Japanese trade and Tankan disappoint

Emily Nicol

Following a more positive session in the US and Europe on Friday, and somewhat more encouraging comments out of the US regarding trade discussions with China, Asian equities started the week on the front foot. And after China announced over the weekend that the central bank will replace its key lending rate with a more market-driven benchmark aimed at lowering borrowing costs, the main Chinese CSI300 rose a sizeable 2.2% on the day, while the Hong Kong Hang Seng was also more than 2% higher. But despite some underwhelming trade figures and a dire sentiment survey out of Japan overnight (see more details below), the Topix closed 0.6% higher.

In bond markets, while Treasuries edged slightly lower at the end of last week (with 10Y USTs up 2bps), moves in Asian markets overnight were limited, with e.g. 10Y JGBs unchanged at -0.24%. And European markets have moved only marginally lower at the open this morning. While final euro area CPI figures, due this morning, are likely to report a downwards revision to headline inflation from the flash release, the second half of this week will bring several potential market-moving events. For example, in the euro area, Thursday will bring the ECB’s account from July’s Governing Council meeting as well as the flash August PMIs.

While the Fed minutes from July’s FOMC meeting (Wednesday) might provide limited new insight, most attention will be on the Jackson Hole Symposium (kicking off on Thursday evening), with FOMC Chair Powell due to give his keynote speech on Friday. The back end of the week will also see G7 leaders meet in France, with UK PM Johnson likely to have the first informal discussions on Brexit with German Chancellor Merkel and French President Macron. And Italy’s PM Conte seems highly likely to lose tomorrow’s no confidence vote in the Senate.

Overnight brought the release of Japanese trade figures for July, as well an update on manufacturing and non-manufacturing sentiment in August, both of which pointed to a deterioration in economic conditions in Q3. Admittedly, the trade report at face value exceeded expectations with the value of exports down just 0.2%M/M (following a more than 5%M/M drop in June), to leave them down just 1.6%Y/Y, following a fall of more than 6½%Y/Y in June. Nevertheless, this still marked the eighth consecutive year-on-year decline. And with the value of imports up more than 1%M/M (-1.2%Y/Y), the adjusted trade deficit widened by ¥93bn to ¥127bn. 

The detail of the report suggested that export growth was likely boosted by temporary one-off factors. For example, the improvement in shipments to the US (up 8½%Y/Y) was supported by a jump in aircraft exports (+27%Y/Y), while exports of semi-conductor machinery to that country were up by a whopping 144%Y/Y. Meanwhile, exports to the EU were underpinned by a surge in car shipments (up more than 50%Y/Y), while ships and aircraft also provided a boost. Shipments to Asia, meanwhile, remained weak in July, down more than 8%Y/Y, the ninth consecutive annual drop. And the near-7%Y/Y drop in exports to Korea, with a more than 40%Y/Y decline in shipments of semi-conductor machinery, tentatively suggests that the intensification of the trade dispute between the two countries was already starting to take its toll.

When stripping out seasonal and price effects, the BoJ’s trade data suggested that the export performance was somewhat more encouraging, with export volumes up a stronger 0.9%M/M, to leave them ½% higher compared with a year earlier. But with import volumes almost 4½% higher in July – the largest monthly increase since October – today’s figures suggest that net trade remained a drag on growth at the start of Q3.

With underlying export growth seemingly still weak and risks to the global economic outlook firmly skewed to the downside, business surveys have unsurprisingly provided an increasingly downbeat assessment of conditions over recent months. And a further marked deterioration this month was the message from the latest Reuters Tankan, which showed the headline manufacturing diffusion index declining 7pts in August – the most for sixteen months – to -3, the first time pessimists have outweighed optimists in the sector since April 2013. And the deterioration was particularly evident in the key export-oriented sectors – i.e. the DI for general machinery was down 16pts to -8, while the DI for electrical machinery down 30pts to -25.

But there were signs that the persistent weakness in the manufacturing sector and the forthcoming consumption tax hike was taking an increasing toll on non-manufacturers too. Indeed, the headline index for large non-manufacturers fell a notable 12pts in August – the largest monthly drop for more than four years – to +13, the lowest since October 2016. This in part reflected another sizeable decline in the wholesaler and retailers DI, down 22pts to -5, the lowest since 2016. Today’s survey suggested that, on the whole, non-manufacturers were similarly downbeat about the near-term outlook with the forecast DI signalling no improvement over the coming three months.

