Morning comment: Japanese spending & wages, German IP & Brexit flextension

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
While positive headlines regarding progress made towards a trade deal with the US continued to flow yesterday, that news seems to have already been fully factored into Wall Street, with the S&P500 eventually closing up just 0.2% on a day devoid of much other economic news. US Treasury yields were just a smidgen lower, along with European bond yields, after the account of the ECB’s last Governing Council meeting confirmed the Bank’s understandably dovish disposition.

Today in Asia there have been further favourable headlines concerning progress towards a US China trade deal, albeit with some disagreement over when the final terms might be agreed. While Xinhua reported that President Xi was keen to press ahead as soon as possible, President Trump told reporters that there was still “a way to go”, albeit the two sides were “rounding a turn” to a deal that could be “very monumental”. Markets were closed today for holiday in mainland China, Hong Kong and Taiwan. In Japan investors shrugged off a surprisingly weak set of wage data in the Monthly Labour Survey (see below for more details) so that the TOPIX still rose 0.4%. Markets were also slightly firmer in Singapore and South Korea but again weaker in Australia. 

In Europe, meanwhile, sterling initially took some support from reports that European Council President Donald Tusk has proposed a twelve-month ‘flexible’ extension to the Brexit date, with the ability to leave sooner if the UK Parliament ratify a deal, with expectations that EU leaders will approve something along these lines at their Summit next Wednesday. And the mood might also benefit from the more positive German IP report released earlier this morning (more details below). 

Japan:
Today’s Japanese dataflow concerned consumer spending and labour incomes for February. Regarding the former, most importantly the BoJ released its Consumption Activity Index. The BoJ’s index – which is constructed using both demand- and supply-side indicators – declined 0.3%M/M in real terms following an unrevised 0.2%M/M increase in January. Annual growth slowed 0.1ppt to 1.0%Y/Y, with annual growth in January revised lower due to a downward revision to monthly growth in December. Within the detail, spending on durable goods fell 1.6%M/M following a similar decline in January, while spending on non-durable goods and services was just slightly lower. Meanwhile, the travel-adjusted real index – which conceptually aligns most closely with the national accounts measure of private consumption by removing the net spending of tourists – fell 0.2%M/M in February, erasing the increase recorded in January, so that annual growth was steady at 1.0%Y/Y. As a result, average month spending on this measure for the quarter to date is now unchanged from that which prevailed in Q4.

Meanwhile, the MIC’s household survey – also released today – pointed to a modest easing in annual growth in household spending in February, albeit only by slightly more than the market had expected. After adjusting for a discontinuity caused by changes undertaken to the survey last year, MIC reported that growth in real spending amongst two-or-more person households slowed 0.3ppt to 1.7%Y/Y, while core spending – which excludes housing, auto sales and certain other expenditures – rose a similar 1.9%Y/Y. Even assuming that February levels are maintained in March, the unadjusted measures suggest that spending is on track for a gain of about 1%Q/Q in Q1 – a very unlikely outcome considering the results of the BoJ’s indicator discussed above. The February installment of the Cabinet Office Synthetic Consumption Index – the most reliable indicator of private consumption spending – may be released sometime next week. It is worth recalling that the results of that measure for January meant that strong growth would be required in February and/or March just to achieve a flat result for Q1 as a whole.

Elsewhere in today’s MIC survey it was reported that real disposable income for workers’ households fell 0.8%Y/Y in February following an unlikely 3.9%Y/Y increase in January. Meanwhile, further news on developments in workers’ incomes was provided by the MHLW’s release of the preliminary results of the Monthly Labour Survey for February, together with the delayed final results from the January survey. As always, we caution that the preliminary results can be subject to substantial revision – a statement that seems especially apt following today’s report. Indeed, today’s results raised far more questions than answers – not least, further questions about the reliability of Japan’s labour market statistics.

For now the headline measure of total labour cash earnings (per person) records a 0.8%Y/Y decline in February, marking the weakest outcome since June 2015. Moreover, the previously reported 1.2%Y/Y lift in January was today revised to a 0.6%Y/Y decline. According to today’s report, contracted earnings fell 0.2%Y/Y in February, following a revised 0.6%Y/Y decline in January. Bonus payments fell an estimated 34.2%Y/Y in February, weighing heavily on headline earnings during that month. By contrast, the preliminary estimates indicated that scheduled earnings of part-time workers rose 2.3%Y/Y on a per hour basis, down just 0.3ppt from January. Growth in scheduled monthly wages for full-time workers was steady at January’s outcome of 0.4%Y/Y – albeit the latter was revised down 0.6ppt from the preliminary report to a level that was last visited previously in November 2017.

