Morning comment: Japanese sentiment & wages, & more from the RBA

Chris Scicluna
Emily Nicol
Mantas Vanagas

After posting only a small loss on Wednesday, Wall Street displayed more decisive weakness on Thursday amidst more poor data and downgraded growth forecasts in Europe and news that President Trump would not be meeting China’s Xi ahead of 1 March – the date at which the current truce on tariffs is scheduled to end. At the close the S&P500 was down 0.9% – it had been down as much as 1.6% intraday – while the 10-year Treasury yield had fallen 4bps to 2.65%

Since the close US equity futures have traded back towards their earlier session lows, while US Treasury yields have nudged lower too. Not surprisingly, therefore, Asian equity markets have been bathed in red today – none more so than in Japan, where the TOPIX closed down 1.9% on a busy day for economic data which brought, among other things, a particularly downbeat Economy Watchers survey (see below). JGB yields moved lower too, with the 10Y yield down 2bps to -0.03% – just above this year’s low. Markets in China and Taiwan remained closed, and while Hong Kong returned from holiday the Hang Seng is little changed. South Korea’s Kospi fell 1.2% and Australia’s ASX200 fell 0.3%. Most notable in the region’s bond markets, Australia’s 10Y yield fell 5bps to a 26-month low of 2.10% after the RBA’s updated Statement on Monetary Policy further encouraged thoughts of a possible policy easing later this year (more on this below too). New Zealand’s 10Y bond yield fell 4bps to also sit at 2.10% as investors looked ahead to the likelihood of a dovish policy message at next week’s RBNZ meeting.

The domestic focus in Japan today was on the household sector with the release of new reports on the performance of labour incomes and consumer spending for the month of December. But the Economy Watchers survey and BoJ bank lending report for January were also released, providing a more up-to-date picture regarding the state of the economy, with the former of these arguably the most striking of the day's releases.

Indeed, most disappointingly, the Cabinet Office’s Economy Watchers survey for January tallied with other recent surveys (e.g. the Reuters Tankan and PMIs) to suggest a decidedly lacklustre start to the year for the Japanese economy. In particular, the overall current conditions index fell to just 45.6 – the weakest outcome since July 2016 – following a December reading that was revised down 1.3pts to 46.8. The weakness in January was driven by the household sector, with the household-related index falling 2pts to 44.6 – the weakest result since September 2016. After falling steeply in December, the business-related index rose a modest 0.5pt to 46.6. The forward-looking components were somewhat less discouraging, with the overall outlook index rising 1.5pts to 49.4 – still just below the average through Q4. But while the household-related index improved 2pts to an even 50, firms remained very cautious with the business-related index rising just 0.5pt to 46.8 – still the second-lowest reading seen in the last 2½ years.

Meanwhile, news on workers’ incomes (all-important for the BoJ) and labour input was provided by the MHLW’s release of the preliminary results of the Monthly Labour Survey for December. As always, we caution that the preliminary results can be subject to substantial revision, while sampling changes and recent revelations about the conduct of this survey have added further uncertainty about the actual pace of wages growth in Japan. Nevertheless, taken at face value, the December survey provided a small upside surprise, with growth in the headline measure of total labour cash earnings (per person) unexpectedly edging up 0.1ppt to 1.8%Y/Y. Taking a matched sample of business respondents – to try to look through the impact of sampling changes – growth in total labour cash earnings (per person) was only slightly weaker at 1.7%Y/Y. And after allowing for a decline in the rate of inflation, growth in real total cash earnings (per person) increased to a 6-month high of 1.4%Y/Y.

Unfortunately for the BoJ, the detail of the survey suggests that the potential flow-through to inflation might be weaker than suggested by the headline figures. Solid headline growth was attributable to growth in bonus payments – presumably linked to productivity – which rose 2.7%Y/Y in December. Growth in contracted earnings fell back to 0.8%Y/Y from 1.3%Y/Y in November, with growth in scheduled earnings (i.e. ordinary time) slowing 0.4ppt to 0.9%Y/Y and non-scheduled earnings (i.e. overtime) declining 1.0%Y/Y compared with growth of 0.6%Y/Y in November. (Given the drop in inflation, however, the rise in real contractual earnings of 0.4%Y/Y was the strongest in 27 months.) The preliminary estimates indicated that scheduled earnings of part-time workers rose 2.5%Y/Y on a per hour basis, up 0.2ppt from November. However, growth in scheduled monthly wages for full-time workers slowed 0.4ppt to 1.0%Y/Y – a result that was only in line with the average growth recorded during last year.

