Morning comment: Japanese IP drops again

Chris Scicluna
Emily Nicol
Mantas Vanagas

The S&P500 closed flat on Thursday amidst a mixed set of corporate earnings reports and despite a much stronger-than-expected durable goods orders report for March – the latter adding to other signs that today’s national accounts might reveal a small lift in GDP growth in Q1 despite the negative impact of the partial government shutdown early in the quarter. The US dollar drifted slightly higher, as did US Treasury yields with the 10Y rising 1bp to 2.53%. However, Intel stock fell 7% in extended trading after the company reduced its Q2 and full-year earnings forecasts to levels that were well below market expectations, with the company noting that its clients were working their way through bloated inventories.

Intel’s news has weighed on US equity futures and contributed to a materially weaker tone across most Asian equity markets. In Japan, where investors had a wealth of economic data to digest – including yet another disappointing IP report – before departing for an extended Golden Week holiday, the TOPIX made some late gains to limit today’s losses to just 0.25% while the 10Y JGB yield fell about 1bp to -0.045%, reversing yesterday’s gain related to the BoJ’s policy announcements. China’s CSI300 fell more than 1% on a day in which President XI pledged not to pursue a yuan depreciation that would harm other countries. Stocks fell slightly less than that in Taiwan and South Korea, while markets in Singapore and Australia were little changed. In New Zealand the Kiwi firmed slightly after some relatively positive comments about the economy were made in a local newspaper article by RBNZ Governor Adrian Orr – comments that were later followed by news of a lift in consumer sentiment and a record month for exports.

An extremely busy day in Japan has seen the release of a large number of economic reports covering developments in both activity and prices. In summary the activity data was very mixed – the aforementioned IP report being the clear ‘lowlight’ – but the BoJ did receive some better-than-expected news regarding inflation.

As far as activity is concerned the main focus today was the IP report for March. Unfortunately, output fell 0.9%M/M – a considerably worse outcome than the flat result that the market had expected. This more than erased the unrevised 0.7%M/M pickup that occurred in February following the 2.5%M/M slump registered in January. As a result, in headline terms output was down 4.6%Y/Y when calculated using the unadjusted series, and down 3.0%Y/Y when calculated using the seasonally-adjusted series. Sadly, this also means that output fell 2.6%Q/Q during Q1 – marking the worst quarter since Q214, when output slumped after the last consumption tax hike – which will weigh heavily on overall GDP growth when the provisional national accounts for Q1 are released on 20 May. 

Within the detail, production of capital goods fell 2.4%M/M and 8.4%Y/Y. In a similar vein, production of durable consumer goods fell 3.1%M/M and 5.8%Y/Y while production of construction goods fell 2.8%M/M and 2.9%Y/Y. Production of non-durable consumer goods bucked the general trend with a 0.3%M/M increase in March and was up 0.2%Y/Y. With respect to the key export-oriented sectors, output of production machinery declined an especially severe 6.7%M/M and 12.1%Y/Y, while production of electronic parts and devices rebounded 5.8%M/M – the first increase since October – but was still down 8.5%Y/Y. Production of electrical machinery and ICT equipment increased 0.7%M/M but was still down 6.3%Y/Y. Meanwhile, production of motor vehicles declined 3.4%M/M – erasing the rebound recorded in February – and was down 6.8%Y/Y.

Elsewhere in the report, aggregate shipments fell 0.6%M/M in March and were down 3.3%Y/Y. Shipments fell across all major use categories, including non-durable consumer goods and capital goods once the impact of transport items is excluded. Inventory levels increased a very unwelcome 1.6%M/M and were still up 0.4%Y/Y. Inventories of capital goods rose an especially large 3.0%M/M – and an even larger 5.1%M/M once transport items are excluded – and were up 1.3%Y/Y. Of note, inventories of production machinery increased 3.2%M/M despite the cutback in output during the month while inventories of business-orientated machinery rose an even steeper 7.3%M/M. By contrast, inventories of motor vehicles fell 2.3%M/M and 10.1%Y/Y. Finally, the overall inventory-shipments ratio increased 1.7%M/M in March and was up 3.5%Y/Y – an outcome that continues to bode poorly for production, at least in the near term. Over the past year the inventory-shipments ratio has declined in the non-durable consumer goods sector, but climbed steeply in the consumer durable goods and capital goods sectors.

Understandably, in describing the performance of the sector, METI chose to downgrade its assessment, replacing last month’s unduly charitable suggestion that “Industrial production is pausing” with the more realistic observation that “Industrial production is in a weak tone recently”. METI’s latest survey of manufacturers did point to an expectation of some improvement in activity over the next couple of months, with firms forecasting a 2.7%M/M increase in output in April – down slightly from the 2.9%M/M increase that was forecast last month – and a further 3.6%M/M increase in output in May. But firms’ forecasts tend to be too optimistic – last month they had forecast a 1.3%M/M increase in output in March – so these forecasts need to be taken with a pinch of salt, especially in light of the ongoing weakness seen in the manufacturing PMI. Indeed, correcting for the usual over-optimistic bias, METI expects firms’ upbeat forecast for April to translate into a 0.5%M/M decrease in output when these figures are released next month.

