Japanese GDP upwardly revised, Chinese exceeds expectations

Chris Scicluna
Emily Nicol

Overview:
Friday’s particularly weak US payrolls report fuelled market expectations that an easing in Fed policy was on the cards sooner rather than later – with fed funds futures pricing in a probability of more than 80% of a 25bps rate cut at July’s FOMC meeting – while USTs and equities rallied (the S&P 500 closed up 1% on Friday to take the weekly gain to almost 4½%). And the news over the weekend that Donald Trump has “indefinitely suspended” his threatened tariff hikes on Mexican imports gave a further boost to Asian equities today. Japan’s Topix closed up 1.3%, supported also by today’s GDP report that confirmed firmer headline growth than initially estimated (see below for more details), while China’s CSI 300 was up 1.3% as its May export data beat expectations (see write-up below). In the bond markets, however, USTs have more than reversed Friday’s gains, with 2Y yields up to 1.90%, from below 1.80% immediately after the payroll report) and 10Y yields back at 2.13%, having initially touched 2.06% for the first time since 2017 on the release of Friday’s data. Asian bond yields were also largely higher today, although 10Y JGB yields were up just 0.4bps to -0.126%.

Today’s most notable data will come from the UK, where the monthly GDP and sub-sector activity figures for April are set to signal a soft start to the second quarter with the steepest drop in manufacturing output for more than two years. Focus in the UK this week will, of course, also be on politics as the nomination process for the Conservative party leadership closes today and the first official elimination ballot will be held on Thursday. But most notable this week for global financial markets will be the US dataflow, with key US releases including CPI (Wednesday), IP and retail sales (Friday) ahead of next week’s FOMC meeting.

Japan:
The message from today’s economic releases out of Japan was mixed, with an upwards revision to Q1 GDP contrasting with the very downbeat tone to the latest economy watchers survey.

Turning first to the second release of the national accounts for Q1, headline growth was revised up by 0.1ppt in Q1 to 0.6%Q/Q (2.2%Q/Q annualised). And similar upwards revisions to growth in Q218 and Q418 left the annual rate a touch firmer than initially estimated at 0.9%Y/Y, the strongest pace for three quarters, albeit broadly in line with Japan’s potential rate of growth.

Within the detail, the improvement reflected stronger private sector capex, which was now assessed to have increased 0.3%Q/Q in Q1 compared with the initially estimated decline of the same magnitude. But, overall, domestic demand remained very subdued at the start of the year, with household and government consumption down 0.1%Q/Q, while growth in housing and public sector investment was nudged slightly lower from the preliminary release. So, GDP growth in the first quarter was principally due to net trade (accounting for 0.4ppt of growth). But this was hardly a good news story, as this reflected the steepest drop in imports for a decade (-4.6%Q/Q) on the back of subdued domestic demand. Indeed, external demand was weak in Q1, with exports down 2.4%Q/Q, the most since Q215.

Of course, with Japan’s economy having expanded in three of the past four quarters at a rate of ½%Q/Q or more, we would expect to see some payback in the current quarter. And today’s economy watchers survey provided a bleak assessment of current conditions. Indeed, the headline balance fell a steeper-than-expected 1.2pts in May to 44.1, a near-three-year low, with a further deterioration in household and corporate-related demand alike. So, on average in the first two months of Q2, the headline current conditions DI was more than 1pt lower than the average in Q1. And there was a further notable worsening in the survey’s outlook components too, with the headline figure down 2.8pts, also to its lowest level since mid-2016.

Looking ahead to the remainder of the week, Wednesday’s machine orders release will be closely watched for further insights into the near-term capex outlook, as will the MoF’s business sentiment survey on Thursday, which will provide an updated investment projection for the current fiscal year as well as update on current and future economic conditions. Thursday will also bring April’s tertiary activity figures, followed by final IP data on Friday. In terms of inflation, the goods PPI figures are expected to report a notable drop in the headline rate by 0.5ppt to 0.7%Y/Y, no doubt in part reflecting lower energy prices. In the markets, a 30Y JGB auction will be conducted on Thursday.

China:
China’s exports in May beat expectations, rising 1.1%Y/Y in USD terms in contrast to an expected decline of around 4.0%Y/Y. Imports fell a steeper 8.5%Y/Y, and so the trade surplus roughly tripled to $41.65bn, the largest so far this year. By destination, exports to the US dropped 4.2%Y/Y after a much sharper drop of 13.1%Y/Y in April, with the smaller decline probably thanks to the fact that many shipments were brought forward to dodge the increase in US tariffs from 10% to 25% on $200bn of goods from 10 May. Meanwhile, similar to the performances of the prior few months, Chinese imports from the US were down a much steeper 26.8%Y/Y ahead of the increase in Chinese tariffs to 25% on $60bn of US goods from 1 June.

With respect to trade with other economies, exports to Japan edged up 0.5%Y/Y while those to the EU continued to see solid growth, up 6.1%Y/Y, suggesting some diversion of shipments away from the US to China’s second-largest market. But Chinese imports from Japan continued to disappoint, falling 15.9%Y/Y, the most since January 2016, probably weighed by the extended Golden Week holidays. Chinese imports from South Korea, however, were down an even steeper 18.2%Y/Y. Looking ahead, with the manufacturing new export orders PMI having fallen a further 2.7pts to 46.5 in May, export growth seems likely to weaken over the near term.

