Morning comment: Disappointing Japanese data, Chinese & Europen PMIs

Emily Nicol

Despite some firmer-than-expected US data, Wall Street closed a little lower on Thursday (S&P500 down 0.3%) as sentiment appeared to be impacted by the collapse of the US-North Korea summit earlier in the day. Credit spreads also widened slightly but 10-year Treasury yields rose 4bps to 2.72%. Meanwhile, Fed Vice-Chair Richard Clarida emphasised a disinclination to be pre-emptive with monetary policy at this juncture, while Fed Chair Jerome Powell also restated that the Fed would be patient in determining future adjustments to policy.

With a Bloomberg report suggesting that the US was still working towards a final trade deal with China that could be agreed between President Trump and President Xi as soon as mid-March, equity markets firmed across the Asia-Pacific region on Friday. In Japan the TOPIX rebounded 0.5% as investors also took heart from news of a stronger-than-expected lift in business capex in Q4 and a modest upward revision to the manufacturing PMI in February, even as the labour market appeared to weaken slightly in January and consumer confidence slipped further in February (more on these releases below). Equities also firmed in China – the CSI300 rising more than 2% – thanks to the trade rhetoric and a surprising rebound in the Caixin manufacturing PMI in February – the latter contrasting with the previous day’s official PMI (also discussed below). Gains in Singapore and Australia were somewhat more restrained.

Sentiment surveys will dominate the data flow today, including final manufacturing PMIs from the euro area, UK and US today, while the flash euro area CPI figures for February will also be noteworthy ahead of next week’s ECB meeting. In the US, the personal income and spending figures – including the closely-watched PCE deflator – will also be released.

A very busy day for data in Japan included new information on the performance of the economy in Q4 as well as more up-to-date indicators of activity and inflation. In summary, that information suggests that GDP growth in Q4 was likely a touch firmer than the 0.3%Q/Q rebound estimated provisionally, but also confirmed that activity has likely fallen away at the beginning of this year.

First up, the MoF released its survey of corporations for Q4 which, amongst other things, contained information that will be used by the Cabinet Office in the revised estimates of Q4 GDP growth to be published next Friday. Of particular note, respondents indicated that their capex (excluding software) rebounded 3.3%Q/Q in Q4 following a 4.4%Q/Q decline in Q3. As a result, annual growth in spending picked up to 5.5%Y/Y from 2.5%Y/Y previously – an outcome that was about 2ppts stronger than had been expected by the market. Spending in the manufacturing sector rebounded 8.8%Q/Q, while growth in the non-manufacturing sector was a negligible 0.2%Q/Q. The preliminary national accounts had estimated that real private non-residential investment increased 2.4%Q/Q in Q4. Given the usual correlation in this measure with that in the MoF survey, it is not obvious that today’s upside surprise will lead to a significant upward revision to business capex in Q4. But given also the implied adjustments to inventories, we could well see a modest upward revision to the preliminary estimate of GDP growth of 0.3%Q/Q. That would, however, offer little comfort in light of the 0.7%Q/Q decline in output in Q3 and the very weak early signs that are emerging concerning activity in the current quarter.

Elsewhere in the survey, we learned that business sales (excluding financial and insurance firms) rose 0.7%Q/Q in Q4, lowering annual growth to 3.7%Y/Y. Sales grew 1.3%Q/Q in the manufacturing sector – reversing a similar decline in Q3 – but just 0.5%Q/Q in the non-manufacturing sector. Meanwhile, ordinary profits declined 5.1%Q/Q in Q4 and were down 7.0%Y/Y (operating profits fell 6.7%Q/Q and 10.9%Y/Y). This was mostly driven by the manufacturing sector, where ordinary profits fell 11.2%Q/Q and so were down 10.6%Y/Y. By contrast, non-manufacturing profits fell 1.5%Q/Q and were down 4.9%Y/Y. As a result, corporate profitability – measured as the ratio of ordinary profits to sales – fell back to 5.3% in Q4 from 5.7% in Q3. This still compares very favourably with an average profit margin of 4.5% over the past decade, but is below the cyclical high of 6.7% reached back in Q2. Profitability in the manufacturing sector fell to 6.4% from 7.3% previously while profitability in the non-manufacturing sector edged lower to 4.9% from 5.0% previously.

Turning to more up-to-date information, today also saw the release of the household labour market survey for January. Perhaps not surprisingly, especially in light of the downbeat tone of this week’s activity indicators, household employment fell a further 320k in January following a 200k decline in December (albeit the latter a much smaller decline than had been estimated last month). As a result, annual growth in employment slowed a further 0.8ppt to 1.0%Y/Y – still strong considering that overall economic activity has been little changed over the past year. Compared with a year earlier the largest lift in employment occurred in the IT and telecommunications sector, whereas the construction sector reported a large fall in employment. The employment rate (i.e. the proportion of the working-age population in employment) fell a further 0.3ppt to 59.7% in January – the lowest level since March last year but still 0.6ppt higher than a year earlier.

