Morning comment: China GDP, Japan trade & CPI from EA, UK & NZ

Emily Nicol & Mantas Vanagas

The focus for investors in Asia today has been on the latest macro data out of China, which indicated a lift in activity in March that was sufficient to leave Q1 GDP growth unexpectedly steady at 6.4%Y/Y (more on these figures below). Even so, equity markets have generally increased only modestly across the region, with investors perhaps surmising that today’s data will cause China’s policymakers to curtail planned stimulus. Indeed, in China the CSI300 was unchanged on the day, with stocks also down slightly in Hong Kong. In Japan the TOPIX firmed 0.3% as the March trade balance surpassed expectations, albeit mostly due to weaker-than-expected imports. In New Zealand the 10-year bond yield initially fell 10bps to 1.93% and the Kiwi dropped a cent against the Greenback following a weaker-than-expected CPI report (more on this below), but these moves were halved later in the day following the release of China’s improved economic reports. Kiwi equities closed just short of this year’s highs, also buoyed later in the day by news that the Government had decided not to proceed with an expanded capital gains tax regime – likely reflecting the objections of a junior coalition partner.

The recent run of better-than-expected data in China continued today with the release of the national accounts for Q1 and various activity indicators for March. China’s GDP grew 1.4%Q/Q – 0.1ppt slower than the previous quarter and the slowest pace of growth registered for three years. Even so, annual growth was unexpectedly steady at 6.4%Y/Y – 0.1ppt firmer than the median estimate in Bloomberg’s survey of analysts (and even firmer than seemed likely a few weeks earlier before the release of several partial indicators). In terms of the sectoral breakdown, growth in primary sector activity slowed 0.8ppt to 2.7%Y/Y, while growth in the tertiary sector slowed to 7.0%Y/Y – the latter the slowest pace since the series was constructed in 1992. By contrast, growth in secondary (i.e. industrial) activity increased 0.3ppt to a one-year high of 6.1%Y/Y.

The monthly indicators for March cast more light on the results discussed above. Industrial production rose 8.5%Y/Y – far above the median expectation of just 5.9%Y/Y and the strongest year-on-year reading since July 2014. As a result, after declining to a ten-year low of 5.3%YTD/Y in February, year-to-date growth lifted to 6.5%YTD/Y in March – an outcome that lends credence to the surprisingly strong manufacturing PMI readings recorded for that month. Growth in manufacturing output stood at 9.0%Y/Y, up from 5½%Y/Y at the end of last year. Growth in in mining output also increased over that period (to 4.6%Y/Y), whereas growth in power generation moderated across numerous industries.

The retail sales figures for March also provided a positive surprise, with growth rising to 8.7%Y/Y from last year’s year-end outcome of 8.2%Y/Y. As a result, year-to-date growth picked up to 8.3%YTD/Y from 8.2%YTD/Y in February. Growth in non-rural fixed investment also increased 0.2ppt to 6.3%YTD/Y in March, which was in line with market expectations. The pick-up in capex was again driven by state-owned firms, where growth increased to 6.7%YTD/Y from 5.5%YTD/Y in February. Once again greater caution was exhibited by private firms, where growth in investment slowed to 6.4%YTD/Y from 7.5%YTD/Y previously. By industry, growth in investment in the education sector remained strong at 14.7%YTD/Y – double the pace recorded in the latter months of last year. Meanwhile, last year’s decline in investment in the utility sector seems to have run its course, with spending rising 0.7%YTD/Y – the first positive growth rate since December 2017. But investment in the manufacturing sector slowed to a one-year low of 4.6%YTD/Y from 5.9%YTD/Y previously.

Finally, with today’s activity figures generally firmer than expected, the urban unemployment rate fell 0.1ppt 5.2% in March from the two-year high recorded in February – an outcome still consistent with this year’s official target of “around 5.5%” but a little higher than recorded at any point in 2018.

The main domestic focus in Japan today was on the MoF’s merchandise trade report for March. In summary, the performance of exports broadly conformed to market expectations, but imports were slightly weaker than expected – an outcome that resulted in a larger-than-expected trade surplus when measured in unadjusted terms and a slightly smaller-than-expected trade deficit when measured in seasonally-adjusted terms.

