Morning comment: Japan spending & wages, Aussie retail

Chris Scicluna
Emily Nicol

The price action in equity, credit and commodity markets continued to be dominated by the sell-off in the US Treasury market yesterday. After peaking at 3.23%, the US 10-year yield settled back to 3.19%. Nonetheless, the S&P500 still closed down 0.8% – recovering from an earlier 1.4% decline – while both crude oil and copper fell 2%. And while US 10-year yields were no higher than they were at the same time yesterday, Asian equity markets took their lead from the declines seen on Wall Street. With the exception of Taiwan (down 1.9%), declines were generally relative modest, however, with the Kospi closing down 0.3% and the Hang Seng largely erasing earlier losses (currently down 0.2%), but the Topix closing down 0.5% following a mixed bag of Japanese consumer spending and labour earnings data (details below). A slightly firmer than expected retail sales report and new lows in the Aussie dollar helped the ASX200 post a 0.3% gain. Of course, markets remained closed today in mainland China for a public holiday – that calm is likely to be rudely interrupted when the market re-opens on Monday.

Today’s main focus will, of course, be the US labour market report this afternoon. However, in the euro area this morning BTPs are unperforming after the government finally last night released the economic and fiscal arithmetic underpinning its plans to increase the budget deficit to 2.4% of GDP next year. As had been suggested by the comments of various officials over the past couple of days, the government will now target a slight decline in the deficit ratio to 2.1% and 1.8% in 2020 and 2021 respectively. But that improvement is predicated on an unrealistic forecast of an acceleration in GDP, with growth predicted to pick up from 1.2%Y/Y this year to an average of 1.5%Y/Y in the coming three years (versus average growth of close to 1.0%Y/Y on unchanged policy), overlooking the adverse impact on demand of the higher yield environment that will result. As such, the planned deterioration in the underlying health of the public finances is marked: the structural deficit is forecast to rise from 0.9% of GDP this year to 1.7% of GDP in each of the coming three years, having been projected to decline close to zero by 2021 on unchanged policy. And so, if and when (as we expect) economic growth falls some way short of the government’s plans, the headline budget deficit would seem highly likely to trouble the Stability and Growth Pact’s key 3% of GDP threshold. Certainly, the government’s plans are not what the doctor ordered.

Ahead of Monday’s national holiday, the local focus in Japan today was on the household sector with the release of new reports on the performance of consumer spending and labour incomes for the month of August.

Turning first to consumer spending, of particular interest was the release of the BoJ’s Consumption Activity Index, which as an indicator of private consumption spending is bettered only by the slightly less timely Cabinet Official Synthetic Consumption Index. The BoJ’s index – which is constructed using both demand- and supply-side indicators – fell 0.1%M/M in real terms in August – a soft result that was compounded by a 0.3ppt downward revision to growth in July (which is now flat on June). Even so base effects meant that annual growth picked up to 0.6%Y/Y from a downwardly revised 0.3%Y/Y in July. While spending on durables rose 0.6%M/M, spending on non-durables fell 0.6%M/M. Meanwhile, the travel-adjusted real index – which conceptually aligns most closely with the national accounts measure of private consumption by removing the (growing) net spending of tourists – also fell 0.1%M/M following a July outcome that was revised down 0.4ppts to just 0.1%M/M. As a result, the average level of spending across July and August is now just 0.1%Q/Q above the average level in Q2. At face value this suggests that consumer spending is unlikely to be a significant positive driver of GDP growth in Q3. Moreover, even after today’s downward revisions to the BoJ’s index, we note that the Cabinet Office Synthetic Consumption Index still points to a much weaker picture in July. As a result, we will await the latter’s August reading – likely released sometime next week – with some interest.

Today also saw the release of MIC’s household spending and income report for August. After adjusting for a discontinuity caused by changes undertaken to the survey at the beginning of this year, in sharp contrast to the BoJ’s spending indicator, MIC reported that real spending amongst two-or-more person households rebounded 3.5%M/M in August lifting annual growth to 2.8%Y/Y – an outcome that was well above market expectations and tallied more closely with the stronger retail sales figures released a week ago. Core spending – which excludes housing, auto sales and certain other expenditures – rose 3.0%M/M and 1.9%Y/Y. However, it is again worth noting that the household survey measure of spending is an inconsistent predictor of the national accounts measure of private consumption, and this has been especially so in recent times.

