Morning comment: Dire data from China & Japan

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Wall Street began yesterday on a weaker note after US Trade Representative Robert Lighthizer, speaking on progress in the US-China negotiations, warned that “Much still needs to be done, both before an agreement is reached, and more importantly, after it is reached”. News of a record deficit on the goods trade balance in December didn’t help sentiment. But the early losses were gradually erased, leaving the S&P500 down a fractional 0.05% at the close (the DJI fell 0.3%). The US dollar was generally firmer against key counterparts, but was outperformed by sterling, which gained as UK MPs rubber-stamped Theresa May’s plans for a series of votes that should facilitate the avoidance of a no-deal Brexit next month, but still voted against a motion that sought to rule out a no-deal Brexit under any circumstances going forward. Meanwhile, the yield on 10Y US Treasuries rebounded 3bps to 2.67% amidst ongoing corporate debt issuance and in concert with higher yields in Europe.

Against that rather mixed backdrop, today brought plenty of economic news for investors in the Asia-Pacific region to digest, and most of that economic news was disappointing, even relative to downbeat expectations. Most notably, China’s official PMI surveys weakened in February and Japan’s IP, retail spending and housing starts reports revealed a sharper-than-expected decline in activity in January (much more on these below). Not surprisingly, therefore, equity markets were mostly weaker across the region. In China, however, the CSI300 fell just 0.3%. But Japan’s TOPIX fell 0.8%. 10Y JGB yields ticked up to -2bps ahead of the announcement that the BoJ has reduced the frequency of its planned purchases of 5-10Y bonds in March by one operation to four, but increased the maximum purchase amount on those operations by ¥50bn to up to ¥650bn.

Elsewhere, South Korea’s KOSPI fell 1.8% with a marked drop late in the day as the meeting between President Trump and North Korea’s Kim Jong Un in Hanoi was abruptly cut short with ‘no agreement’. In his press conference, Trump revealed that differences on the lifting of sanctions were the deal-breaker. In Australia, however, the ASX200 bucked the regional trend with a 0.3% gain while ACGBs were a touch weaker following a Q4 CAPEX survey that proved slightly stronger than market expectations (details on this below too).

Looking ahead, this morning brings flash February inflation figures from Germany and Italy after the French and Spanish numbers revealed slight increases from last month. And later on the focus will be on US Q4 GDP, with a step down in growth from the first three quarters of the year expected.

Japan:
The main domestic focus in Japan today was on the IP report for January. Investors were bracing for more bad news in light of the exceptionally weak export performance that had already been reported for that month (recall that the BoJ estimated a 5.3%M/M decline in export volumes). As it turns out, manufacturers had an even poorer month than the market had expected, with industrial output slumping 3.7%M/M in January – the steepest monthly drop since the 4.7%M/M decline in January 2018 – to be unchanged from a year earlier. While regional holidays have likely had some impact on activity during the month, a progressively weaker trend has been in place for some months now. Indeed, the January outcome marks the third consecutive decline in output since the post-disaster rebound in activity that occurred back in October.

In January the largest declines were seen in production of capital goods (down 8.4%M/M in total and 10.0%M/M excluding transportation) and consumer durables (down 6.9%M/M). Production of construction goods fell 3.2%M/M but construction of non-durable consumer goods rose 2.7%M/M. Elsewhere in the report, aggregate shipments fell an even greater 4.0%M/M in January and so were down 0.9%Y/Y, led by a 14.2%M/M slump in shipments of capital goods. Inventory levels, which have been a concern in some parts of the industrial sector, fell a welcome 1.5%M/M in January but remained up 1.2%Y/Y. Driven by an especially large increase in the durable consumer goods sector, the overall inventory-shipments ratio rose 0.8%M/M in January but was down 1.1%Y/Y.