Elsewhere in the survey, the number of regular employees rose 0.2%M/M in December – the third consecutive such increase – so that annual growth nudged up to 0.8%Y/Y. The preliminary estimates suggested that the number of full-time employees rose 0.5%Y/Y, up from no growth in November, while growth in part-time employment slowed to 1.7%Y/Y from 2.2%Y/Y previously. However, given the marked tendency for subsequent revisions to boost part-time employment at the expense of full-time employment, this finding is likely to be substantially overturned when the final estimates are released. Finally, after rising sharply over the previous two months – reflecting a rebound in activity in the wake of the natural disasters that struck through Q3 – aggregate hours worked (per person) were reported to have declined 3.2%M/M in December to be down 2.1%Y/Y.

In other news, the MIC survey of household spending – a less reliable guide to the developments in the national accounts measure of private consumption than yesterday’s BoJ Consumption Activity Index – pointed to a comparatively subdued December. After adjusting for a discontinuity caused by changes undertaken to the survey last year, MIC reported that real spending amongst two-or-more person households fell 0.1%M/M. Annual growth improved to a negligible 0.1%Y/Y – the first positive reading since August, but still weaker than market expectations. Core spending – which excludes housing, auto sales and certain other expenditures – declined 1.2%Y/Y, but spending nonetheless grew just over 1%Q/Q through Q4 – a result that is consistent with the BoJ’s own consumption indicator. Elsewhere in the survey, and again after adjusting for a discontinuity, it was reported that real disposable income for workers’ households rose 2.1%Y/Y in December, marking the strongest outcome since June.

Finally, the BoJ reported that bank lending rose 2.4%Y/Y in January, unchanged from the previous month’s 12-month high. Loan growth at the major city banks was also steady at 1.6%Y/Y, while growth in lending at regional and shinkin banks slowed 0.1ppt apiece to 3.1%Y/Y and 1.9%Y/Y respectively, continuing the recent gradual downward trend.

Euro area:
After yesterday’s disappointing German IP data for December (with production falling for a fourth successive month to be down 1.5%Q/Q), this morning’s equivalent French figures came in a touch stronger than expected, with overall industrial output up 0.8%M/M and manufacturing production up 1%M/M. The improvement in part reflected a bounce back in production of intermediate and consumer goods, while output of capital goods continued to fall. Admittedly, this pickup in December followed a steeper than previously estimated decline in November and left overall IP down 1.4%Y/Y. Over the fourth quarter as a whole, French manufacturing output was down by 0.5%Q/Q, with construction output down 0.6%Q/Q.

Meanwhile, the Dutch production figures, also published this morning, can only be described as dire. In particular, manufacturing production fell a much-steeper-than-expected 3.9%M/M in December, the sharpest monthly drop for a decade. This left production down more than 4%Y/Y, the first year-on-year drop since September 2015, with electrical machinery output down 14%Y/Y. So, over the fourth quarter as a whole, Dutch manufacturing output was down 0.6%Q/Q, the largest quarterly drop since Q315. Looking ahead, Italy’s industrial production data are also due later this morning and expected to report a modest increase following a decline of 1.6%M/M in November.

Despite the weak manufacturing performance in Germany at the end of last year, December’s trade report, published this morning, suggested that external demand held up well that month, with for example, the value of exports rising 1.5%M/M, the strongest monthly pace since May. Admittedly, on an unadjusted basis, this left exports merely flat compared with a year earlier. But with the value of imports up a smaller 1.2%M/M, the adjusted trade surplus widened slightly to €19.4bn in December, a six-month high and broadly in line with the average for the year as a whole. While the pickup in exports in December followed a drop in November, this still left them 1% higher over the fourth quarter as a whole, after a 0.2%Q/Q decline in Q3. And with the value of imports flat in Q4, today’s data suggest that – like in France and Italy – net trade provided a modest boost to German GDP growth last quarter, for the first time in a year.

Brexit noise will continue today, with Irish Taoiseach Leo Varadkar set to visit Belfast for talks with the intransigent Northern Irish DUP and other local parties before Theresa May visits him in Dublin later in the day to discuss how, if at all, the presentation of the controversial border backstop arrangements might be finessed to facilitate the passage of the current Withdrawal Agreement through the UK Parliament. We certainly don’t expect any meaningful breakthrough today, nor indeed next week, with suggestions now that a meaningful vote being held in the House of Commons perhaps no sooner than late March.