Turning to the details, the value of exports fell 1.0%M/M in March after a 6.8%M/M gain in February (the latter a rebound from January’s poor result). As a result, exports were down 2.4%Y/Y, compared with the 1.2%Y/Y decline recorded in February. Taking the last three months combined – to remove the influence of regional holidays – exports fell 3.9%Y/Y in Q1, marking the worst quarterly outcome since Q316. Based on the MoF’s calculations, after adjusting for changing prices, export volumes fell 5.6%Y/Y in March. While the volume of shipments to both the US and the EU grew 0.3%Y/Y and 4.8%Y/Y respectively, exports to Asia fell 8.0%Y/Y – the latter reflecting a 15.2%Y/Y decline in exports to China (not much better than the 20.8%Y/Y decline reported in January). Meanwhile, the value of imports rose 2.1%M/M in March but was up just 1.1%Y/Y. According to the MoF’s calculations, import volumes increased an even weaker 0.4%Y/ Y in March. Given these results, the seasonally adjusted trade balance amounted to a small deficit of ¥178bn compared with a small surplus of ¥27bn in February (the latter revised down from ¥116bn reported previously).

Turning to implications for the national accounts, after adjusting for both seasonal and price effects, the BoJ estimated that export volumes had declined 1.4%M/M in March and were down 1.2%Y/Y. In addition, following some chunky but largely offsetting revisions, export volumes are now estimated to have declined 3.5%M/M in January and then increased 3.6%M/M in February. As a result, export volumes fell 1.8%Q/Q in Q1, the largest quarterly drop since Q215. On the same basis, the volume of imports increased 1.3%M/M in March and were up 2.1%Y/Y. Even so, after including the impact of revisions, imports fell 2.5%Q/Q in Q1. So, at face value, this suggests that while both exports and imports contracted in Q1, net goods exports will make a small positive contribution to GDP growth for the first time in a year.

In other statistical news, today also saw METI release the final results of the IP report for February. After taking accounting of revisions, the picture presented by the final report was not greatly different to that depicted in the preliminary release. The good news is that the slump in industrial output in January was revised to 2.5%M/M from 3.4%M/M previously. However, from that improved base, output increased a revised 0.7%M/M in February – down from the 1.4%M/M gain that had been estimated previously. As a result, output fell 1.1%Y/Y in February – 0.1ppt weaker than the preliminary estimate. Assuming no more than modest growth in March, output remains on track to decline about 2.0%Q/Q in Q1. Elsewhere in the report, the final figures indicate that aggregate shipments increased 1.6%M/M in February but were still down 0.3%Y/Y. Inventory levels increased 0.4%M/M and were up 1.4%Y/Y, while the inventory-shipments ratio rose 0.5%M/M and 1.9%Y/Y. Firms’ operating rate (capacity utilisation) rose 1.0%M/M but was down 1.8%Y/Y, while firms’ production capacity declined 0.3%Y/Y despite ongoing investment activity.

Finally, with the BoJ’s next Policy Board meeting and Outlook Report just a week away, today the BoJ released the latest edition of its semi-annual Financial System Report – analysis that, in the current context, will have some bearing on any consideration that might be given to easing monetary policy further if upwards inflation momentum is judged to have been lost. The report noted that financial intermediation, particularly bank lending, has continued to be active, with domestic loan interest rates hovering near historically low levels and loans outstanding continuing to grow around 2½%Y/Y. It was noted that Japanese financial institutions had maintained upward momentum in their overseas exposure, particularly through lending and investment in overseas credit products such as highly rated CLOs and investment-grade corporate bonds. Against this backdrop, the Bank concluded that financial and economic activity has generally shown no signs of overheating as compared to the bubble period in the late 1980s. That said, the Bank did note rapid growth in real estate loans – with the deviation of the real estate loans to GDP ratio from trend reaching a record high for the post-bubble period – so that vulnerabilities related to this activity warrant close attention. For example, the Bank mentioned that the increase in loans has been mainly driven by those to small firms and rental housing businesses run by individuals and the financial institutions extending such loans tend to have relatively low capital adequacy ratios.

On balance, once again the BoJ concluded that Japan’s financial system “has been maintaining stability on the whole”, with financial institutions capital and liquidity generally assessed as being resilient in the face of a tail event like the Lehman Brothers failure. That said, the BoJ did note that the profitability of domestic deposit-taking and lending activities has continued to decline. According to the Bank’s analysis, this seems to be mostly caused by structural factors such as the decrease in growth expectations and the secular decline in loan demand associated with the shrinking population, as well as the prolonged low interest rate environment. In addition, the Bank made a point of noting that regional financial institutions had become more active in domestic lending to middle-risk firms and the real estate industry, as well as in securities investment, causing their capital adequacy ratios and stress resilience to decline moderately, so that downward pressure on the real economy from the financial system could intensify in the event of stress.

Further information on financial sector intermediation will come with the release of the quarterly Senior Loan Officer Opinion survey on Friday.