Much of the particularly severe weakness in the headline earnings data over the past two months seems to be due to oddities in the employee count. According to the preliminary survey, the number of regular employees rose an unlikely 0.6%M/M in January – revised up from 0.1%M/M previously – and a further 0.1%M/M in February. As a result, growth in regular employment increased to 2.0%Y/Y in January – up from just 0.8%Y/Y in December – and remained elevated at 1.8%Y/Y in February. According to these estimates, growth in the number of part-time employees more than doubled to 5.2%Y/Y in January, before declining slightly to 3.6%Y/Y in February. By contrast, the full-time employee count rose 0.6%Y/Y in January, before strengthening to 1.1%Y/Y in February. Should these employee counts be revised lower, all else equal earnings-per-person would be revised higher. Finally, aggregate hours worked (per person) were reported to have increased 0.7%M/M in February following an unrevised 1.3%M/M in January. Given favourable base effects, the annual decline moderated to 0.6%Y/Y from 2.4%Y/Y previously.

In other news, the BoJ’s latest quarterly Opinion Survey – which captured responses surveyed from 7 February to 5 March – reported that a net 19.2% of households perceive present economic conditions to be worse than a year earlier, up from the net 14.3% who held that view in the previous survey. A net 30.6% of respondents indicated that they expected conditions to worsen further over the next 12 months (fractionally less pessimistic than the prior survey). Regarding present household circumstances, a 33.5% of households perceived a deterioration over the past year, up from the net 31.7% who held that view in the previous survey. And regarding prices, a net 68.0% of households reported slight or significant increases over the past 12 months, down from 69.6% previously. However, the proportion of households forecasting slight or significant increases in prices over the next 12 months increased slightly to 78.7% from 77.5% previously. Sadly for the BoJ, the proportion of households that had never heard of the Bank’s 2% inflation target remained high at 38.4%.

UK:
Ahead of next week’s key EU summit, talks between the Government and Labour leadership will continue today in an attempt to find a Brexit compromise. But the discussions so far appear to have generated nothing new in terms of concessions from either side, and we don’t attach a significant probability that these talks will ever make a decisive breakthrough. So, the short extension of the Brexit deadline to late May, which Theresa May had hoped for, will not be available. Instead, the BBC is reporting that European Council President Tusk will propose to offer the UK a twelve-month "flexible" extension to the article 50 deadline, with scope for the UK to leave the EU sooner than that date if Parliament manages in due course to ratify the Withdrawal Agreement.

That broadly matches our baseline expectation, and we assume that EU leaders will indeed agree to such a “flextension” along these lines next Wednesday night. But the precise end-date will no doubt be argued over, as will the conditions to be attached, which are likely to include an assurance that the UK won’t obstruct EU decision-making over the period concerned (e.g. by committing to vote with the majority of member states on key decisions).

One practical complication on the UK side might be passage of the ‘Cooper bill’, which, having got bogged down in the House of Lords, will now likely receive royal assent on Monday. That would oblige Theresa May to consult MPs on Tuesday on the length of any extension to request. And there would be an additional risk that, if the EU granted an extension of an alternative duration, the PM would have to return to Parliament on Thursday to seek MPs’ approval. Nevertheless, we do not expect an accidental no-deal scenario, and the “flextension” should be rubber-stamped by this time next week, after which Parliament will get back to the tortuous business of trying to find a majority in favour of one solution to Brexit or another. 

With respect to data, today brings only UK labour productivity data for Q4. Preliminary estimates showed very weak growth in the main productivity indicators – output per hour and output per job – which reported a drop of 0.2%Y/Y and 0.1%Y/Y respectively, and we would expect that those rates to remain little changed. On the flip side, with wage growth having ticked higher that quarter, unit labour cost growth is likely to have increased. The BoE appears to be watching this indicator very closely – in its latest policy communication, the MPC said that domestic inflationary pressures as measured by unit wage costs, a subset of total unit labour costs, has increased recently, albeit other indicators remained more modest. 

Euro area:
Focus in the euro area today was again on the manufacturing sector with February IP figures from Germany. And there was a welcome upwards surprise to German production figures this morning, all the more so in light of yesterday’s dire factory orders data and the persistent weakness in recent manufacturing sentiment surveys. In particular, total IP rose 0.7%M/M in February, with the 0.8%M/M decline previously estimated in January also revised away.  And so, on average so far in Q1, output was 0.4% higher than the average in Q4. Admittedly the improvement was more than fully accounted for by the construction sector, which reported growth of 6.8%M/M in February, to leave output up on average in the first two months of the year by more than 4% compared with Q4. While production of capital goods also rose in February (0.6%M/M), production of consumer and intermediate goods fell by 1.6%M/M and 0.6%M/M respectively. And so, manufacturing output declined for the second successive month in February, albeit by only 0.2%M/M. While this still suggests the sector will remain a drag on growth in Q1, the average level in January and February suggests a drop of 0.4% compared with Q4, less extreme than the declines of more than 1½%Q/Q and 1%Q/Q in Q3 and Q418. 

US:
Of course, of most interest over the remainder of the day will be the US March labour market report, with an increase of about 170k in non-farm payrolls expected. That would represent a rebound from February’s small increase of 20k but still some way down on the 2018 average of 223k. We also expect a small increase in the unemployment rate, related to a pickup in the number of individuals entering the labour force, as well as another firm (0.3%M/M) increase in wages. The consumer credit report for February will also be released.    

 

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