Morning comment: Plenty of new Japanese data & US tariffs

Chris Scicluna

Yesterday’s regular session on Wall Street was positive with the S&P500 advancing a further 0.3%, marking its fourth consecutive daily gain and 10Y UST yields edging up to 2.87%. However, Treasury yields and equity futures – and risk assets generally – turned lower soon after the New York close as Bloomberg reported that President Trump was readying the publication of a new list of Chinese imports – worth $200bn annually – that could be subjected to further 10% tariff. That list – running more than 200 pages and a direct response to China’s retaliation to the first round of US tariffs – was published just a few hours later, with US officials saying that the decision on how to proceed would be made after a consultation period that would conclude on 30 August. China responded immediately with the statement that the latest US movement was “totally unacceptable”, indicating further that it would be forced to take retaliatory actions should the additional tariffs be implemented. Unless we see sudden moves to arrange a Trump-Xi summit to resolve the dispute, the US-China trade war (as well as Trump’s ongoing threat of increased tariff on US auto imports) risks leaving a dark cloud over global financial markets through to the autumn.

Indeed, not surprisingly, the US tariff news provided a setback to the recovery in risk sentiment in markets that we’d seen in recent days. In China, the yuan has weakened (initially moving through CNY6.68/$ before recovering some lost ground) and the CSI300 has declined 1.9%, with a solid 1.5% decline also seen in Hong Kong’s Hang Seng Index. The response of markets elsewhere has generally been somewhat more restrained, however. In Japan, the Topix fell 0.8%M/M, with some better than expected local economic data, which pointed to a return to positive GDP growth in Q2 (see below), providing some counter to the impact of an appreciation of the yen. The S&P500 front e-mini futures contract is presently down about 0.7% from its pre-tariff announcement levels, having been down as much as 1.1% at one stage.

Looking ahead, it should be a quiet day for economic news in Europe and the US, with no show-stoppers on the data front. However, Canada’s central bank is widely expected to raise rates by a further 25bps to 1.50%. And following last month’s G7 summit debacle, today’s NATO summit in Brussels will be watched for further evidence of the fraying of the Western alliance.

Outside of the growing US-China trade dispute, the main focus in Japan today was on the local machinery orders report for May. In summary, some payback was to be expected following a very strong uplift in the closely-watched core private machinery series in April. However, the degree of payback in May proved somewhat less pronounced than the market had expected, adding some credence to the upbeat capex forecast contained in last week’s BoJ Tankan survey.

Turning to the detail, total machinery orders in fact rose a further 3.2%M/M in May, lifting annual growth to 15.4%Y/Y. Core private orders – which exclude ships and other volatile categories – fell just 3.7%M/M. Following a 10.1%M/M increase in April, this left core orders up 16.5%Y/Y. Within the detail, orders by manufacturers rose 1.3%M/M and so were up a very strong 26.2%Y/Y. Core orders in the non-manufacturing sector edged up 0.2%M/M and are now up 8.4%Y/Y. Foreign orders rose 1.8%M/M, building on the 10.0%M/M increase seen in April. Meanwhile, public sector orders rose 6.1%M/M and were up a whopping 36.4%Y/Y.

With core orders maintaining most of their April uplift, average orders over the April/May period are running 6.0% above the average monthly level reported in Q1. The Cabinet Office’s survey of firms, released with the March data, had indicated that firms expected core orders to rise by 7.1%Q/Q in Q2. On the face of it, today’s report suggests that orders are on track to post an outcome that is in the vicinity of that forecast. With corporate profitability remaining at high levels and the economy operating at high rate of capacity utilisation, the environment remains conducive to a continued uptrend in business capex provided that confidence in the global economic outlook remains positive.

Today also saw METI release the Tertiary Industry Activity Index for May. In common with machinery orders, market expectations had been cautious in light of the solid 1.0%M/M reported in April. However, rather than post a slight decline, the overall index advanced a modest 0.1%M/M in May. Annual growth in the original series nudged down 0.1ppt to 1.2%Y/Y, although we note that annual growth measured using the seasonally-adjusted series edged up 0.2ppts to 1.1%Y/Y. In the detail, the largest positive contributions to growth came from the wholesale trade and health care sectors while the retail trade and living/amusement-related services were a weight on growth. As a result of today’s outcome, the average reading of the Tertiary Industry Activity Index over April/May is now 0.8% above the average level that prevailed in Q1 to bode well for a return to positive GDP growth in Q2.

In other news, the BoJ published producer goods price data for June. In headline terms, the PPI rose 0.2%M/M, in line with market expectations, nudging annual inflation up by 0.1ppt to 2.8%Y/Y. Within the detail, a further 2.2%M/M increase in prices in the petroleum/coal sector was a key driver, while prices in the non-ferrous metals sector rose a further 1.0%M/M. Measured in yen terms, import prices rose a somewhat firmer 1.8%M/M in June, led especially by 5.5%M/M lift in prices in the petroleum/coal/gas sector. This caused annual growth in import prices to increase to an 8-month high of 10.5%Y/Y.

Finally, we note that yesterday the Cabinet Office released its Synthetic Consumption Index for May, which of all indicators generally has the best correlation with the national accounts measure of private consumption. The index fell 0.4%M/M in May and was down 0.4%Y/Y. As a result, for the period April/May combined the index is running just 0.2% above the average for Q1. Assuming no revisions and a flat June, spending on this measure would still rise 0.2%Q/Q in Q2 following a dip in consumption of 0.1%Q/Q in the first quarter. More optimistically, in light of the recent encouraging income data, it seems reasonable to expect a slightly firmer June and thus marginally stronger growth in Q2.

There’s no notable data due out of the euro area or the UK today. But after yesterday’s monthly GDP data strongly suggested that UK economic growth picked up to 0.4%Q/Q in Q2 from 0.2%Q/Q in Q1, the BoE’s MPC will judge next month that its May Inflation Report forecast – which pointed to three rate hikes over the coming three years – remains on track. As such, with Theresa May now looking pretty safe from challenge over the summer (but certainly not safe from challenge in the autumn), the figures may be sufficient to persuade the majority on the MPC to vote to raise rates on 2nd August, with the intensification of trade-war risks and possible financial market fall-out now seemingly representing the main risk to such action. Carney will speak in Boston this evening, although with the focus being the global financial crisis he might avoid giving any hints about next month’s MPC vote.

The economic data focus in the US over the coming two days will be on inflation. Ahead of tomorrow’s CPI figures, today brings the June PPI release. Core goods prices have risen 0.3%M/M in six of the past eight Months, while inflation in services has also been trending higher. But the volatile food and energy components seem likely to be well-behaved today, as gasoline prices were little changed last month while food prices have been unexceptional. Wholesale inventory data are also due today, while NY Fed President John Williams will speak publicly.

Today’s Westpac-MI consumer confidence survey point to a solid improvement in sentiment over the past month. The headline index rose 3.9%M/M to 106.1 in July – the highest reading since November 2013 and now above the survey’s long-term average. While respondents were a bit more optimistic across all aspects of the survey, the most significant improvement came in perceptions about general economic outlook, especially over the longer term.

In other news, housing finance data for May reported that the number of home loan approvals rose an unexpected 1.1%M/M in May – the first increase since November. Excluding approvals for refinancing, the number of approvals rose 1.8%M/M while the value of those approvals rose 0.8%M/M. All of the growth came from the owner-occupier sector, with approvals for investment lending down 0.1%M/M.


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