Morning comment: Japanese trade, European surveys & FOMC minutes

Emily Nicol and Mantas Vanagas

A better than expected earnings report from Walmart helped to lift Wall Street after a soft start on Tuesday. However, the market faded into the close leaving the S&P500 with only a modest 0.15% gain. Meanwhile, Treasury yields and the US dollar both slipped as investors awaited today’s FOMC minutes, which will likely have a dovish tone. Today Asian equity markets have mostly continued with a very mildly positive tone. In Japan the TOPIX rose 0.4% despite another disappointing trade report (more on this below), with similar gains seen in Singapore and somewhat larger gains in South Korea. In China the equity market posted a modest increase despite newswires reporting that the US is seeking yuan stability as one condition of a prospective trade deal. In the bond market yields were little changed in Japan while Australian bonds moved in line with the US Treasury market following a Q4 wages report that was only fractionally weaker than expectations.

Today the focus in Japan turned towards the performance of firms operating in the traded goods sector, with the MoF releasing the merchandise trade report for January. This report made for very disappointing reading, with the value of exports down a substantial 6.6%M/M – the third consecutive decline – resulting in an annual contraction of 8.4%Y/Y. This is the worst result since October 2016. And based on the MoF’s calculations, after adjusting for changing prices, export volumes reported a similarly steep decline of 9.1%Y/Y, with a huge 20.8%Y/Y drop in shipments to China and a modest 1.5%Y/Y decline in shipments to the EU only partially offset by a 10.2%Y/Y lift in shipments to the US. The value of imports also fell a substantial 4.4%M/M in January – influenced by lower fuel prices – and were down 0.6%Y/Y (volumes rose 0.5%Y/Y according to the MoF’s calculations). But with the slump in exports being larger, the seasonally adjusted trade deficit unexpectedly widened to ¥370bn in January – an outcome that contrasted sharply with the small surplus that had been expected by the market.

After adjusting for both seasonal and price effects, the BoJ reported that export volumes decreased 5.3%M/M in January, leaving them 5.5% below the average monthly level through Q4. On the same basis, the volume of imports fell just 0.1%M/M and so was a comparatively modest 2.0% below its respective Q4 average. As a result, while it is early in what can be a very volatile quarter – reflecting the variable influence of regional holidays – today’s figures suggest that net exports are well on track to make a fourth-consecutive negative contribution to GDP growth (recall that net exports subtracted 0.3ppt from GDP growth in Q4). And given muted prospects for domestic expenditures after the rebound that occurred in Q4, today’s report adds to the risk that Japan’s economy will fail to grow during the current quarter.

In contrast, the latest overseas visitor numbers were more positive in January, suggesting that services exports might well receive a welcome boost from tourist spending at the start of the year. In particular, overseas visitor arrivals rose to 2.69mn in January, an increase of 7½% compared with a year earlier, with a notable increase in visitors from China, up 19.3%Y/Y to 754k.

Euro area:
After the German ZEW investor survey yesterday showed a further deterioration in the current situations index this month to its lowest level since 2014, the focus in the euro area today will be on the Commission’s flash consumer confidence indicator for February. Having maintained a downward trend throughout 2018, consumer confidence posted a surprise increase at the start of 2019 and expectations are for a further modest improvement this month, although this would likely still be the third-lowest reading for almost two years. Elsewhere, the ECB’s Chief Economist Praet is due to speak in Frankfurt, while Germany will sell 5Y bonds. 

Ahead of Theresa May’s scheduled Brexit update to the UK parliament one week today, she is desperately trying to get some concessions from the EU in order to muster enough support of her MPs. She is due to meet with European Commission President Jean-Claude Juncker this evening, where talks on how to get around the major sticking point of Irish border backstop will continue. The meeting seems likely to prove inconsequential with the Commission yesterday reiterating that the EU27 will not reopen the withdrawal agreement or accept a time limit to the backstop.  With the Brexit date fast approaching, there is mounting evidence of the damaging impact prolonged uncertainty about the future UK-EU economic relationship is having on the UK economy. Certainly, today’s CBI Industrial Trends survey is likely to report that manufacturing orders declined again this month. The CBI has been very vocal about the Brexit risks and there is little doubt that the survey will once again reiterate those concerns, perhaps alongside the negative effect on UK manufacturers from weaker demand from other major economies.

In the US, attention today will be on the minutes from last month’s FOMC meeting, which seem likely to repeat the dovish tone to the post-meeting statement and press conference. Certainly, the minutes will be closely watched for any further insights into the Fed’s near-term policy outlook, with the statement having signalled at least a long pause to the tightening cycle, with the door seemingly left open for a rate cut too. Also, the Fed’s Kaplan is due to speak publicly, while the Treasury will auction 2Y floating-rate bonds.  

The main focus in Australia today was on the Wage Price Index for Q4, especially with the RBA’s Board having recently again highlighted developments in the labour market as warranting especially close scrutiny. The headline index – which excludes bonuses – rose 0.5%Q/Q, leaving annual growth at the previous quarter’s three-year high of 2.3%Y/Y. While the headline quarterly outcome rounded down to be 0.1ppt below market expectations, both private and public sector wages rose 0.6%Q/Q. As a result, annual growth in private sector wages rose 0.2ppt to a new cyclical high of 2.3%Y/Y, while annual growth in public sector wages eased 0.1ppt to 2.5%Y/Y. In the detail, over the past year the strongest growth in private wages in the healthcare, education and arts/recreation sectors, whereas wage growth lagged notably in the IT/telecommunications sector. Meanwhile, it is worth noting that once bonus payments are included, annual wage growth is somewhat firmer at 2.7%Y/Y – unchanged from Q3 and above the headline ex-bonus measure for a fourth consecutive quarter. Historical experience suggests that the outperformance of this measure provides some grounds for expecting regular wage growth to continue to strengthen gradually over the coming year.

In other labour market news, the DEWR trend index of internet job vacancies rose 1.3%M/M in January following an upwardly revised 1.4%M/M increase in December. As a result, annual growth in vacancies picked up to a six-month high of 3.3%Y/Y.

New Zealand:
A quiet day in New Zealand featured the release of the producer price indices for Q4 – never a great focus for the market given that their release comes after the CPI and the largely contemporaneous relationship between these two indicators. For the record, the PPI inputs index rose a strong 1.6%Q/Q, lifting annual growth to 4.7%Y/Y. Meanwhile, the PPI outputs index rose a more subdued 0.8%Q/Q, lowering annual growth slightly to 3.4%Y/Y. A key driver of both indices this quarter was a spike in wholesale electricity prices – not passed on to retail customers – in part due to the impact of very dry weather on water storage in the hydro lakes.


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