Over the remainder of the week, Thursday will bring the latest inflation figures – expected to show that headline CPI ticked slightly higher in May by 0.2ppt to 2.7%Y/Y – followed on Friday by retail sales, IP and investment data for the same month. Chinese new loan figures, due sometime this week, will also be watched.

UK:
Attention in the UK this week will no doubt be on politics, as the nomination process for the Conservative party leadership closes today. As things currently stand there are eleven candidates, although we are likely to see this number reduce if potential contenders fail to garner the required eight endorsements to progress. The first ballot among MPs to officially eliminate one candidate will be held on Thursday, with subsequent rounds to be conducted over the following week. When the number of contenders has been whittled down to two, party members will be allowed to vote, with the winner likely to be confirmed in the week commencing 22 July.

It will be a busy day for UK economic data too, with the release of the monthly activity indicators for April. Most notably, the monthly GDP figure is expected to report a soft start to Q2 following a contraction in March even as consumer spending was boosted by the timing of Easter and warmer weather. Indeed, while services and construction activity might have grown in April, manufacturers scaled back production significantly (probably down more than 1.0%M/M) following the inventory-related surge in Q1 and as car factories shut down in the face of possible no-deal disruption.

Over the rest of the week, the latest labour market figures, due tomorrow, will also be of interest. Following the marked drop in the number of people employed in February and March, the headline employment figure in April is expected to report the first decline on a three-month basis since October 2017. This notwithstanding, the headline unemployment rate is expected to remain unchanged at 3.8%. Average wage growth, meanwhile, is likely to edge lower to an eight-month low of 3.0%3M/Y. Finally, the RICS house price survey for May is due on Thursday. In the markets, the DMO will sell 30Y Gilts on Wednesday.

Euro area:
The euro area should be much quieter for economic data this week, with the most noteworthy release the aforementioned euro area industrial production figures on Thursday. Despite the weakness in Germany in April, these are expected to show that IP excluding construction reversed the 0.3%M/M decline recorded in March. More clarity on this outcome will follow Italy’s IP release today, while the Bank of France’s business sentiment survey (due tomorrow) will provide an update on conditions in May. The second half of the coming week will also bring final inflation figures from the largest member states – including Germany (Thursday), France and Italy (Friday) and Spain (Wednesday) – which are expected to align with the preliminary releases showing a notable drop in headline and core CPI rates as the Easter-related boost to services inflation in April reversed.

Beyond the economic data, the Eurogroup meeting on Thursday will be interesting not least given the Commission’s recommendation in the past week to launch a new Excessive Deficit Procedure (EDP) against Italy. Moreover, euro area Finance Ministers are due to reach agreement on the key features of the planned euro area Budgetary Instrument for Convergence and Competitiveness (BICC), which will represent the first common fiscal policy tool for the single currency. The BICC is highly likely initially to be very small in size, and targeted on supporting structural reforms and public investment rather than boosting demand. However, if the design features to be agreed in the coming week are sufficiently flexible in terms of the possible use of funds, and can allow for a significant future increase in size, then the BICC might eventually prove a useful basis for a single euro area budget to be used to support demand in the event of the next recession and/or financial crisis. Indeed, in this context, in his post-Governing Council meeting press conference yesterday, ECB President Draghi emphasised that fiscal policy would have to play a more substantive role in boosting economic activity if and when the downside risks to the economic outlook crystallise. And, if it is designed appropriately, the BICC might eventually have a useful part to play.

Elsewhere, ECB President Draghi and Vice-President de Guindos will speak publicly on Wednesday at an ECB conference, although the focus will be on central, eastern and south-eastern European countries and so might be of little relevance to the debate on the monetary policy outlook. In the markets, Germany will sell 10Y Bunds on Wednesday, while Italy will sell 3Y and 7Y BTPs on Thursday.

US:
In the US, ahead of the forthcoming FOMC meeting on 20 June, this week week will bring a number of key economic releases, including May figures for CPI (Wednesday), retail sales and IP (Friday). Against the backdrop of weaker energy inflation, the annual rate of headline CPI is expected to have edged back below 2%Y/Y, while core inflation is likely to have moved sideways at 2.1%Y/Y. Meanwhile, a stronger showing from retail sales is expected, while manufacturing output is anticipated to have posted the first increase for five months. Sentiment surveys will also be closely watched, including the NFIB small business optimism indicator (tomorrow) and the preliminary University of Michigan consumer confidence index (Friday). In the markets, the Treasury will sell 3Y notes tomorrow, 10Y notes on Wednesday and 30Y bonds on Thursday.

Australia:
After a quiet start to the week, tomorrow’s NAB monthly business survey will be of interest for an update on conditions in May – indeed in April, the headline business conditions index fell 4pts to 3, its second-lowest reading since the start of 2016, which the business confidence index remained at its weakest level since mid-2013. This will be followed by the latest monthly consumer confidence survey on Wednesday. Meanwhile, given the importance the RBA has attributed to the labour market in determining future monetary policy, all eyes on Thursday will be on the latest employment figures for May. 

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