Japanese IP beats expectations (for a change)

Chris Scicluna

Overview:
Following yesterday’s better showing, Asian equities were, on the whole, slightly weaker today as investors awaited the outcome of tomorrow morning’s Trump-Xi trade discussions. Sentiment in Japan was, at least, supported by a stronger-than-expected IP report (see detail on this and the latest labour market and price data below), and so Japan’s Topix closed down just 0.1% to end the week up 0.3% from last Friday’s close. China’s CSI300, however, fell 0.2% to end the week down a similar margin.

Meanwhile, forex markets and USTs were little changed. But JGBs made gains (10Y yields down to 0.17%). Nevertheless, the BoJ just announced cuts of ¥50bn in the upper end of its range of planned purchases for 3-5Y JGBs (now ¥250-500bn) and 10-25Y JGBs (to ¥100-250bn) with an increase of the same amount in the top end of the range of its planned amount of purchases of 1-3Y JGBs (to ¥250-500bn).

In Europe, meanwhile, equity markets are somewhat mixed this morning. And Bunds and OATs are slightly weaker after an upside surprise in this morning’s French flash inflation figures pointed to upside risks to the euro area figures due shortly.

Japan:
A busy day for economic data out of Japan brought several top-tier releases, with the May industrial production report standing out with some rare good news from the troubled sector. Indeed, IP comfortably beat expectations, rising 2.3%M/M, the most in fifteen months, after a rise of 0.6%M/M the prior month. Compared to a year earlier, IP was still down a sizeable 1.8%Y/Y. However, the average level for the first two months was 1.6% above the Q1 average. The METI production survey forecast suggests a decline in output of 1.2%M/M in June to be followed by modest growth of 0.3%M/M in July. While METI thinks the decline in manufacturing production in June will be somewhat larger, at 1.7%M/M, that would still suggest IP growth of more than 1.0%Q/Q in Q2, providing decent support to GDP, albeit sufficient to reverse little more than half of the 2.5%Q/Q decline in the sector in Q1.

The detail of the IP report suggested that all major sub-sectors upped production in May. Following a surge in April, output of autos was up a further 1.6%M/M to leave the average for the first two months of Q2 up 8.8% above the Q1 average. Production of electrical machinery was up for a fourth successive month in May and by a vigorous 4.4%M/M. But the increases in output of general machinery (1.9%M/M) and electronic parts and devices (6.6%M/M) were insufficient to reverse the declines the prior month.

Overall, shipments (up 1.6%M/M) outpaced inventories (up 0.6%M/M) in May. However, as is often the case in this respect, there was significant variation across the subsectors. Inventories of general machinery were little changed, while those of electronic machinery (-3.3%M/M), electronic parts and devices (-2.9%M/M) and ICT equipment (-13.3%M/M) fell back. But the opposite was true for autos, where inventories rose 3.2%M/M, the most since January, to suggest deliberate stockpiling to meet the expected rise in demand ahead of October’s consumption tax hike.

Moving to the labour market, as expected the unemployment rate remained unchanged at 2.4%, the average rate since the start of 2018. While the number of workers employed fell for a second successive month (down 80k) so too did the number of workers unemployed (down 60k) and the total labour force (down 90k). The job-to-applicant ratio, which provides a decent guide to the tightness of the labour market, came in at 1.62x, down just 0.01 from the series high recorded over recent months. But having declined in April for a fourth consecutive month to the lowest since 2017, the number of job offers picked up to a three-month high.

Finally, in terms of inflation, the headline rate for Tokyo was unchanged at 1.1%Y/Y in June, meeting the consensus forecast. However, higher inflation of fresh food offset the impact of lower energy prices. So, excluding such items, Tokyo inflation on the BoJ’s preferred core measure remained unchanged at 0.8%Y/Y. But the Tokyo core rate that aligns with the BoJ’s forecast measure (i.e. excluding fresh food prices) dropped 0.2ppt to 0.9%Y/Y. Services inflation was unchanged at 0.7%Y/Y, the average rate of the past twelve months. But goods inflation fell 0.2ppt for the second successive month to 1.6%Y/Y. Once again, mobile telephony weighed on inflation, with charges down 5.8%Y/Y and handset prices down 9.1%Y/Y.

Attention now shifts to Monday’s release by the BoJ of its latest Tankan, which seems bound to suggest a deterioration in business conditions in the past quarter, and unease about conditions ahead. The indices for non-manufacturers will be watched for evidence that the weakness of the industrial production is starting to take its toll on services. And following a reassuringly firm machine orders report in April, firms’ forecasts for capex will also be watched.

Euro area:
The week’s dataflow from the euro area comes to an end with the flash June inflation figures. And the French numbers just released showed a significant upside surprise, with the EU harmonised measure rising 0.3ppt to 1.4%Y/Y contrary to the consensus expectation of no change. The national headline measure also rose 0.3ppt to 1.2%Y/Y thanks principally to a rise of 0.5ppt in services inflation to 1.1%Y/Y. And as deflation in goods moderated slightly to -0.6%Y/Y, core inflation in France appears to have picked up too.

Yesterday’s figures from Germany and Spain were a mixed bag. In line with expectations, German inflation on the EU-harmonised measure was unchanged at 1.3%Y/Y in June. On the national measure, however, the German CPI rate surprised on the upside, rising 0.2ppt to 1.6%Y/Y due to higher inflation of services (up 0.8ppt to 2.0%Y/Y) and food (up 0.3ppt to 1.2%Y/Y). In contrast, energy inflation fell 2.0ppts to 2.2%Y/Y, suggesting that German core inflation rose more than the headline rate. In Spain, however, annual CPI rate on the EU-harmonised measure fell a larger-than-expected 0.3ppt to a 2½-year low of 0.6%Y/Y. While detail was lacking, lower energy prices were cited by Spain’s Statistical Agency as the driving factor for the drop in inflation.

On the basis of all these data, we see upside risks to our forecast for the euro area of headline inflation unchanged at 1.2%Y/Y and core inflation up to 1.0%Y/Y.

UK:
Having risen to a seven-month high of -10 in May, the headline GfK index of consumer confidence fell back to -13 in June, matching the figures from February to April. Within the detail, most components deteriorated slightly, e.g. households’ assessment of the economic situation over the coming twelve months was revised down and the climate for making major purchases was judged to be the worst for seven months. So, all-in-all, today’s survey provided further evidence that the weakness in retail sales already evident in Q2 is likely to linger into Q3.

Final Q1 GDP data are out shortly. The estimate of GDP growth of 0.5%Q/Q, boosted by Brexit-related inventory accumulation, seems bound to be confirmed. But the current account deficit is likely show a notable deterioration of £8bn or so for Q4 to rise back close to the record high of £32.2bn recorded in Q415.

US:
In the US, the May personal income and spending data, together with the associated PCE deflators, are due today along with the final University of Michigan consumer sentiment survey results for June. Most notably, despite slow job growth last month, personal spending looks set to post solid growth supported by decent growth supported by firm retail and vehicle sales.

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