With respect to the key export-oriented sectors, there were notable declines in production of electrical machinery and ICT equipment (>10%M/M and >11%M/M respectively) no doubt in part reflecting the sharp drop in exports to Asia at the start of the year as demand was likely impacted by regional holidays. Electronic parts and devices output also fell for the third consecutive month (and by 8½%M/M), while production of autos was down almost 9%M/M. And so despite softer shipments from these sectors, inventories of electrical machinery and ICT equipment fell sharply in January, with the former now down more than 6% compared with a year ago and the annual increase in the latter moderating slightly to 21%. The year-on-year increase in electronic parts and devices inventories also eased to 20%Y/Y the softest pace since March 2018. But while auto inventories were still down compared with a year earlier, the annual increase in general machinery inventories was the largest since November 2011.

Not surprisingly, METI chose to downgrade its assessment of the manufacturing sector to “Industrial production is pausing” from its previous advice that “Industrial production is picking up slowly”. Judging by the latest survey of manufacturers, even METI’s revised assessment seems somewhat charitable. While in aggregate firms forecast a 5.0%M/M rebound in activity in February – up from a forecast 2.6%M/M increase at the time that the December IP report was released – firms expect this to be followed by a 1.6%M/M decline in output in March. Even if firms’ rosy near-term forecast proves accurate, and assuming no revisions, this implies that output will decline about 1.5%Q/Q in Q1. Unfortunately, after correcting for the usual over-optimistic bias, METI expects firms’ forecast to translate into a mere 0.4%M/M rebound in output in February. An outcome as poor as that would leave output on track for a huge decline of about 4%Q/Q in Q1 – a development that would explain why the manufacturing PMI fell to a preliminary 26-month low of just 48.5 in February (the final report will be released tomorrow).

In other news, METI also released a very weak account of retail spending during January, in keeping with Daiwa’s analysis of the reports released by the major retailers. Indeed, the value of retail sales declined 2.3%M/M – a much larger fall than the market had expected – so that annual growth slowed to 0.6%Y/Y from 1.3%Y/Y previously. Almost all of the major storetypes reported lower spending in January, with the largest falls occurring for apparel/accessories (-6.8%M/M), motor vehicles (-6.6%M/M) and general merchandise (-2.7%M/M). While the retail sales figures are far from being the best indicator of private consumption, the January outcome – leaving the level of spending 2.1% below the average recorded through Q4 – is clearly pointing to a very weak start to Q1. And so with the more reliable indicators, such as the Cabinet Office synthetic consumption index, having declined in both November and December – thus providing a very weak base for Q1 – the likelihood of private consumption recording positive growth this quarter seems increasingly slim.

Continuing the gloomy tone, MILT reported that the number of housing starts slumped 9.3%%M/M to a 12-month low in January. This outcome was much weaker than the market had expected and caused annual growth to slow to just 1.1%Y/Y. This also means that the number of starts in January was 8.7% below the average level recorded through Q4, raising further concerns about prospects for aggregate GDP growth during the current quarter. On a brighter note, Japan’s largest contractors reported that construction orders rose 19.8%Y/Y in January, although the 3-month average still rose just 0.3%Y/Y. Domestic private orders rose 15.2%Y/Y, led by a 25.0%Y/Y increase in orders in the manufacturing sector. Government orders rose 22.6%Y/Y after being especially weak in December.

China:
The focus in China today was on the release of its official PMI reports for February. Perhaps not that surprisingly, the official composite PMI fell 0.8pt to a new low of 52.4 (this series only dates back to the beginning of 2017). The closely-watched manufacturing PMI missed the consensus forecast, falling 0.3pt to a 3-year low of 49.2. While the large firm PMI rose for a second month, edging higher to 51.5, that for medium-sized firms fell 0.3pt to 46.9 and that for small firms slumped 2.0pts to a 12-month low of 45.3. Within the detail, the production index fell 1.4pts to 49.5, the first sub-50 figure since 2008-9. But the overall new orders index rose 1.0pt to a 4-month high of 50.6. These readings, of course, will likely have been impacted in some way by the timing of the Lunar New Year holiday. More disturbingly, however, the manufacturing export orders index weakened 1.7pts to a 10-year low 45.2 and the employment PMI for the sector fell again to just 47.5. The news outside of the manufacturing sector was also slightly discouraging, with the non-manufacturing PMI falling 0.4pt to 54.3. Within the detail of that survey the new orders index fell 0.3pt to 50.7, and the employment index was unchanged at a weak 48.6.

