 10Y notes today and 30Y USTs tomorrow.

UK:
The coming week will be exceptionally quiet for UK data. Instead, the main event of the week will be the Chancellor’s Spring Statement, the first such announcement since the main Budget was moved to the autumn. This will be a far more streamlined affair than previous statements which would always bring a raft of policy changes. Instead, this week’s event will merely consist of an update to the fiscal and economic forecasts. The most recent monthly public borrowing figures confirmed that PSNB for the financial year to date is running at its lowest level since the financial crisis, thanks to a boost in tax receipts. Accordingly, the deficit could undershoot the official 2017/18 forecast of £49.9bn by as much as £10bn. Meanwhile, having downgraded its GDP growth expectations at the time of November’s Budget, the performance of productivity growth and GDP since then suggests the OBR might nudge that outlook a touch higher this time around. Finally, following December’s draft agreement on withdrawal terms, the OBR report will also contain estimates of the impact of the UK’s Brexit “divorce” payments. During the transition period, the UK’s net contribution to the EU is likely to remain close to the current level of £10bn. That figure is likely to subside subsequently but the divorce payments will stretch over many years. Any savings compared to current levels will not be recorded as a projected gain to the public purse, as the OBR is assuming that these funds will instead be spent domestically.  (In the bond market, the DMO will sell 10Y index-linked Gilts on Thursday.)    

China:
There were no data releases in China today. Over the remainder of the week the focus will be on Wednesday’s release IP, retail sales and capex data for January/February combined. According to Bloomberg the market expects growth rates to have slowed slightly from the calendar-year averages reported in December.

Australia:
After a quiet start to the week in Australia with no economic reports released today, the main focus this week will be on the latest readings from the NAB business survey and Westpac consumer confidence survey, released tomorrow and Wednesday respectively. Housing finance data for January will also be released tomorrow.

New Zealand:
As in Australia, there were no economic reports released in New Zealand today. The domestic focus this week will be on Thursday’s Q4 GDP report. According to Bloomberg the market expects a 0.8%Q/Q lift in activity – an immaterial 0.1ppt above the RBNZ’s most recent forecast – raising annual growth to 3.1%Y/Y. The Balance of Payments for Q4 will be released a day earlier, providing a last minute indication of activity in the services sector. This week will also see the release of the February REINZ housing report (Wednesday) and the February manufacturing PMI (Friday).

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