With the labour force participation rate falling 0.2ppt to a ten-month low of 61.2%, the labour force posted a 210k decline this month but was still up 0.6%Y/Y. But given the size of the decline in employment, this was insufficient to prevent the unemployment rate from rising 0.1ppt to 2.5% (male unemployment was steady at 2.5%, but female unemployment rose 0.3ppt to a 13-month high of 2.5%). Separately, the MHLW reported that the effective job offer-to-applicant ratio remained steady at 1.63x for a third consecutive month – just below the four-decade high recorded back in September. The number of outstanding job offers fell 1.0%M/M, however, lowering annual growth to 0.7%Y/Y. By contrast the number of new job offers rose 2.7%M/M and 2.8%Y/Y in January, but the number of new job applicants fell 0.5%M/M and 1.4%Y/Y. So in summary the labour market remains very tight, but there appears to have been an unsurprising loss of forward momentum in recent months – at least some of which likely reflects weakening demand-side factors.

In other household-related news, the Cabinet Office released the results of its survey of consumer sentiment for February. The headline index fell for a fifth consecutive month, declining 0.4pt to 41.5, the lowest reading since November 2016 and one that is now slightly below its long-term average. Within the detail, declines were recorded across three of the four main sub-indices, with a pick-up in the employment index being the only exception. The index measuring consumers’ willingness to buy durable goods fell a further 0.8pt to 40.9, which was also the lowest reading since November 2016. While Japan’s consumer spending has been constrained more by income growth than any lack of optimism, the continuing weakening of consumer sentiment is clearly an unwelcome development.

Turning to the manufacturing sector, the final results of the February manufacturing PMI survey were only slightly less discouraging than the preliminary findings released last month. The headline business conditions index was revised up 0.4pt to 48.9, leaving it 1.4pts below the January reading and still the weakest since June 2016. Within the detail, the output index was revised up 0.4pt to a still very contractionary 47.4, leaving it down 2.0pts for the month and down 6.6pts since the end of last year. The new orders index was revised up 0.3pt to 47.1, but was still down 1.3pts for the month. And while the new export orders index was revised up 0.7pt to 47.7, resulting in a 1.7pt lift for the month, this follows a 3.1pt slump in January. Meanwhile, the employment index was revised up 0.9pts to 51.6, leaving it now little changed from January. In keeping with the bulk of the survey, the input prices index was revised up 0.4pt to 56.7, reducing its decline for the month to 0.9pt. The output prices index was revised up 0.3pt to 51.7, leaving it down 0.4pt for the month and somewhat below the average level recorded through 2018.

Finally, the advance CPI for the Tokyo area for February provided an upside surprise, albeit mainly at the headline level. The seasonally-adjusted headline index was unchanged during the month – a firmer than expected outcome considering the 0.5%M/M increase in January – causing annual inflation to edge up 0.1ppt to 0.6%Y/Y. After rising 7.7%M/M in January, fresh food prices fell 3.1%M/M in February. The ‘BoJ forecast’ core index (which excludes fresh food) increased 0.2%M/M, building on a 0.3%M/M increase in January, to leave annual inflation on this measure unexpectedly steady at 1.1%Y/Y. Meanwhile, energy prices rose 1.1%M/M, led by a small rebound in fuel prices and higher prices for electricity, and so were up 8.8%Y/Y. As a result, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased a more restrained 0.1%M/M in February, leaving annual inflation on this measure steady at 0.7%Y/Y. As far as other key aggregates are concerned, after excluding fresh food, annual goods inflation picked up 0.2ppt to 1.7%Y/Y, while inflation in prices for industrial products also picked up 0.2ppt to 0.6%Y/Y. Service sector inflation slowed 0.1ppt to 0.8%Y/Y, but this is still double the pace experienced this time last year. Of course, inflation still remains distant from the BoJ target. And given the tone of recent activity indicators, the prospects of achieving that target in the foreseeable future appear increasingly slim.

Following yesterday’s weaker official manufacturing PMI reading, today saw the release of the Caixin manufacturing PMI for February – a survey that is more focused on SMEs. Surprisingly, the headline index rebounded 1.6pts to a three-month high of 49.9 – a result that contrasted with the official manufacturing PMI which, as we noted yesterday, had depicted increasing weakness amongst smaller firms in particular. Within the somewhat mixed detail, the output index rebounded 2.1pts to 50.2 and the new orders index rose 2.9pts to also sit at 50.2 – a three-month high. However, the new export orders index fell 1.0pt to 49.4 and the future output index fell 0.5pt to 55.1. The survey’s pricing indicators were firmer, with the input prices index rising 1.5pts to 49.6 and the output prices index jumping 3.0pts to 50.9 – outcomes that hint at increased demand associated with the Lunar New Year holiday. So, as we noted yesterday, given the variable impact of holidays, caution needs to be exercised in reading these surveys at this time of the year. Indeed a clearer picture of how the Chinese economy has begun the year will not emerge until the release of the combined January/February activity indicators are released in on 14 March.

