Japanese consumer mood darkens

Chris Scicluna
Emily Nicol

After a better day for US stocks yesterday (the S&P500 closed up 0.65%), the positive momentum petered out in Asia today, with US futures pointing lower and the main regional equity indices failing to gain traction. In Japan, where a survey reported a further deterioration in consumer confidence to the lowest since the consumption tax was last raised five years ago, the Topix closed down 0.1%. And with no new glimmers of light on the trade war front while the market was open, China’s CSI300 closed down 0.4%. Within the past half hour or so, however, a spokesperson for China’s Commerce Ministry has confirmed that the authorities are “in effective contact” with the US, and insisted that China wouldn’t crack down on foreign companies and wanted to discuss the removal of recent tariffs.

In the bond markets, JGBs today made further gains across the curve, with 10Y yields falling to a new three-year low within a whisker of -0.30%, as BoJ Policy Board member Suzuki stated that there was no need for the Bank to be “extremely strict” about its 10Y yield target range (currently specified as “about double the range of between -0.1% and +0.1%”). Discussing the current challenges facing the Bank, he suggested that no additional stimulus was required at this stage. He also noted that a deeper negative interest rate was among the tools available to the BoJ should further easing be necessary, and that the reversal rate (the interest rate below which further easing would be contractionary due to the negative side-effects on the banking sector) had not yet been observed. But Suzuki suggested that evidence of that key threshold being reached – such as a slowdown in bank lending – could emerge before long and so the BoJ would need to tread carefully if and when (perhaps at the next Board meeting in September) it decides to ease policy further.

Elsewhere in the bond markets, UST yields have been oscillating within yesterday’s range, with 10Y yields currently back up near 1.48% after the Chinese Commerce Ministry comments but the 2Y-10Y curve still slightly inverted. Support for USTs ahead of the trade-war comments came from yesterday’s remarks from two FOMC members which tallied with Jay Powell’s Jackson Hole signal that additional Fed easing is likely on its way next month. The Dallas Fed’s Kaplan said that he was “on heightened alert” and emphasised that policy needed to be “forward-looking”, while the San Francisco Fed’s Daly echoed the sentiment stating that “It’s better to avoid the ditch than dig yourself out of the ditch”.

In the euro area, while Bunds have made losses this morning on the back of the Chinese comments (10Y yields back to -0.70%) but the first August inflation data from the German regions and Spain this morning suggest a weakening in headline CPI this month. Meanwhile, BTPs have locked in the gains of the past few days, with 10Y yields still very close to 1.0%, as Italian President Mattarella is set this morning to give PM Giuseppe Conte a formal mandate to form a new coalition government between the populist Five Star Movement and centre-left pro-EU Democratic Party, thus keeping the destabilising nationalist League out of office. First and foremost among the tasks for the new administration will be to prepare a credible 2020 Budget consistent with EU rules while also avoiding the contractionary VAT hike built into current legislation. By reducing debt interest costs, lower BTP yields will provide a little help in squaring the circle. Finally, in the UK, where politics is most dysfunctional, Gilts have followed the trend lower in recent minutes, but sterling has settled down following its weakening in response to yesterday’s highly provocative move by the Government to shut Parliament for five weeks to limit its ability to block a no-deal Brexit.

While private consumption accelerated in the second quarter driven by increased demand for durable goods, to leave its quarterly growth rate at its strongest for two years and accounting for almost ¾ of GDP growth, households are becoming increasingly downbeat as the consumption tax hike approaches. Indeed, today’s consumer confidence survey reported the eleventh consecutive decline in the headline sentiment indicator in August, to 37.1, matching the post-2014 consumption tax hike low reached in April 2014. This left it more than 6pts lower compared with a year earlier and on average so far in Q3 more than 2pts below the average in Q2.

Within the detail, consumers expressed greater unease about near-term employment opportunities, with the relevant index falling to the lowest for 2½ years, while confidence about income growth remained at its weakest for more than four years. But they were most downbeat about their willingness to buy durable goods, with the relevant survey component falling to 31.7 in August, the lowest since the previous consumption tax hike and the second lowest since the global financial crisis, to leave it on average so far in Q3 more than 4½pts lower than the average in Q2.

