Morning comment: Trump/Kim, Japan business confidence, French & UK jobs, ahead of US CPI

Chris Scicluna

Overview:
While yesterday saw Bunds sell-off and BTPs and euro area equities rally in the wake of constructive comments from Italy’s Finance Minister, the S&P500 rose just 0.1% and Treasury markets were little changed from Friday’s close as investors awaited today’s historic Trump-Kim meeting and the important central bank announcements to come later this week. Needless to say, markets in Asian today were focused on the Trump-Kim meeting.  Following an initial three hours of talks, Trump told reporters that he and Kim had had a “fantastic” meeting that went “better than anybody could have expected”, and indicated that he would soon sign a document to reflect the progress than had been made. As a result, Asian equity markets have generally traded with a positive tone today, albeit less so in Japan (Topix up 0.3%) than in China (Shanghai up 0.9%) while South Korea’s Kospi is little changed on the day. Further details of the meeting will likely emerge over coming hours, after which investor attention will doubtless turn to today’s UK labour market numbers and all-important US CPI report.

Japan:
Today’s domestic diary kicked off with the release of the MoF/Cabinet Office Business Outlook Survey for Q2, which cast some further light on the expectations of the business sector in advance of next month’s more comprehensive BoJ Tankan survey. In keeping with Friday’s Economy Watcher’s survey, and with the earlier May PMI readings, the MoF survey suggests that firms feel that business conditions have deteriorated somewhat in recent months. And not surprisingly, the detail suggested that this softening was driven by factors largely unrelated to the domestic economy, with concerns about the direction of US trade policy and about political developments in some countries likely to be key factors. The positive news is that the more forward-looking aspects of the survey indicated that the deterioration in business conditions is likely to be short-lived. 

Amongst large firms, a net 2.0% of respondents reported a deterioration in overall business conditions in Q2 – the first worsening reported since Q217. This outcome occurred despite a net 7.2% of firms reporting an improvement in domestic economic conditions. Looking ahead, large firms are much more optimistic about prospects over the remainder of this year, with a net 6.9% of firms forecasting an improvement in business conditions in Q3 and 7.9% of firms expecting an improvement in business conditions in Q4, firms operating in the manufacturing sector slightly more optimistic than those operating in the non-manufacturing sector. On balance, firms expect domestic conditions to continue improve across both quarters. Expectations amongst medium-sized firms were very similar to their larger counterparts, whereas, as usual, smaller firms were much less optimistic – reporting a more widespread deterioration in business conditions in Q2 and being less confident about the outlook for the remainder of the year. 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 will rise 2.1%Y/Y in FY18 (led by 3.0%Y/Y growth amongst manufacturers), up from the 1.5%Y/Y growth forecast in the prior survey. Ordinary profits are forecast to fall 1.5%Y/Y in FY18, which is slightly more pessimistic than the decline of 1.2%Y/Y that had been forecast in March. This largely reflects a forecast 3.1%Y/Y decline in profits in the manufacturing sector, all of which is expected to take place in the first half of the year). Even so, for all industries, firms forecast that spending on plant and machinery and software will rise 5.4%Y/Y in FY18 – a sharp contrast to the 6.5%Y/Y that was forecast in March but consistent with past experience whereby the first estimate for the impending fiscal year proves much too pessimistic. Spending amongst manufacturers is forecast to rise 15.0%Y/Y (a forecast that seems to have received some early support from yesterday’s April machinery orders) while spending amongst non-manufacturers is forecast to be essentially unchanged.

Turning to the day’s other economic releases, the BoJ published producer goods price data for May. In headline terms, the PPI rose a much stronger-than-expected 0.6%M/M. In combination with a small upward revision to the April reading, this caused annual inflation to rise to 2.7%Y/Y from 2.1%Y/Y in April. Within the detail, a 4.3%M/M increase in prices for petroleum was a key driver, while prices in the chemicals and non-ferrous metals sectors rose 1.1%M/M apiece. The yen’s depreciation contributed to an even larger rise in import prices. Measured in yen terms, import prices rose 2.7%M/M in May, led by high prices for petroleum and metals, causing annual growth to pick up to a six-month high of 6.5%Y/Y.

Today also saw METI release the Tertiary Industry Activity Index for April. Tertiary sector activity – which accounts for almost three-quarters of overall activity – rebounded 1.0%M/M during the month. This outcome was above market expectations and lifted annual growth to 1.4%Y/Y from 0.9%Y/Y previously. In the detail, the index of business services rose 0.8%M/M and the index of personal services rose 1.1%M/M. As a result of today’s outcome, the Tertiary Industry Activity Index has moved to a level 0.9% above the average level that prevailed for Q1. While some payback may well occur in May, today’s report still bodes well for a return to positive GDP growth in Q2.