Meanwhile, with most economic sentiment surveys pointing to a further loss of growth momentum in the UK at the start of the year, the labour market – whose fortunes will have a key bearing on BoE policy over coming quarters – now looks to be losing steam too. The latest PMIs, published earlier this week, implied that employment declined in January for the first time in six years. And today’s KPMG and REC Report on Jobs – a survey of recruitment and employment consultancies – brought a similar message. Companies have reportedly become more cautious when making recruitment decisions, with vacancies rising at the slowest rate for 27 months and survey respondents reporting the first drop in the permanent staff placements since the Brexit referendum.

Nevertheless, the labour market appears to remain tight – unsurprisingly given that the most recent data for late last year showing that the UK employment rate was at a record high and the unemployment rate at the lowest level for decades – with the REC survey reporting that worker availability continued to decline in January and some workers are now unwilling to switch positions against a backdrop of Brexit uncertainty. Nevertheless, pay growth remained firm, with the relevant survey indicator rising slightly on the month to a level in line with its average in Q418. As the economy continues to weaken, however, wage growth should be expected to soften – indeed, in its latest Inflation Report published yesterday, the BoE revised its wage growth for this year and next slightly lower, to 3% and 3¼% respectively.

A busy week for the RBA concluded today with the Bank releasing its updated Statement on Monetary Policy (SMP), setting out in more detail its view of the central outlook for the economy and the risks around that outlook. The “Overview” touched on many of the points made by Governor Philip Lowe in his speech on Wednesday. In particular, it was contended that further progress in reducing unemployment and bringing inflation into the target range can reasonably be expected, so that higher interest rates would become appropriate at some point. But the Bank acknowledged that other scenarios, in which the labour market and consumption growth are weaker than currently expected, are also possible – scenarios than might lead to a sustained increase in unemployment and a lack of progress in returning inflation to target, and consequently a need to lower the cash rate. As Lowe stated on Wednesday, the probabilities of these two sets of scenarios have shifted to be “more evenly balanced than previously”.

As far as the Bank’s central scenario is concerned, as outlined in the post-meeting statement on Tuesday, the Bank has lowered its outlook for growth and pushed out its forecast of a gradual lift in underlying inflation. Specifically, the Bank now expects GDP growth of 2¾%Y/Y in 2019, down from 3¼%Y/Y previously, with year-ended growth expected to decline to 2½%Y/Y in June compared with 3¼%Y/Y previously (as usual the Bank’s forecasts are presented in quarter-point rounded terms). The forecast for 2020 was also revised down to 2¾% from 3¼%Y/Y previously. A key driver of these revisions is a less positive assessment of the outlook for private consumption, which is expected to average growth of 2¾% across the forecast horizon – down ¼% from the Bank’s previous forecast, on account of recent data and developments in the housing market. Despite the slightly weaker outlook for growth, the unemployment rate is still expected to end this year at 5% before declining a little further to 4¾% by the end of 2020.

Importantly, these forecasts are based on the technical assumption that the Bank’s cash rate broadly follows market expectations, which would imply as a minimum no lift over the foreseeable future. Indeed, given the rally this week, the market is now fully factoring one 25bp rate cut over the next 12 months, but the Bank’s forecasts likely assume a stable cash rate. The Bank’s forecast also assumes Brent crude at USD63/bbl, the AUD at USD0.72 and the TWI at 62. On these assumptions, CPI inflation is forecast to end this year at 1¾%Y/Y – down from 2¼% forecast previously – but the forecast for end-2020 is unrevised at 2¼%Y/Y. The Bank’s forecast for the trimmed mean sees inflation end this year at 2%Y/Y, revised down from 2¼%Y/Y previously, but the end-2020 forecast was also unrevised at 2¼%Y/Y. The Bank’s newly extended forecast horizon sees that inflation rate prevail through to June 2021. In other words, the RBA expects inflation to remain below the midpoint of the 2-3% target throughout the extended forecast horizon – a forecast that might reasonably suggest that the hurdle to a rate cut is lower than that for a hike.

It should be a quiet end to the week in the US with no new economic data scheduled for release. 

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at