Euro area:
Datawise, it will be a busy day for top-tier releases in the euro area, with arguably the most noteworthy the European Commission’s August business and consumer surveys, which typically provide a decent guide to euro area GDP growth. With business sentiment set to have remained weak and consumers a touch more downbeat, the headline economic sentiment indicator is expected to report a further decline this month, possibly to its lowest level since early 2015, suggesting no improvement in aggregate economic momentum in Q3.

Ahead of tomorrow’s euro area flash CPI estimate, focus today will also be on first of the preliminary inflation releases from the larger member states. The Spanish figures this morning fell short of expectations, with the EU-harmonised inflation declining 0.2ppt to 0.4%Y/Y, a near-three-year low. And the initial releases from the Länder point to a drop in German inflation too. Lower global oil prices are likely to have played a role in both countries.

Meanwhile, there was a modest upwards surprise to the updated French Q2 national accounts figures this morning, with GDP growth upwardly revised by 0.1ppt to 0.3%Q/Q, unchanged from growth in Q1 and leaving output up a stronger 1.4%Y/Y. This principally reflected a slightly stronger contribution from net trade on the back of a drop in imports in Q2. But household consumption was also a touch firmer. And this morning’s monthly consumption figures for July suggested that spending on goods rebounded at the start of Q3, rising 0.4%M/M following a 0.2%M/M decline in June, with a particular pickup in consumption of manufactured goods. This left consumption up 0.3% on a three-month basis, the first such rise since April 2018. Overall, the French economy is benefiting from President Macron’s fiscal U-turn, which is supporting consumer confidence and set to provide ongoing support to demand. And, of course, a limited reliance on the manufacturing sector and global demand is also undoubtedly helping at this stage in the global economic cycle.

German labour market data for August are also due imminently, while in the markets, Italy will sell 5Y and 1Y bonds today.

UK-based car manufacturers are undoubtedly struggling in the face of ailing demand and the existential threat posed by a no-deal Brexit. And today’s car production figures added to the steady flow of negative news from the sector, suggesting that output fell a further 10.6%Y/Y in July, the fourteenth consecutive year-on-year decline, to leave production in the year to date down a whopping 18.9%YTD/Y. To some extent the weakness in the year-to-date figure reflected the earlier summer maintenance in car factories which was brought forward to April. Indeed, there was a pickup in production for the domestic market in July (10.2%Y/Y) for the second successive month. But this in part reflected base effects as production last year was cut significantly in preparation for the implementation of new standards testing. Moreover, the domestic market accounts for a relatively small share of total output, with demand from overseas markets representing roughly 80% of car production. And so, despite sterling’s depreciation, against the backdrop of weaker demand from the EU and Asia in particular, production for export fell a sizeable 14.6%Y/Y, to leave the level of such output over the past twelve months at its lowest for eight years.

In the US, this afternoon will bring revised Q2 GDP figures, which are likely to confirm annualised growth of around 2%Q/Q, down from 3.1%Q/Q ann. in Q1. But against the backdrop of the ongoing trade war with China, likely of more interest today will be July’s advance goods trade data, along with preliminary inventory and pending home sales figures for the same month. In the markets, the Treasury will sell 7Y notes.

Following yesterday’s disappointing construction figures, today saw the Australian Bureau of Statistics publish the latest capex survey for Q2. At face value, these also disappointed. Contrasting with expectations of a modest increase, total new capital expenditure declined a further ½%Q/Q, to mark the fourth contraction out of the past five quarters to leave spending down 1% compared with a year earlier. But consistent with yesterday’s construction figures, the weakness principally reflected the survey’s estimate of spending on buildings and structures – which is not used in the national accounts – which was down a sizeable 3.3%Q/Q, 6.6%Y/Y. More importantly, spending on plant and equipment – which feeds directly into the national accounts – rose 2.5%Q/Q, the first increase for three quarters to leave it 5.7% higher than a year ago.

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