As usual we caution that interpreting Chinese data around the beginning of the year is complicated by the difficulty associated with accurately adjusting for regional holidays. That said, notwithstanding the sharp rebound in the Chinese equities in recent months and a strong start to year for growth in credit, at face value these PMI reports suggest that there remains pressure on authorities to take action to stabilise growth. Daiwa’s chief China economist Kevin Lai has thus reaffirmed his expectation of a further 100bp cut in the reserve requirement ratio in March.

Euro area:
Ahead of tomorrow’s flash February euro area inflation figures, the equivalent releases from the largest four member states are the main data focus in the region today. We have already seen the release of the French figures, which reported a softer-than-expected rise in the EU-harmonised rate this month, of 0.1ppt to 1.5%Y/Y. Within the national CPI breakdown, food price inflation picked up in February, as did the annual increase in energy prices. But services inflation edged lower and the decline in prices of manufactured goods was a touch steeper (-0.5%Y/Y). So, when the final figures are published next month, these are likely to show that core inflation edged lower in February.

The Spanish figures are also out and similarly reported a modest increase in the headline harmonised rate, up 0.1ppt to 1.1%Y/Y, in part reflecting rising fuel prices. Of course, of more significance for tomorrow’s aggregate euro area release will be Germany’s figures – due at 12.00CET – which are expected to show that the EU-harmonised CPI rate moved sideways this month at 1.7%Y/Y. However, like in France and Spain, the equivalent Italian rate is expected to have risen from 0.9%Y/Y previously.

This morning also brought the second estimate of French Q4 GDP, which confirmed that growth was steady at the end of last year at 0.3%Q/Q, albeit leaving the annual increase moderating to just 0.9%. Within the detail, today’s release confirmed that net trade was the main driver of growth in Q4, contributing 0.2ppt to the quarter-on-quarter rate. In contrast, household consumption moved sideways. But consistent with the improvement in consumer confidence since the start of the year, the latest consumption figures, also published this morning, showed that spending on goods picked up in January, rising 1.2%M/M to almost fully reverse the 1.5%M/M decline in December. While this partly reflected increased spending on energy, spending on durable goods also rose for the first month in three. And we fully expect private consumption to make a positive contribution to French GDP growth in Q1.

UK:
The release overnight of the latest GfK survey suggested that UK consumers remained downbeat in February. The headline consumer confidence indicator inched only slightly higher from -14, which was the lowest level since mid-2013, to -13. Consumers’ assessment of their personal financial situation was unchanged – following some deterioration last year, this appears to have stabilised in recent months, perhaps as higher wage growth and rising employment have given consumers more confidence about their financial future. The same factors seem to have provided support to the climate for major purchases, with the relevant indicator up to a five-month high. Meanwhile, consumers’ assessment of the broader economy also improved a touch, but overall remained highly negative. For example, a three-month average of the forward-looking indicator for the general economic situation was the lowest since the global financial crisis. There might be a combination of factors at play, but Brexit uncertainty is clearly the main factor behind consumer pessimism, suggesting that confidence is unlikely to recover substantially until a deal is approved (or Brexit is reversed). As such, we expect that consumer spending growth will have eased this quarter from the 0.4%Q/Q pace in Q3 and Q4 last year.

The housing market performance is one of the many drivers of UK consumer confidence and spending decisions, and the Nationwide house price index, also released this morning, suggested that house price growth remained weak this month. Indeed, against the backdrop of significant inertia in the market, the headline index was up just 0.4%Y/Y, the third consecutive reading of 0.5%Y/Y or lower. Meanwhile, the Lloyds Business Barometer once again highlighted that businesses are feeling more perturbed than consumers about Brexit risks, with the survey’s headline indicator extending the recent downward trend and falling to 4, the lowest level since 2011.

