Morning comment: Japan activity, Aussie CPI & euro area surveys

Chris Scicluna
Emily Nicol
Mantas Vanagas

Favourable earnings reports propelled the S&P500 to a 0.9% gain on Tuesday, stretching the year-to-date advance to 17.0% and leaving the index at a new record high. Other US assets were also in vogue, with the US dollar firming and the 10-year Treasury yield falling 2bps to 2.57% (and subsequently drifting towards 2.55% in Asian trading today). Notwithstanding Wall Street’s exuberance, equity markets in the Asia-Pacific region have mostly lost ground today. Ahead of tomorrow’s BoJ Board meeting announcements – which we assume will see all key policy parameters left unchanged – Japan’s TOPIX fell 0.7% with JGB yields also nudging lower. Similarly, South Korea’s KOSPI fell 0.9%. However, in China, earlier losses were reversed in the afternoon session with the CSI 300 currently up slightly on the day, perhaps supported by news that US-China trade talks would continue in Beijing next week with Chinese officials to return to Washington DC to continue negotiations during the following week.

Most excitement in Asian-Pacific markets, however, was seen in Australia, where the ASX200 rose 1.0% as the Australian dollar and domestic interest rates fell sharply following a disappointingly soft Q1 CPI report – one that has sparked optimism that the RBA might ease policy as soon as 7 May (more on this below). Indeed, yields on ACGBs fell a whopping 14-16bps in the 2-5Y part of the curve and the 10Y yield fell 11bps to 1.79%, erasing a good portion of the sell-off seen over the course of this month. In the currency market the Aussie dollar lost more than half a cent against the Greenback. New Zealand’s markets reacted similarly – but less emphatically – to the Aussie news, with investors concluding that the increased likelihood of an RBA policy easing might be enough to cause the RBNZ to ease policy a day later on 8 May.

Looking ahead, today’s European data focus will be on April corporate sector surveys, with the German Ifo and French INSEE indicators likely to echo the downbeat message from last week’s flash PMIs.

The only economic report released in Japan today was the All Industry Activity Index for February. The headline index fell 0.2%M/M, in line with market expectations. And while the previously estimated 0.2%M/M decline in January was revised away – the month is now estimated to have been flat – annual growth still declined to just 0.4%Y/Y in February from 1.1%Y/Y previously. Sadly, over the January/February period activity stands 0.3% below the monthly average level recorded during Q4 – a result that adds to signs that GDP may have contracted slightly in Q1.

Within the detail, as usual the main interest today concerned developments in construction activity during the month, with developments in industrial activity (+0.7%M/M) and tertiary activity (-0.6%M/M) already reported previously. The good news is that total construction activity increased 1.5%M/M in February. While this follows a 2.1%M/M increase in January, activity was still down 1.6%Y/Y. Public construction rose 2.3%M/M in February, led by a 3.8%M/M increase in building activity, but was still down 2.9%Y/Y. Private sector construction rose 1.0%M/M for a second consecutive month, but was still down 0.7%Y/Y.

The main domestic focus today was on the release of the CPI report for Q1, which provided a substantial downside surprise in both the headline and core measures of inflation. The headline index was unchanged during the quarter – the consensus expectation had been for a 0.2%Q/Q increase – so that annual inflation fell a greater-than-expected 0.5ppts to a 2½-year low of 1.3%Y/Y. Key upward contributions were made by vegetables (up 7.7%Q/Q due to adverse weather conditions), seasonal increases in secondary education fees (up 4.2%Q/Q) and motor vehicles (up 2.4%Q/Q). The largest price declines were for automotive fuel (down 8.7%Q/Q), domestic holiday, travel and accommodation (down 3.8%Q/Q) and international holiday, travel and accommodation (down 2.1%Q/Q). Non-tradeables prices rose 0.4%Q/Q, lowering annual inflation for this indicator of domestic inflation by 0.6ppts to 1.8%Y/Y. Tradeables prices fell 0.6%Q/Q and were up just 0.4%Y/Y.

Most importantly for monetary policy, both of the RBA’s favoured statistical measures of core inflation – the trimmed mean and weighted median – were very weak as well and inconsistent with inflation moving back inside the RBA’s 2-3% target band. The weighted median was especially soft, rising just 0.1%Q/Q – 0.3ppts below market expectations. And with a slight downward revision weighing too, growth in the annual weighted median slowed to 1.2%Y/Y – 0.4ppts below market expectations. The trimmed mean – which the RBA gave greater prominence to in the last Statement on Monetary Policy – increased a slightly firmer 0.3%Q/Q, with Q418 revised up 0.1ppts to 0.5%Q/Q. However, annual inflation on this measure slowed 0.2ppts to 1.6%Y/Y – an outcome that was still 0.1ppts below market expectations. The RBA’s last published forecast predicted that the trimmed mean would rise 1.8%Y/Y in Q219. Meeting that forecast will now require a 0.6%Q/Q increase in Q219 – a move of that magnitude was last recorded in Q415.