Thursday will bring more sentiment surveys, with the flash PMIs likely to point to a further deterioration in manufacturing conditions in August, with the headline, output and new orders components expected to have remained in contractionary territory. Focus on Friday will turn to inflation, with national CPI figures for July expected to show headline inflation declining 0.2ppt to ½%Y/Y, a four-month low. Friday will also bring final wage figures for July. In the markets, a 20Y JGB auction will be conducted tomorrow.

Euro area:
There are a number of noteworthy euro area releases this week, kicking off today with final euro area CPI figures for July. While core inflation is expected to be confirmed at the flash estimate of 0.9%Y/Y, down 0.2ppt from June, headline inflation is likely to be revised lower from the flash estimate to 1.0%Y/Y, 0.3ppt lower than June and the lowest for 2½ years. Today will also bring euro area balance of payments data for June, followed tomorrow by euro area construction output figures for the same month.

But Thursday will see the most significant releases of the week, with the flash PMIs and Commission’s consumer confidence indicator for August. While consumer confidence improved slightly in July, there was a further deterioration in business confidence, particularly in the manufacturing sector. Indeed, the euro area’s manufacturing PMI fell 1.1pts to 46.5, the lowest since December 2012. And with geopolitical tensions having risen over recent weeks, we would expect to see a further worsening of conditions this month too. Service sector sentiment was more stable in July – with the headline activity index down 0.4pt to 53.2 – to leave the composite PMI in expansionary territory (51.5). But while this should remain above the key-50 level in August it is likely to signal a further moderation in economic growth.

Also of interest on Thursday will be the ECB’s account from its July Governing Council meeting, at which President Draghi hinted that a multi-faceted easing package will be forthcoming, for any further insight into the policy adjustments likely to be preferred by Governing Council members.

In addition, Italian Prime Minister Conte faces a vote of no confidence in Italy’s Senate tomorrow, where rejection of his coalition government seems a formality. Supply-wise, Germany will sell 30Y bonds on Wednesday.

While the government attempted to play down the findings from the weekend’s leaked paper predicting that a no-deal Brexit would lead to, among other damaging impacts, severe extended delays to medical supplies, food and petrol shortages, and the return to a hard border in Ireland, business groups admitted that many companies, particularly small firms, were still ill-prepared for a no-deal Brexit on 31 October, blaming a lack of clarity and financial assistance from the government. And the week’s CBI industrial trends (tomorrow) and distributive trades (Thursday) surveys are likely to further reinforce the negative impact of continued Brexit uncertainty already being experienced by manufacturers and retailers alike. Indeed, in July, manufacturers suggested that orders were at their weakest for more than nine years, while retailers indicated that sales were down compared with a year earlier for the third consecutive month. Public finance figures for July are also due on Wednesday.

Perhaps the most important event, however, will be the G7 Summit in Biarritz, which kicks off on Friday. In the margins, UK PM Johnson will likely have the first informal discussions on Brexit with German Chancellor Merkel and French President Macron, as well as Commission President Juncker and European Council President Tusk.

In the US, there are several events of note this week, with focus on Wednesday on the FOMC minutes from the end-July meeting, when the Fed cut its FFR target rate by 25bps to 2.00-2.25% but offered a less dovish policy statement than had been expected. But the Fed’s Jackson Hole Symposium – focussing on ‘The challenges for monetary policy’ – kicking off Thursday evening, with Chair Powell giving a keynote speech on Friday, will also be watched closely for any further up-to-date insights into policy-makers’ thinking of the growing concerns about the global economic outlook, heightened geopolitical risks and recent moves in global financial markets.


Data-wise, following a quiet start to the week, Wednesday will bring existing home sales figures for July, while new home sales data will be published on Friday. Meanwhile, Thursday will see the weekly jobless claims numbers released alongside the flash Markit PMIs and Kansas Fed activity index for August and the Conference Board’s leading indices for July. In the markets, the US Treasury will sell 30Y TIPS on Thursday.



It should be relatively quiet for economic news from Australia this week, with tomorrow’s RBA minutes from its 6 August meeting likely the most noteworthy release. Wednesday will bring vacancy figures for July, while Thursday will bring the flash PMI surveys for August.


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