US:
In the US, all eyes today will be on the delayed first release of Q4 GDP. While data published earlier this week showed a (likely unintentional) pickup in inventories in December, yesterday’s trade figures disappointed suggesting overall GDP growth of around 2%Q/Q annualised, down from the 3.2%Q/Q ann. rate of the first three quarters of last year. Today will also bring weekly initial claims figures and February’s Chicago PMI. A number of Fed Governors will speak publicly, including Vice-Chair Clarida, Bostic, Harker and Kaplan.

Australia:
The main domestic focus in Australia today was on the release of the CAPEX survey for Q4, which provided further important indications ahead of next week’s full national accounts, as well as an update on firms’ expected spending over the coming year or so. In contrast to the earlier reported weakness in retail spending and construction, the total volume of capex spending rose 2.0%Q/Q in Q4 – double market expectations. In addition, a previously reported 0.5%Q/Q decline in spending in Q3 was revised away to leave spending flat in the quarter. In contrast to yesterday’s construction data, the CAPEX estimate of spending on buildings and structures – which is not used in the national accounts – rose 3.2%Q/Q in Q4, thus breaking a run of four consecutive declines. More importantly, spending on plant and equipment – which goes directly into the national accounts – rose 0.7%Q/Q and 8.1%Y/Y.

The news regarding firms’ forward capex plans was positive. For the 2018/19 financial year, the 5th estimate of firms’ nominal spending was 3.6% above the comparable estimate made for 2017/18, and 4.0% above the last estimate made three months ago. Forecast spending on plant and equipment was 10.8% above the comparable forecast made for 2017/18, while forecast spending on buildings and structures was 1.4% lower. Within the mining sector forecast spending was 6.8% lower than the comparable estimate for 2017/18. Meanwhile, in the manufacturing sector forecast spending was 5.8% higher than the comparable estimate for 2017/18, but was 1.2% lower than the estimate made three months ago, mostly due to a downward revision to spending on buildings and structures. In the remaining industries – which makes up the bulk of investment spending – forecast spending was 8.9% above the comparable estimate for 2017/18, and up 4.8% from the estimate made three months ago. Almost all of the latter revision was accounted for by an upward revision to growth in spending on plant and machinery.

Finally, today also saw the first estimate of capex spending for the 2019/20 financial year. These early estimates tend to be very unreliable, but for the record the 1st estimate was a welcome 11.0% above the comparable estimate made for 2018/19, driven by an 18.8% lift in forecast spending in the mining sector. Forecast spending in the manufacturing and ‘other industries’ sectors grew 5.2% and 6.8% respectively.

In other news, as usual the end of the month saw the RBA release its money and credit aggregates, in this case pertaining to January. Private sector credit increase just 0.2%M/M – the same as in December – so that annual growth fell 0.1ppts to 4.3%Y/Y. Housing credit also rose just 0.2%M/M, so that annual growth slowed by 0.3ppts to 4.4%Y/Y. Owner-occupier housing credit rose 0.3%M/M and 6.2%Y/Y, but investor housing credit rose just 0.1%M/M and 1.0%Y/Y. Meanwhile, other personal credit fell 0.6%M/M in January and was down 2.8%Y/Y. By contrast, business credit rose 0.3%M/M, lifting annual growth by 0.3ppts to 5.2%Y/Y.

New Zealand:
The focus in New Zealand today was on the ANZ Business Outlook Survey for February – the first report this year given the usual holiday break in January. Unfortunately the headline business confidence index fell 6.8pts to a heavily negative -30.9, reversing about half of the improvement that had been recorded in the December survey. The more important index measuring firms’ own outlook for activity remained positive, but this too slipped a modest 3.1pts to +10.5 – a level that is almost 20pts shy of its historical average. The slightly weaker tone was also reflected in less positive hiring intentions (down 4.4pts to +3.0) and capex intentions (down 1.3pts to +2.3), leaving both well below average levels. Meanwhile, while there was a small increase in the proportion of firms expecting to increase their selling prices over the next three months, firms’ average year-ahead inflation expectation fell 0.09ppt to 2.06% – the lowest reading since October 2017.

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