Japanese retail data disappoint

Chris Scicluna

In an interview yesterday on Fox Business Network, President Trump was boisterous ahead of his bilateral with Xi Jinping, which is now confirmed for Saturday morning in Osaka. Among other things, he stated that, if a deal’s not possible, “My Plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them”. But the wider consensus is that the US will suspend plans to add tariffs to the extra $300bn of Chinese imports previously mooted by Trump. And so the tone to markets in Asia today was positive.

Indeed, despite a modest disappointment from the latest Japanese retail sales data (see below), the Topix closed up 1.2%, the best showing for a week, while China’s CSI300 rose a similar 1.1%. And UST yields extended yesterday’s gains, with 10Y yields now up to 2.06%, their highest level since last Friday. Despite a decent 2Y auction, with the yen weaker (briefly above ¥108/$) the JGB curve steepened, reducing expectations of imminent changes in the BoJ’s Rinban purchase amounts. At the same time, dovish BoJ Policy Board member Wakatabe also stated there was no need to change the 10Y yield target range of +/-0.20%. But he echoed the sentiment of Governor Kuroda last week who stated that the range should be interpreted flexibly. And Wakatabe also insisted that the BoJ would be ready to provide extra monetary stimulus swiftly if necessary, and singled out the risks to growth in the second half of the year from October's planned consumption tax hike.

Market moves in Europe have been similar to those in Asia this morning, with equities largely stronger and euro area govvies weaker (10Y Bund yields up almost 2bps to above -0.29%). Data-wise, today brings the first indication of June inflation in Germany (with Spain's equivalent figures already released having provided a downside surprise) and the Commission’s latest comprehensive euro area economic sentiment survey.

Today brought the first noteworthy Japanese data of the week with May retail sales figures. With sales boosted early in the month by the extended Golden Week holiday, and later in the month by record high temperatures for May, positive growth was widely anticipated. In the event, however, growth was less vigorous than anticipated, with sales up just 0.3%M/M following a drop of -0.1%MM (revised down from unchanged) the previous month. That, however, left them up 1.2%Y/Y, the strongest annual rate so far this year, and took the average for the first two months of Q2 0.3% above the Q1 average.

Within the detail, general merchandise sales fell for the first time since January (down 0.6%M/M) and food sales down too (-0.9%M/M, more than reversing the rise in April). And following a surge of 2.5%M/M the previous month, sales of apparel and accessories were up just 0.1%M/M despite the end-month heat-wave. But sales of household machines were again strong (up 1.0%M/M and 5.7%Y/Y), while auto sales had their best month for more than a year, rising 3.4%M/M and 2.0%Y/Y.

While these retail data give an insight into activity on the Japanese High Street, as ever we caution that they do not normally provide a reliable guide to overall private consumption. The May household spending report and, in particular, BoJ consumption activity data, both due at the end of next week, are likely to be more insightful in that respect.

Euro area:
After national surveys released earlier this week suggested that firms and households are becoming more downbeat in Germany while the opposite is the case in France, the Commission’s full business and consumer survey results for June are due today. With sentiment in other member states probably moving more closely in line with Germany than France, we already know that the flash euro area consumer confidence index fell to a five-month low this month. And with Markit having reported that its flash PMIs implied that growth in activity beyond the Big Two member states slowed to the weakest since 2013, the Commission’s headline euro area Economic Sentiment Indicator is expected to fall back somewhat after rising for the first time in eleven months in May.

Today also brings the first indications of June inflation with the flash estimate from Germany due around lunchtime. The annual CPI rate on the EU-harmonised measure is expected to remain unchanged at May’s thirteen-month low of 1.3%Y/Y. But the equivalent Spanish number released earlier this morning fell a larger-than-expected 0.3ppt to a 2½-year low of 0.6%Y/Y, with lower prices of electricity and fuel cited by Spain’s Statistical Agency as the driving factor.

The Conservative leadership contest continues, with the most likely victor Boris Johnson continuing to give mixed messages about his Brexit policy, which – like his tax and public spending policy – he appears to be making up as he goes along. After he said on Tuesday that the UK must leave the EU on 31 October “deal or no deal”, “come what may, do or die”, yesterday he took a softer line, suggesting the chances are “a million to one against” the UK leaving without a deal.

It’s best to take everything he says with a pinch of salt. But we certainly continue to see the probability of a no-deal Brexit at end-October at significantly less than 50%. Nevertheless, given the marked negative shock to economic activity that it would cause, it was no surprise yesterday when BoE Governor Carney stated that “it’s more likely [than not] that [the MPC] would provide some stimulus” in the event of a no-deal Brexit.

All the while, the UK economic data-flow remains downbeat. While production lines returned to normal after closing early for maintenance in April in the face of no-deal Brexit risks, the latest SMMT data published overnight showed that car output was down 15.5%Y/Y in May, the twelfth successive year-on-year decline. That left them down a steep 21.0%Y/Y in the year to-date. Cars produced for the domestic market fell a hefty 25.9%Y/Y (-20.1% on a year to-date basis) while those produced for exports – which account for more than 80% of total output, and more than half of which are destined for the EU – were down 12.6%Y/Y (-21.3% on a year to-date basis).

The US will today see the final release of Q1 GDP data. Given adjustments that should broadly offset each other, this will likely make little change to the previous estimate of growth of 3.1%Q/Q annualised, although a slight downwards adjustment is expected. May pending home sales figures and the usual weekly jobless claims numbers are also due today. In the bond markets, the Treasury will sell 7Y Notes.


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