Elsewhere in the MIC survey it was reported that real disposable income for workers’ households fell 0.9%Y/Y in August after being down 2.0%Y/Y in July. But at face value, somewhat more positive news on workers’ incomes was provided by the MHLW’s release of the preliminary Monthly Labour Survey results for August. While growth in total labour cash earnings (per person) slowed to 0.9%Y/Y from 1.6%Y/Y previously – an outcome that was somewhat below market expectations – all of that slowdown was attributable to the usual volatility in bonus payments. Indeed bonus payments declined 7.4%Y/Y in August, in contrast with the 2.8%Y/Y increase reported in July. More importantly, growth in contracted earnings increased to 1.3%Y/Y from 1.1%Y/Y in July – now just 0.1ppts below the 21-year reached in May. Growth in scheduled earnings (i.e. ordinary time) increased to 1.4%Y/Y from 1.0%Y/Y in July, marking a new 21-year high for this series, but growth in non-scheduled earnings (i.e. overtime) slowed to 1.0%Y/Y from 1.6%Y/Y previously. The preliminary estimates suggest that scheduled earnings of part-time workers rose 2.8%Y/Y on a per hour basis – the faster pace since June last year. Growth in scheduled monthly wages for full-time workers was stable at 1.2%Y/Y for a third consecutive month. After allowing for inflation, real total cash earnings fell 0.6%Y/Y in August, marking the first decline since April.

That said, as always, we caution that the preliminary wage and employment estimates from the Monthly Labour Survey can be subject to substantial revision in due course. And unfortunately, this survey has also been subject to sample changes this year that have introduced some additional uncertainty about the actual pace of wages growth in Japan. Taking a matched sample of business respondents, growth in total labour cash earnings (per person) was steady at a slightly lower 0.8%Y/Y and growth in scheduled earnings increased slightly to 0.7%Y/Y – the latter just half the pace of the full sample equivalent.

Elsewhere in the survey, the number of regular employees rose 0.1%M/M in August – the same as in July – leaving annual growth steady at 1.3%Y/Y (and slightly lower than the 1.6%Y/Y increase in employment measured in the more comprehensive household survey). The number of full-time employees rose 1.0%Y/Y, up from 0.7%Y/Y in July. Growth in part-time employment slowed to 2.3%Y/Y from 2.9%Y/Y previously. As usual we would treat this finding with caution given the marked tendency for subsequent revisions to boost part-time employment at the expense of full-time employment. Finally, after declining over the prior two months, aggregate hours worked (per person) were reported to have rebounded 1.6%M/M in August and so were up 0.4%Y/Y.

Euro area:
Ahead of the coming week’s euro area industrial production figures, this morning brought further insight into the performance of Germany’s manufacturing sector in Q3 with the latest factory orders figures. And these beat expectations with total orders up 2%M/M in August. With domestic orders having slipped back, the increase was more than fully accounted for by a near-6%M/M rise in overseas orders on the back of an 11%M/M increase in new orders from countries outside the euro area (orders from elsewhere in the euro area were, however, down 2.2%M/M). When excluding major orders, they were up more than 3%M/M, having been down 2.0%M/M on that basis in July. Indeed, there were notable declines in orders in each of the previous two months. And on average in the first two months of Q3, total orders were 1.8% lower than the average in Q2 indicating another weak showing from Germany’s manufacturers last quarter and a continued tepid outlook for the sector too. Indeed, today’s manufacturing turnover figures – which typically closely align with manufacturing output – were again disappointing, showing a rise of just 0.2%M/M in August suggesting that the production figures due to be published on Monday will again report a subdued outturn that month.

Today will also bring Italian retail sales figures for August, which are expected to show an increase of just 0.1%M/M, reversing the decline in July but leaving sales up just 0.2%Y/Y, a tepid performance that would tally with the recent deterioration in economic sentiment in Italy and illustrate the unlikelihood of the acceleration of growth anticipated in the government’s forecasts.

Focus in the UK today will be Q2 unit labour cost numbers of significant interest to the BoE as it tries to gauge the impact of the tight jobs market on the inflation outlook. Total unit labour costs in Q1 rose 3.1%Y/Y, the most since Q413, and a further increase today would support the BoE’s view that domestically generated price pressures have risen despite the UK’s mediocre economic growth performance, upping the probability that the MPC will feel the need to tighten policy again sooner rather than later.

All eyes today will be on the September labour market report. Following the non-manufacturing ISM showed the employment component rising to a record high earlier in the week and a decent ADP employment showing, expectations are for another solid increase in non-farm payrolls circa 185k, which could see the unemployment rate return to its cyclical low of 3.8%. And, after last month’s upside surprise, there will be great interest in developments in average hourly earnings (a high base effect will likely see a temporary decline in annual wage inflation from the 2.9%Y/Y growth recorded in August). The impact of Hurricane Florence represents an additional source of uncertainty. The full trade report for August, which will show a widening in the deficit as flagged by the preliminary goods figures, and consumer credit data for August will also be released.

Australia’s retail sales rose 0.3%M/M in August, just a notch above market expectations, following an unrevised flat reading in July. Favourable base effects meant that annual growth picked up to 3.8%Y/Y from 2.9%Y/Y previously. Following a soft July, spending picked up at department stores and at stores selling household goods and apparel, and continued to rise at cafes and restaurants and at other retail stores. Given this outcome, the average level of spending over July and August is running 0.5% above the average through Q2. This leaves spending on track for positive growth in Q3, but growth in volumes will likely fall well short of that reported in Q2 (1.2%Q/Q).

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