Market reaction to the CPI report has been substantial, with the market now pricing slightly more than a 50% chance of a 25bp rate cut at the next RBA policy review on 7 May – up from just over a 10% chance when markets had closed on Tuesday. Given the resilience of the key labour market indicators, together with somewhat improved global sentiment of late, this change in pricing seems a little aggressive. Looking ahead, the only important domestic data released between now and the RBA’s decision is the retail sales report for March, released just 3 hours before the RBA’s scheduled announcement.

In other news, the DEWR internet job vacancies trend index fell 1.5%M/M in March, leaving the index down 3.8%Y/Y. However, perhaps fuelled by increased talk of rate cuts, the weekly ANZ-Roy Morgan consumer confidence index rose 4.2pts to 119.5 – the highest reading since early December. Within the detail the largest increases were seen in indices measuring consumers’ perception of the 5-year ahead outlook for the economy and the year-ahead outlook for their own financial situation.

Euro area:
Following yesterday’s disappointing European Commission consumer sentiment release – with the headline index unexpectedly declining for the first month in four and by 0.7pt to -7.9 to match the level at the start of the year – the flow of sentiment surveys has turned to the corporate sector today, with the German Ifo and French INSEE business sentiment surveys for April. Tallying broadly with last week’s flash PMIs, the French survey – just released – suggested that overall conditions remained broadly stable at the start of Q2, with the headline index moving sideways at 105 in April, comfortably above the long-run average and the highest level since November. Sentiment in the services sector was little changed too, with the index similarly at 105, while retailers were a touch more upbeat (with the relevant index rising 2pts to 105). But French manufacturers were more downbeat in April, with the headline index falling for the first month in four and by 2pts to 101, its lowest level since June 2016. This weakness in part reflected a marked deterioration in production that month, while overall order books remained subdued. While today’s survey suggested that conditions remained more favourable than average in the main sectors, the survey’s turning-point indicator took a notable turn for the worse in April suggesting a downside skew to the risks to the economic outlook over the near term.

Supply-wise, Germany will sell 10Y Bunds today.

MPs’ return to Parliament yesterday from their Easter break has failed to provide any greater clarity with respect to the Government’s intentions for Brexit or Theresa May’s future as Prime Minister. Certainly, while Tory MPs are increasingly agitating to remove May from office over her handling of Brexit, last night’s 1922 Committee meeting of Conservative backbenchers failed to reach agreement on whether to amend the party rules to allow a new challenge to Theresa May’s leadership sooner than December. Further talks on the issue will be held today. However, even if the senior Tories do decide to change their rules to allow a challenge to May that might, by the autumn, result in her replacement with a populist Hard Brexiter such as Boris Johnson, the Parliamentary arithmetic – which is clearly opposed to the no-deal Brexit that such a new leader might espouse – won’t change.

Likewise, while the talks between the Government and Labour leadership continue to go nowhere, the Parliamentary arithmetic also remains firmly against May’s deal. So, while reports suggest that – in a last-ditch attempt to avoid UK participation in the European Parliament elections – the Prime Minister might next week introduce to Parliament the Withdrawal Agreement Bill that would seek to implement the Withdrawal Treaty if it was ever signed, we strongly doubt that this will find the necessary majority among MPs. Indeed, with just 16 sitting days of Parliament between today and the European Parliament elections on 23 May, it seems entirely fanciful to believe that such contentious legislation – involving, for example, the nuts and bolts of the Irish border backstop and the Brexit divorce bill – could find approval in the House of Commons before polling day, not least given that the Withdrawal Agreement was rejected by a majority of 58 MPs in the third meaningful vote on 29 March. So, UK participation in the European parliament elections will not be avoided. And the inevitable dire performance of the Tories in those ballots will no doubt take May one step closer to her departure from Downing Street, regardless of what the 1922 Committee decides today.

Data-wise, it should be another relatively quiet day for UK releases, with just March public finance figures. These figures are likely to show that public sector net borrowing (PSNB) rose slightly in March, leaving the full fiscal-year figure at roughly £23.5bn, only a touch higher than the OBR’s most recent forecast and around £18bn lower than in FY17/18.

Following the upwards surprise to yesterday’s new home sales figures, which rose 4.5%M/M in March to record the second highest level in this business cycle, it should be a quiet day for economic news in the US with just weekly mortgage applications numbers due for release, while the Treasury will sell 2Y floating-rate notes and 5Y fixed-rate notes.

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