UK:
Yesterday’s UK data were grim. The biggest monthly drop in manufacturing output (of 1.4%M/M) in more than five years left the level of output in April at its lowest since last August. And the sharpest drop in export volumes (of 6.1%M/M) since August 2014 triggered a widening of the trade in goods deficit to the biggest since September 2016. Among other things, on a day when Jaguar Land Rover announced it will move production of its Land Rover Discovery SUV to Slovakia from next year, the data raised questions whether pre-Brexit nerves mean that UK manufacturing companies are already being squeezed out of global supply chains.

Nevertheless, the markets continue to price in a roughly 50:50 probability that the BoE will raise rates in August. And so, all of the other top-tier data releases scheduled this week will face heightened scrutiny. Today brings one of the BoE’s most closed watched set of numbers: the labour market data. Last month’s figures confirmed that real wages have returned to positive growth (albeit modestly). And we expect that trend to have continued in April, not least as the labour market tightens further, with an increase in the number of jobs of around 110,000 in the three months to April expected, leaving the unemployment rate to remain at 4.2%.

On the political front, meanwhile, today sees the start of two consecutive days of debate and votes in the House of Commons on the EU Withdrawal Bill. There are 16 amendments for MPs to vote on – most notably those concerning membership of the EEA and a customs union. If they were so minded, a coalition of the known pro-Remain opposition MPs would only need 15 or so Conservative members to vote alongside them in order to uphold the amendments. A defeat for the government would not only impact its Brexit strategy but would also herald a period of heightened political uncertainty.  However, for now, perhaps with the exception of the amendment demanding that Parliament holds a meaningful vote on the final Withdrawal Agreement, the government looks likely to win out. Please see yesterday’s special blog article for further discussion of the background.  

Euro area:
French payrolls data released earlier this morning showed continued job creation led by the private sector in Q1, albeit at a more moderate pace than the trend last year – perhaps unsurprising in light of the softer GDP growth performance. In particular, total payrolls rose 0.2%Q/Q and 1.2%Y/Y, down from 0.4%Q/Q and 1.4%Y/Y in Q4. Private sector payrolls also rose 0.2%Q/Q rate and 1.6%Y/Y, down from 0.6%Q/Q and 1.9%Y/Y previously. The number of public sector employees was flat on the quarter but lower than a year earlier.  

Later today we’ll see the June German ZEW survey of investor sentiment, which seems set to remain downbeat given the continued dominance of downside surprises in the euro area economic dataflow, escalation of Italian and Spanish political uncertainty, and exaggerated BTP market turbulence. In the markets, Italy will sell 12-month bills, after the sale of 6-month bills at the end of last month strikingly resulted in an average yield above the equivalent Greek rate.

US:
In the US, today brings one of the key releases of the week, the CPI report for May. Core CPI is expected to be pushed up by above-potential economic growth to post another rise of 0.2%M/M in line with the average so far this year, while the headline index might rise 0.3%M/M on the back of higher fuel and food prices too. As a result, the annual rate of core inflation will likely rise to at least 2.2%Y/Y, the highest in more than a year, while the annual headline rate will likely rise to at 2.8%Y/Y, the highest since 2012. The May NFIB small business survey is also due along with the monthly federal budget statement for the same month. In the markets, the Treasury will sell 30Y bonds.

Australia:
The focus today was on the release the NAB Business Survey for May. Perhaps not surprisingly, the survey reported a decline in firms’ assessment of business conditions from last month’s historic high, with the index falling 6pts to a still very robust +15. Firms’ assessment of trading conditions, profitability and hiring intentions were all slightly less buoyant this month and the business confidence index fell to 6.2 – the lowest reading since October 2016.

In other news, housing finance data for April reported that the number of home loan approvals fell 1.4%M/M in April – the fifth consecutive monthly decline. Excluding approvals for refinancing, the number of approvals fell 1.9%M/M (the same outcome as in March) while the value of those approvals was unchanged from a month earlier. 

New Zealand:
Today saw the release of the Electronic Card Transactions report for May, which captures non-cash spending in the retail sector (i.e. all payments made by electronic means). After slumping 2.2%M/M last month, spending rebounded a disappointing 0.4%M/M in May. Core spending, which excludes spending on fuel and autos, also rose 0.4%M/M and was up 3.4%Y/Y. Even so, this outcome means that average core spending over the first two months of Q2 is sitting 0.6% below the average experienced in Q1, with total spending down an even greater 1.2% compared with its Q1 average.

In somewhat better news, the ANZ Heavy Traffic Truckometer – a measure of traffic flows that is correlated with economic activity – rose 3.0%M/M in May following an upwardly-revised 2.7%M/M increase in April. As a result, the 3-month average rose over 4%Y/Y, marking the strongest growth recorded since January.

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