Buoyant Japanese orders, well-behaved Chinese inflation, & downbeat Aussie consumers

Chris Scicluna
Emily Nicol

US stocks largely failed to advance yesterday, with the S&P500 closing effectively unchanged on the day. Talking about the trade war, Donald Trump boasted that “It’s me that is holding up the deal” with China, adding that "We had a deal with China and then they went back on the deal, and unless they go back to the deal I have no interest". So, perhaps unsurprisingly, equities in the Asia-Pacific region shifted into reverse gear today, with China’s CSI300 down 0.8%. China's latest inflation data had little impact and avoided major surprises, however, with pressures limited to food prices, and seemingly leaving scope for further PBoC action in due course. But with demonstrators back on the streets, Hong Kong’s Hang Seng was very much the worst performer, currently down about 1.9%. In contrast, Japanese indices saw more moderate losses (the Topix closed down 0.45%), as April’s machine orders surprised on the upside with the biggest rise in core private sector orders in six months (detail below).

Given the downbeat tone to Asian equities, US futures are pointing lower today, while USTs made gains: 2Y yields are currently down 5bps from yesterday’s peak at 1.90% while 10Y yields are down a similar amount at 2.12%. JGBs were also slightly firmer across the curve. And most euro area govvies have opened higher after yesterday saw the 5Y5Y inflation swap forward rate grind down to a new record low below 1.22%, while further members of the Governing Council stated that the ECB is ready to cut rates or restart QE if the economic outlook deteriorates. Mario Draghi will speak publicly later this morning, although the nature of the event means that his comments might not, on this occasion, relate to the ECB’s own monetary policy. Today’s most notable economic data, meanwhile, will be the US CPI report, which will represent a notable extra piece of information for the Fed to chew at next week’s all-important policy FOMC meeting.

After Japan’s GDP report earlier this week saw private sector non-residential investment growth revised higher in the first quarter – marking the ninth increase out of the past ten quarters – today’s machinery orders release provided reasons to be cautiously optimistic about the near-term capex outlook too. In particular, private sector core orders increased for the third consecutive month in April and by a stronger-than-expected 5.2%M/M, leaving the level of orders 2½% higher than a year earlier, the first such increase this year. The pickup in part reflected a rebound in orders placed by manufacturers (up 16.3%M/M, following a drop of 11.4%M/M in March), with extra strength in the particularly volatile ship building and other transport equipment sub-sectors. Meanwhile, orders placed by non-manufacturers rose for the second successive month (1.3%M/M) to their highest level since October 2016.

Some of this vigour at the start of Q2 likely reflected some front-loading of orders ahead of the extended Golden Week holiday. But while we expect to see some payback in May, we would need to see significant declines in May and June (circa 8%M/M) to avoid a positive outturn for the second quarter as a whole – indeed, the level of orders in April stood an impressive 8½% higher than the average in Q1. So, while the Cabinet Office’s projected rise of 15.7%Q/Q in Q2 looks excessively bullish, we certainly expect to see positive orders growth this quarter suggesting continued moderate capex growth in Q2 and Q3. Of course, extra spending over the near term would seem appropriate as businesses bring forward spending ahead of October’s tax hike.

Today’s release also showed a surge in government machinery orders at the start of the fiscal year. While that might possibly reflect its fiscal measures aimed at supporting the economy in the run up to the consumption tax hike, the extreme jump of 93.4%M/M in April, the strongest monthly increase since 1988 to leave them more than 12½% higher than a year earlier, seems likely also to reflect volatility associated with exceptional items. Meanwhile, in contrast to the government sector, demand for machinery from overseas was much weaker in April, with the 18½%M/M drop marking the third monthly decline out of the past four.

Turning to inflation, the goods PPI came in weaker than expected in May, adding to the evidence that consumer price inflation likely peaked in April. In particular, producer prices fell for the first time this year and by 0.1%M/M, to leave annual inflation easing 0.6ppt to 0.7%Y/Y only just above the two-year low hit in January. The largest price decline (and biggest contribution to the drop in the headline rate) came from the nonferrous metals sector, down 2.4%M/M. And with certain other components softer than of late, measured in yen terms import price inflation declined more than 3ppts to -1.4%Y/Y.

So with prices of raw and intermediate materials easing further in May, final corporate prices for consumer goods also fell for the first month in four, to push annual inflation on this measure back into negative territory (-0.4%M/M) for the sixth month out of the past seven. Prices of durable consumer goods were down 2.5%Y/Y (with prices of imported items down a hefty 5.9%Y/Y in yen terms). And while prices of non-durables were up 0.6%Y/Y, this was just half the rate seen in April.