Moving on, today METI also released news on retail sales during March. Total spending increased 0.2%M/M – slightly above market expectations, with growth in February also revised up 0.2ppt to 0.4%M/M. Spending on motor vehicles slumped 5.8%M/M, while spending on apparel fell 1.6%M/M. Fortunately, spending on household machines rebounded 2.5%M/M, while and spending on food and beverages increased 1.7%M/M and spending on general merchandise increased 0.8%M/M. Even given today’s slight upside surprise, retail spending fell 1.3%Q/Q in Q1. However, the retail sales figures are not the best indicator of private consumption which, while looking soft, is unlikely to be anywhere near as weak as that. A better gauge will come after the Golden Week holiday when the BoJ will release its Consumption Activity Index for March (13 May), while the Cabinet Office’s Synthetic Consumption Index will likely make an appearance a week or so later.

Turning to the construction sector, following on from the midweek report of a lift in activity in February, MILT reported that the number of housing starts increased a further 2.3%M/M in March – an outcome that was stronger than the market had expected and caused annual growth to increase to 10.0%Y/Y from 4.2%Y/Y previously. The number of starts still fell 1.3%Q/Q in Q1, reflecting the particularly soft reading seen back in January.

Moving to the labour market, the household survey pointed to a strong 180k increase in employment in March, bringing the total increase across Q1 to 350k – remarkably robust considering the underlying performance of the economy (a phenomenon not at all unique to Japan). Nonetheless, annual growth in employment slowed slightly to 1.0%Y/Y in March – just half as strong as the lift in employee numbers reported in the MHLW’s somewhat suspect February Monthly Labour Survey released earlier this week. Compared with a year earlier the largest lift in employment occurred in the healthcare/welfare and education sectors, whereas the manufacturing and professional/technical services sectors were the largest drag. In unadjusted terms the employment rate (i.e. the proportion of the working-age population in employment) increased 0.3ppt to a 4-month high of 60.3%.

With the labour force participation rate also increasing, the labour force increased a further 330k in March and was up 1.0%Y/Y. As a result, the unemployment rate increased 0.2ppt to 2.5%, erasing the surprising decline that had been recorded in February. Somewhat surprisingly, the female unemployment rate remained at just 2.2%, whereas the male unemployment rate increased 0.3ppt to an 11-month high of 2.8%. Separately, the MHLW reported that the effective job offer-to-applicant ratio remained steady at 1.63x for a fifth consecutive month in March (just below the four-decade high recorded back in September). However, the number of outstanding job offers fell 0.5%M/M, while the number of new job offers fell 4.0%M/M – the latter erasing growth that had been recorded over the previous two months. These series warrant monitoring for potential further weakness in coming months.

Finally, the advance CPI for the Tokyo area for April provided some better news for the BoJ, with all of the key aggregates printing well above market expectations. The seasonally-adjusted headline index increased 0.3%M/M – albeit the first increase since January – causing annual inflation to rise a greater-than-expected 0.5ppt to a 7-month high of 1.4%Y/Y. While this partly reflected a 1.4%M/M rebound in the price of fresh food, the ‘BoJ forecast’ core index (which excludes fresh food) still increased a solid 0.2%M/M, unexpectedly lifting annual inflation on this measure to 1.3%Y/Y – the highest reading since October 2008 when the period associated with the 2014 consumption tax hike is excluded. The BoJ’s preferred measure of core prices – which excludes both fresh food and energy – also increased 0.2%M/M in April, lifting annual inflation on this measure by 0.2ppt to a more than three-year high of 0.9%Y/Y. And when excluding all food and energy, core inflation rose 0.2ppt to 0.9%Y/Y, the highest rate since June 1998. As far as other key aggregates are concerned, after excluding fresh food, annual goods inflation picked up 0.1ppt to 2.0%Y/Y. Inflation in the service sector – which one might expect would respond most readily to persistent extreme tightness in the labour market – increased 0.2ppt to 0.8%Y/Y, which simply erased the decline reported during March.

It remains to be seen whether today’s upside surprise is more than a one-off adjustment to prices at the start of the new fiscal year. Moreover, reflecting the different characteristics of the regional economies, there have been significant differences between the Tokyo and nationwide measures of inflation over the past year, with, for example, Tokyo core CPI (excluding food and energy) averaging 0.5%Y/Y compared with the national core CPI of just 0.1%Y/Y. And the BoJ’s forecast measure of core CPI was also on average 0.2ppt lower over the same period. As such, despite today’s upside surprise, our colleagues in Tokyo expect the national measure of core CPI (excluding fresh foods) to shift lower in April, with inflation dropping 0.1ppt to 0.7%Y/Y. And not least given base effects from the oil price, as well as an anticipated downward shift in services inflation, core CPI is expected to maintain a downward trend through to October at which point the introduction of free early childhood education will also weigh on services inflation. So, when excluding the effect of October’s consumption tax hike, over the fiscal year as a whole, our colleagues in Tokyo forecast national core CPI of just 0.5%Y/Y, almost ½ppt lower that the BoJ’s updated projection.