Euro area:
Ahead of next week’s ECB meeting, the main data focus in the euro area today will be the flash February inflation figures. The equivalent releases from the largest four member states yesterday provided mixed messages – e.g. German inflation moved sideways at 1.7%Y/Y, unchanged from the eight-month low recorded in December and January, while inflation in France, Italy and Spain ticked slightly higher. On balance, we expect the euro area’s headline rate to have increased 0.1ppt to 1.5%Y/Y, still below the average in 2018, while core inflation likely moved sideways at just 1.1%Y/Y.

Today will bring euro area unemployment figures for January – the headline rate is expected to have moved sideways for the second successive month at 7.9% – as well as German unemployment figures for February. The final manufacturing PMIs for February are also due and expected to align with the preliminary reading showing the headline index dropping 1.3pts to a 5½-year low of 49.2.

Ahead of next week’s euro area retail sales figures, this morning brought Germany’s retail sales release for January. As expected, this showed a notable rebound in spending at the start of the year, with sales up 3.3%M/M, more than fully reversing the revised drop of 3.1%M/M in December, which was not quite as steep as originally estimated. This left sales 2.6% higher compared with a year earlier following a decline of 1.6%Y/Y previously, with spending at food and non-food stores rising 2.7%Y/Y and 2.3%Y/Y respectively, while online sales growth remained stronger at more than 6%Y/Y.

The data focus in the UK today will be the February manufacturing PMI survey, which will provide an update on activity in the sector in the middle of Q1. The headline index eased by 1.4pts to 52.8 in January, and a further deterioration is very likely this month, not least given persisting Brexit uncertainty. Nevertheless, support again seems likely to come from precautionary stock-building, after the inventories PMI in January rose to the highest level on the survey’s twenty-seven-year history. BoE lending data for January are also due. These are likely to echo the data released earlier this week by UK Finance, which suggested that mortgage approvals from the major retail banks rose to the highest level in more than a year, while consumer credit growth also picked up.

In the US, it will be a busy end to the week with the personal income and spending report due for December, including the core PCE deflator. Data on personal income for January will be released at the same time, but estimates of spending and the core PCE deflator for that month still face a delay. Also this afternoon we will receive the manufacturing ISM for February, final readings from the manufacturing PMI and University of Michigan consumer survey for February and information on auto sales during February. Fed Chair Powell is due to speak on recent economic developments and longer-term challenges in New York, although this seems bound to reiterate the message from his semi-annual testimony before Congress earlier this week.

Given the increasing focus on developments in the housing market, the key economic report released in Australia today was the CoreLogic measure of home price developments for February. According to CoreLogic the median house price across Australia’s 8 capital cities fell 0.9%M/M – the 16th consecutive monthly decline. And while this was the smallest drop in prices since November, the annual decline steepened to 7.6%Y/Y from 6.9%Y/Y previously, with prices falling 10.4%Y/Y in Sydney and 9.1%Y/Y in Melbourne. To date the RBA has been relatively sanguine about these price declines, which, as Governor Lowe pointed out in his recent parliamentary testimony, come after a huge run-up in prices during prior years. Rather the RBA remains far more interested in downside risk to consumer spending from sluggish – albeit gradually improving – growth in household incomes.

In other news, Australia’s twin manufacturing PMIs painted a mixed picture in February. The long-running but especially-volatile AiG index rose a further 1.5pts to a four-month high of 54.0, while the final CBA index reading was revised down 0.2pt from its preliminary reading to 52.9 – 1.0pt below its final January reading and the lowest reading since July last year. Neither index is followed closely by the market, however, with the monthly NAB Business Survey remaining the preeminent indicator of business sentiment in Australia.

New Zealand:
New Zealand’s merchandise terms of trade fell 3.0%Q/Q in Q4 – a larger decline than the market had expected – and so was down 4.7%Y/Y. This was due to a 1.7%Q/Q decline in export prices – driven by lower prices for dairy products – and a 1.4%Q/Q lift in import prices. Given already-released information on export and import values, these price movements meant that net export volumes were by implication higher than had been estimated by the market. Indeed, merchandise export volumes increased 0.8%Q/Q in Q4, whereas import volumes increased just 0.2%Q/Q. Annual growth in export volumes was nonetheless modest at just 0.6%Y/Y, while import volumes fell 0.2%Y/Y – the latter stabilising following very strong growth during the previous year.

In more up-to-date news, the ANZ-Roy Morgan consumer confidence index fell a marginal 0.7%M/M to 120.8 in February, leaving the index only slightly above its long-term average and very close to the average reading recorded through last year. The component indices were mixed. While fewer respondents expressed optimism about the economic outlook, a net 39% of respondents held the view that it is a good time to buy major household items – a robust reading that was 3pts firmer than in January and follows the strong Q4 retail sales report released earlier this week. Meanwhile, the number of dwelling approvals surged 16.5%M/M in January to be up 33.0%Y/Y. As a result, the number of approvals in the twelve months to January amounted to the largest number in any 12-month period since 1975. A substantial contributor to the growth in January was approvals for apartments and retirement units – a developing trend given demographic pressures – as house approvals rose a more restrained 5.8%M/M and 11.2%Y/Y. In value terms approvals for residential buildings, including alterations, rose 26.6%Y/Y, while approvals for non-residential buildings increased a somewhat weaker 4.7%Y/Y.

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