Japanese spending slumps, but wages trending higher

Emily Nicol
Chris Scicluna

Overview:
With positive commentary yesterday from President Trump on the trade negotiations followed by an announcement from China’s Ministry of Finance that it will waive import tariffs on some US shipments of soybeans and pork, the mood in Asian markets was positive today, with most of the main equity indices higher. So, for example, China’s CSI300 closed up 0.6%. Gains in Japan’s markets were modest however, e.g. the TOPIX closed up just 0.1%, as the latest slug of economic data reported the steepest monthly decline in household spending on the series. In the bond markets, having lost ground over the past two days, USTs were stable in Asian time (e.g. 10Y yields oscillated around 1.80%). But JGBs played catch up from yesterday’s moves elsewhere, with 10Y yields up 2bps to around -0.02% for the first time since April. Euro area govvies have opened only marginally weaker, however, perhaps benefiting from a very weak German industrial production report (see more on these figures and the latest Japanese data below). Looking ahead, however, all eyes today will be on the US labour market report, with a rebound in non-farm payroll growth widely expected as striking GM workers returned to work last month.

Japan:
A busy end to the week in Japan brought further insight into the retrenchment in domestic demand at the start of Q4. And unfortunately, like last week’s retail sales figures, today’s October spending report seriously disappointed. In particular, the MIC’s family income and expenditure survey showed that total household spending declined an extremely sharp 11.9%M/M that month, a drop that was more than double the pace of increase in September and a steeper pace of decline than that which followed the consumption tax hike in April 2014. Weakness was broad based with, e.g., sizeable falls in spending on household appliances (-45%M/M) and clothing (-29%Y/Y). And spending on core items fell a steep 13.1%M/M, similar to the decline in 2014 and leaving the level of spending at the start of Q4 almost 5% below the Q3 average.

The BoJ’s consumption activity index – which provides a more reliable guide to the national accounts measure of consumption – was also significantly weaker in October, down 7.4%M/M. While this was slightly softer than the decline seen in April 2014, the post-tax hike plunge in spending on durable goods appears to be much worse this time around. Indeed, the relevant index fell a whopping 35.2%M/M in October (compared with -28.5%M/M in April 2014), to leave the level at its lowest for 5½ years and more than 25% below the Q3 average. In contrast, the drop in spending on non-durable goods (-6.5%M/M) was just half that seen in 2014, while spending on services was little changed (-0.2%M/M). Of course, it is impossible to know quite how much of the decline in spending in October reflected the tax hike and how much was a consequence of Super Typhoon Hagibis.

Nevertheless, with industrial output having also fallen sharply in October, there is no doubt that Japan’s economy went into reverse at the start of Q4. And this was illustrated by a sharp deterioration in the Cabinet Office’s composite indicators of business conditions, with the headline coincident index down 5.6pts – the most since the 2011 quake – to 94.8, its lowest level since early 2013. And despite some signs of recovery in various November releases, the leading index fell further, to its lowest for almost a decade, raising concerns that the drop in demand might persist through to the start of 2020. As such, the Government maintained its assessment of conditions as “worsening”, and will be able to cite these indices in justifying the latest fiscal stimulus package.

Of course, beyond the volatility in output and spending brought about by the consumption tax hike and natural disasters, some trends are still going broadly in the right direction in Japan’s economy, even if only very gradually. In this respect, today’s labour earnings figures came in a touch stronger than expected, with headline wage growth steady in October at ½%Y/Y. Within the detail, there was an improvement in regular wage growth at the start of Q4, with growth up 0.3ppt to 0.6%Y/Y, the fourth consecutive year-on-year increase and the strongest since January. Meanwhile, growth in overtime earnings moved sideways, while special/bonus payments were down 4.4%Y/Y.

Euro area:
Hopes that Germany’s manufacturing sector might be turning the corner were dashed by this morning’s production data for October. Following yesterday’s weak factory orders figures, and contrary to expectations of a sideways move, total industrial production fell 1.7%M/M, the most since April, following a decline of 0.6%M/M in September. That left it at the lowest level since November 2015, 1.9% below the Q3 average and a huge 8.0% below the peak reached two years ago. Within the detail, manufacturing production also fell 1.7%M/M. Production of consumer and intermediate goods rose, with a welcome surge in the chemicals sub-sector (up 6.7%M/M). But output of capital goods was down 4.4%M/M. And strikingly, production of motor vehicles – so important for the German economy – fell a sharp 5.6%M/M to the lowest level since August 2014. Beyond the manufacturing sector, a second successive monthly rise in energy production (up 2.3%M/M) offset a steep drop in construction (down 2.8%M/M).

This week’s weak IP and factory orders data also followed a very downbeat report on German retail sales (down 1.9%M/M). Of course, special factors might have exacerbated the weakness (e.g. the timing of the German Unity Day holiday at the start of the month might have seen many workers take an extra day’s leave). And the data could be revised significantly in due course. However, the weakness in production tallies with the downbeat survey indicators for the sector. And looked at in the round, the figures undeniably flag the likelihood of another weak showing for German (and euro area) GDP in Q4, and indeed the risks of a second contraction in three quarters in the euro area’s largest member state.

UK:
While it will be a quiet end to the week for top-tier UK data, the overnight release of the KPMG/REC report on jobs offered another downbeat assessment of labour market conditions. In particular, recruitment consultants saw a further decline in permanent placements in November for the ninth consecutive month, with only a modest increase in temporary appointments too. And against the backdrop of persistent political uncertainty ahead of the 12 December election, consultants reported the slowest increase in job vacancies for more than a decade, while wages for both permanent and temporary staff rose at a softer pace – indeed, the relevant index for permanent salaries fell to the lowest since July 2016.

US:
All eyes in the US today will be on the November labour market report. The consensus forecast for nonfarm payrolls is currently a rise of about 190k, above the average for the past six months, boosted by returning GM workers. The unemployment rate is expected to remain unchanged at 3.6%, while monthly wage growth is expected to tick up slightly to 0.3%M/M, albeit leaving the annual rate unchanged at 3.0%Y/Y. The preliminary University of Michigan consumer confidence survey for December is also due along with wholesale trade and inventories figures.

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