Euro area:
Another quiet day for economic data from the euro area has already brought the only release of note in the shape of France’s INSEE consumer confidence survey for April. Contrary to expectations of a fourth consecutive monthly increase, the headline confidence index was unchanged in April. At 96, that still matched the highest level since last August, but was nevertheless still below the long-run average (100). Perhaps encouragingly, within the detail of the survey, households’ assessment of their future personal situation picked up further as did the share of households considering it a suitable time to make major purchases. Nevertheless, both measures remain below their respective long-run averages.

Of course, the recent gradual improvement in household confidence reflects in no small measure the loss of momentum of the Gilets Jaunes protests, and – related to that – the decision of President Macron to respond to those protests. And the culmination of Macron’s “Grand débat national” consultation to identify a new way forward for policy saw the President yesterday evening attempt to re-boot his Presidency with a raft of new proposals. As expected, the measures included income tax cuts (supposedly amounting to €5bn) and indexation of state pensions for those on low incomes, as well as – among other things – moves to promote a more equitable society including a shift to proportional representation in parliament, more powers devolved to regional and local governments, new consultations on how to ensure policy responding to climate change doesn’t hit those on lower and middle incomes, limits on primary school class sizes and the abolition of the Ecole Nationale d’Administration university for the elite. The initial response of the French public seems to have been one of scepticism, with a snap poll published in Le Figaro suggesting that 63% found Macron unconvincing.

Looking ahead to the rest of the day, Finnish central bank Governor Olli Rehn – a leading candidate to take over from Mario Draghi as ECB President in the autumn – will speak publicly about monetary policy later this morning. Late in the day, S&P will announce the outcome of its review of Italy’s sovereign credit rating (currently on BBB with a negative outlook). And the weekend will bring Spain’s general election, which will see the current ruling Socialist Party increase significantly its number of seats in parliament to overtake the ailing right-wing Partido Popular as the number one party. However, the Socialists are likely to fall some way short of a majority, probably also even if it attempts an alliance with the populist Podemos, and so lengthy talks to try to form a government are likely to ensue. Indeed, stable government might well remain elusive, and a further election might be required to try to break the deadlock in the autumn. However, with Spanish economic growth set to be well maintained and the government deficit having fallen further than expected to 2.5% of GDP last year, markets should be able to be patient.

Following yesterday’s CBI Distributive Trades survey, which signalled sluggish retail sales growth at the start of the second quarter, today will bring the CBI’s Industrial Trends survey, which is expected to similarly indicate weak conditions in the manufacturing sector in April. The UK Finance lending figures for March are also due.

In the US, the highlight today will be the advance estimate of Q1 GDP. While several components of domestic demand are likely to be relatively subdued, positive contributions from net trade and inventories are likely to result in growth slightly above the 2.2%Q/Q annualised rate in Q4. The pricing indices of the national accounts will likely be soft, however, with the core PCE deflator down to below 1½%Q/Q ann. The final University of Michigan consumer confidence survey for April will also be released.

The release of Australia’s regular set of quarterly pricing indicators concluded today with the release of information on producer and external sector prices during Q1. The overall finished goods PPI rose 0.4%Q/Q and 1.9%Y/Y, while the PPI for domestic goods rose 0.4%Q/Q and 1.7%Y/Y – the latter slightly firmer than the rate of core CPI inflation reported back on Wednesday. In other news, the ABS reported that export prices rose a further 4.5%Q/Q in Q1 – underpinning the large trade surpluses reported during the quarter – while import prices fell 0.5%Q/Q. Compared with a year earlier export prices rose an impressive 15.3%Y/Y, whereas import prices rose 5.2%Y/Y – the latter largely explained by the weakening of the Aussie dollar over the period.

New Zealand:
New Zealand reported a merchandise trade surplus of NZD922mn in March – an outcome that was almost NZD800mn more favourable than the market had expected. After allowing for usual seasonal effects, the March outcome equated to an underlying surplus of NZD201m – the first surplus recorded in 15 months. There were large surprises on both sides of the ledger this month. Exports jumped almost 12%M/M, lifting annual growth to 18.7%Y/Y, with exports of dairy produce rising 22%Y/Y, meat rising 30%Y/Y and fruit rising more than 40%Y/Y. By contrast, imports declined 1.3%M/M and were down 3.5%Y/Y, weighed down by capital transport items and passenger cars – which had been very high in March last year – and reduced imports of crude oil. Given these outcomes, exports rose 2.6%Q/Q in Q1 while imports fell 1.4%Q/Q, suggesting that net merchandise exports will make a positive contribution to GDP growth during the quarter.

In other news, the ANZ-Roy Morgan consumer confidence index increased 1.1%M/M to 123.2 in April – the best reading in 13 months and a little above the average for the survey. Views regarding the economic outlook were actually slightly less upbeat, but a very strong 46% of respondents indicated that it was a good time to buy major household items – a response that might reflect the substantial discounting that was evident in last week’s soft CPI report.



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