Euro area:
Today will bring the final estimate of March euro area inflation. With the final estimates from Germany, France and Spain last week having aligned with the flash readings, the final aggregate inflation data should also match the earlier readings of 1.4%Y/Y for the headline rate (down 0.1ppt from February) and 0.8%Y/Y for the core rate (down 0.2ppt). Today will also bring the latest euro area trade and balance of payments figures for February, with the former expected to show that the value of exports declined in February in line with developments in Germany. But with imports also likely to be weaker, we might well see the trade surplus widen slightly that month.

With respect to domestic demand, the latest new car registration numbers for March, just released, suggested a further dip in car sales. The euro area reported a drop in its annual growth rate by almost 3ppts to -4.4%Y/Y, the seventh consecutive decline. And the major member states also continued to report a fall in year-on-year growth, with Italy showing the biggest decline of nearly 10%Y/Y. But the ongoing contraction in the new cars market in Europe to a large extent represents payback after the surge in sales ahead of the introduction of new emission testing standards last September. And, when adjusting for monthly volatility, euro area growth continues to improve gradually – the decline in Q1 of 3.9%Y/Y was only around half of that in Q4. Moreover, the seasonally adjusted figures published by the ECB – and due later today – will also indicate a strong quarterly showing in Q1 even if new registrations report a drop in March. Indeed, in the first two months of the year, new car registrations were trending more than 8½% higher than the average in Q4.

Supply-wise, Germany will sell 25Y bonds.

Like in the euro area, today will bring the latest UK inflation figures for March. While the headline CPI rate ticked higher in February to 1.9%Y/Y, this was driven solely by higher energy prices as the core inflation rate decreased by 0.1ppt to 1.8%Y/Y. We expect that both headline and the core inflation will have remained unchanged. This morning will also bring the latest ONS official house price index, which is likely to show a further moderation in annual price growth in February.

In the US, this afternoon will see the release of February’s trade report, which is expected to show a modest widening in the budget deficit in part reflecting a boost to the value of imports from higher prices of crude oil. Today will also bring wholesale inventories figures for the same month.

New Zealand:
The main focus in New Zealand today was the CPI report for Q1 – one of the last important data releases ahead of the next RBNZ monetary policy review on 8 May. As it turns out the headline CPI rose just 0.1%Q/Q – and was unchanged after allowing for seasonal factors – so that annual inflation fell to 1.5%Y/Y from 1.9%Y/Y previously – now some distance below the midpoint of the RBNZ’s 1-3% target range. This outcome was 0.2ppt below market expectations and – more importantly – 0.1ppt below the forecast made by the RBNZ in the last Monetary Policy Statement released back in February.

Within the details, non-tradables prices rose a comparatively strong 1.1%Q/Q, lifting annual inflation for this group of mainly services by 0.1ppt to a five-year high of 2.8%Y/Y – an outcome that was in line with the RBNZ’s expectations. Seasonal tax increases for tobacco (up 9.0%Q/Q) and seasonal increases in education fees (1.6%Q/Q) contributed to this result, while housing-related prices rose a more subdued 0.6%Q/Q. The key surprise today was a larger-than-expected 1.3%Q/Q decline in prices for tradables. This group of mainly goods was down 0.4%Y/Y, compared to the 0.1%Y/Y decline that the RBNZ had forecast in February. Within the detail petrol prices fell 7.0%Q/Q, reflecting the hangover from the sharp decline in crude oil prices late last year. Also of note was a 6.7%Q/Q decline in prices for furniture and furnishings. While this might reflect weakness in the housing market, prices for household appliances increased a contrasting 2.7%Q/Q.

Measures generally suggest that core inflation is tracking slightly below the target midpoint. The 30% trimmed mean rose 0.4%Q/Q while the trimmed mean of annual prices movements edged down to 1.9%Y/Y from 2.0%Y/Y previously. The weighted median also rose 0.4%Q/Q while the weighted median of annual price movements rose a steady 2.2%Y/Y. Importantly, the RBNZ’s favoured model-based estimate of core inflation – the so-called “sectoral factor model” – was steady at 1.7%Y/Y for a fourth consecutive quarter – a 7-year high but the recent lack of continued upward momentum will doubtless disappoint the RBNZ. The sectoral factor model estimate of core inflation in the non-tradables sector was steady at 2.8%Y/Y for a third consecutive quarter. Finally, the RBNZ’s alternate “factor model” estimate of core inflation declined 0.1ppt to 1.7%Y/Y.

Going into today’s release the market was factoring slightly less than a one-third chance of a 25bp policy easing on 8 May – pricing that has now been boosted to slightly better than a 50/50 prospect of a rate cut. Whether the RBNZ opts to ease policy as soon as 8 May will depend crucially on the outcome of the Q1 labour market report released on 1 May and whether the recent slight improvement in global sentiment – not least regarding prospects for China’s economy – proves more than fleeting.

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