Ahead of today’s US jobs report, Asian financial markets were relatively uneventful today, e.g. with most equity indices little changed or posting modest gains. With reports that US trade negotiators will visit Beijing next week to resume talks, China’s CSI300 was among the better performers, rising 0.5%. The Topix closed up 0.2%M/M as the latest Japanese economic data provided rather mixed messages about the strength of spending in May, albeit suggesting a positive performance over the Q2 as a whole (detail below). In the bond markets, USTs and JGBs were relatively little changed with movements in major currency limited too. In Europe, however, BTPs have opened stronger again but equities in core member states are a touch lower after another sharp fall in German factory orders was confirmed, strengthening the case for near-term ECB policy easing.
The latest consumption-related figures out of Japan provided starkly different messages about the strength of household spending in May. The MIC’s latest family income and expenditure survey reported a headline-grabbing 4%Y/Y surge in spending that month, the strongest year-on-year growth for four years. And the adjusted figures were even more striking, with the 5 ½%M/M increase the largest since the pre-consumption tax jump in March 2014. While the pickup was broad-based, the extended Golden Week holiday seems to have provided a notable boost to spending on recreational services suggesting that this improvement might well prove short-lived. Moreover, these figures have provided a far from accurate guide to the national accounts measure of household consumption over the past year or so.
The BoJ’s consumption activity data have offered a better gauge of household expenditure of late. And, unfortunately, today’s figures provided a more downbeat assessment than suggested by the income and expenditure survey. In particular, the headline index fell for the third month out of the past four and by 0.4%M/M. And when adjusting spending by overseas visitors, the index was down 0.7%M/M. Admittedly, this followed a near-2%M/M increase in April. And on this measure, spending on durable goods posted the second successive notable increase (3.4%M/M) to leave it on average so far in Q2 more than 4% higher than the average in Q1. Overall, despite the differing messages for spending in May, today’s reports both signalled a pickup in consumption so far in the second quarter – with core household spending and the adjusted BoJ activity index trending around 0.8% above the respective averages in Q1 – following contraction in Q1.
Separately, given not least the marked pickup in industrial production in May (2.3%M/M), the Cabinet Office’s composite index of economic indicators posted a notable improvement that month, with the coincident index rising for the second successive month by 1pt to a seven-month high of 103.2, prompting the government to upgrade slightly its assessment of the economy to one that has stopped falling. Nevertheless, the report’s leading index was far from encouraging about the near-term outlook, declining for the tenth month out of the past twelve to 95.2, its lowest level since Abe took office at the end of 2012.
The case for imminent easing of ECB monetary policy was strengthened further by this morning’s German factory orders data, which were nothing short of dire. Total orders fell 2.2%M/M, the biggest drop in three months, to stand 8.6% lower than a year earlier – the sharpest annual fall since 2009 – and take the level to its lowest since February 2016. There appear to be no special factors explaining the weakness this month – indeed, excluding bulk items, orders were down a larger 3.0%M/M, the most in five years. The poor performance, however, was related principally to foreign demand (down 4.3%M/M), with orders from within the euro area down 1.7%M/M and those from outside the euro area down a whopping 5.7%M/M. Domestic orders rose 0.7%M/M, but that represented a limp performance after larger declines in each of the first four months of the year.
By type of product, new orders of capital goods were down 2.8%M/M, with intermediate goods down 1.5%M/M, and consumer items down 0.7%M/M. And within the detail, there were renewed sharp declines in orders for chemicals (down 3.6%M/M) and autos (down 3.9%M/M), with metals and other engineered goods down too. Meanwhile, the latest manufacturing turnover data – down for the second successive month in May and by 1.2%M/M, the most since November – point to downside risks to Monday’s IP data.
Overall, the decline in May left the average level of factory orders in the first two months of Q2 down a hefty 1.6% from the Q1 average. So, it would take one of the strongest monthly gains of recent years in June to prevent a further notable drop in orders over the second quarter as a whole after orders already dropped a massive 4.1%Q/Q in Q1. Survey indicators, such as the manufacturing new orders PMI (just 44.2 in June), strongly suggest that a rebound is not in the offing.
Following this week's chorus of dovish sounds from a wide range of Governing Council members, these data make it impossible to believe that the ECB won’t ease policy soon. The only questions are when and by how much. While the case for a July cut is non-negligible, the ECB would normally decide to amend policy only when it has updated its economic forecasts, to be able to calibrate precisely the size of the rate cut (and/or size of adjustment on the asset purchase programme) required. So, we still expect the July meeting merely to come up with a very clear signal of imminent easing, with a cut in the deposit rate – for which there is a strong case now for a 20bps cut to -0.60% – only coming in September, along with a tiered rate framework to ease pressure on the banks. And the Governing Council might then also have news on the asset purchase programme too, confirming an increase in the bond issue/issuer limits to signal a possible expansion of QE in due course.
While the PMI surveys earlier this week signalled an (admittedly dubious) acceleration in jobs growth in June despite a likely drop in output, today’s KPMG and REC report on jobs suggested ongoing sluggishness in recruitment activity at the end of the second quarter. In particular, the number of people placed in permanent roles fell for the fourth successive month, while temporary positions rose at a subdued pace. And unsurprisingly, survey recipients suggested that persistent political and economic uncertainty continued to weigh on job vacancies, with the survey’s relevant index remaining close to a multi-year low. As a reflection of current labour market tightness, however, there was also a smaller pool of available candidates. And the survey also suggested that skill shortages continued to drive wages higher.
This morning will also bring Q1 unit labour cost data from the UK. GDP accelerated in Q1, rising 0.4ppt to 1.8%Y/Y, due to precautionary activity related to the initial Article 50 deadline. However, employment accelerated and wage growth remained relatively firm. As such, having risen to a five-year high of 3.1%Y/Y in Q4, unit labour cost growth seems likely to remain elevated by the standards of the past few years.
Of course, most attention today will be on the US labour market report for June, with nonfarm payroll growth expected to take a step up from 75k in May back close to the average for the year to-date (164k). The unemployment rate, meanwhile, is expected to remain unchanged at 3.6%, while average earnings data will obviously be closely watched too.