There were no surprises from the May Chinese inflation data. While prices overall were unchanged on the month, base effects pushed up the annual CPI rate by 0.2ppt to a fifteen-month high of 2.7%Y/Y. The upwards pressure on an annual basis relates entirely to food prices, up 7.7%Y/Y, the most in more than seven years. In particular, the devastating impact of African swine flu saw pork prices rise 18.2%Y/Y, the most in three years. Inflation of fresh vegetables moderated but remained exceptionally high at 13.%Y/Y. And the equivalent rate for fresh fruits leapt to an eight-year high of 26.7%Y/Y. Beyond food, however, price pressures are diminishing – core inflation eased back 0.1ppt to 1.6%Y/Y, the lowest since August 2016, with services inflation similarly down 0.1ppt to 1.9%Y/Y, the lowest in more than three years. And while pork prices are set to keep food inflation high even if and when fruit price pressures subside, core inflation seems highly likely to remain muted, leaving scope for further PBoC support, most likely via a further cut in the reserve requirement ratio in Q3.

Indeed, the latest producer price data illustrated the absence of pressure in the inflation pipeline. The headline rate of PPI moderated 0.3ppt to 0.6%Y/Y, some 3.5ppts lower than the level a year earlier. While producer output prices from the mining sector accelerated 6.1%Y/Y, manufacturing price inflation eased to 0.5%Y/Y, with consumer goods output prices up 0.9%Y/Y, the same rate as in April, despite a rise in the food component to a seven-year high of 2.2%Y/Y. Indeed, durable consumer goods PPI inflation fell 0.2ppt to -0.8%Y/Y, the steepest decline since late 2016.

Of course, in the US, all eyes today will also be on CPI inflation figures for May. With energy prices having stabilised after rising sharply in April and food prices, overall consumer prices are expected to have risen just 0.1%M/M in May, the smallest monthly rise since January. So, the annual rate of headline CPI is expected to have edged back below 2%Y/Y. Core inflation, meanwhile, is likely to have moved sideways at 2.1%Y/Y. Today will also bring the Federal monthly budget statement, while the Treasury will sell 10Y notes.

Euro area:
What should be a quiet day for euro area economic news has already brought the most notable new data of the day with Spanish final May inflation figures predictably aligning with the preliminary release. That report had shown the EU-harmonised CPI measure declining 0.7ppt to 0.9%Y/Y, a sixteen-month low. The headline national CPI rate also eased 0.7ppt to 0.8%Y/Y. Within the details released for the first time, there was a notable easing in housing inflation (down 2.3ppts to -0.3%Y/Y) on the back of a fall in electricity prices and transport costs, with the respective year-on-year rise moderating 1.4ppts to 1.7%Y/Y. There was also a steeper pace of decline in the price of recreational services (down 1.8ppts to -1.5%Y/Y), as the Easter-related boost to package tours wore off. And with non-energy industrial goods inflation remaining very subdued in May (0.2%Y/Y), the harmonised core CPI rate also eased in May by 0.2ppt to 0.8%Y/Y.

ECB President Draghi and Vice-President de Guindos will speak publicly today at an ECB conference. However, the focus of the event will be on central, eastern and south-eastern European countries. So, while issues related to resilience to global headwinds will have a read across to the euro area, the ECB policymakers might fail to allude specifically to the current debate on the monetary policy outlook and the relative appropriateness of using rate cuts and/or extra QE to respond to any deterioration in the economic outlook. In the markets, Germany will sell 10Y Bunds.

While yesterday’s NAB survey suggested that Australian businesses are a touch more confident after the general election and RBA’s shift to easier monetary policy, households are less so. Today’s Westpac survey suggested that consumer confidence in June reversed its improvement the prior month, with the headline index dropping back 0.6pt to 100.6, still up somewhat from March’s low for the year-to-date but below all bar one of last year’s readings and also below the long-run average. Within the survey, consumers’ expectations for economic conditions over the coming year saw the most significant deterioration, with assessments of current conditions and the health of family finances weaker too. There was also a deterioration in attitudes towards spending, with the index related to readiness to spend on major household items now almost 7pts below its level a year ago, highlighting the likelihood that private consumption will remain on a relatively subdued trajectory for a while yet.

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