Morning comment: Trump ups tariffs while Japanese wages wilt

Chris Scicluna
Mantas Vanagas

Overview:
The US-China trade war has ratcheted up another level, but – for the time being, and having priced in such developments over the course of the week – investors do not yet appear overly concerned. With Trump having judged inadequate progress in the ongoing negotiations, overnight the US increased tariffs from 10% to 25% on $200bn-worth of Chinese imports. In a subsequent statement, China’s authorities repeated an earlier pledge to “take necessary countermeasures”, presumably tit-for-tat tariff hikes and actions to support exporting firms. But with the US move not unanticipated, and having retreated sharply over the week, Chinese stocks shrugged off the announcement and rallied to its highest closing level in a week, with the CSI300 ending the day up 3.6%. The Hang Seng is also up, albeit a little less than 1.0%. And moves elsewhere were largely less marked, with the major indices in Taiwan and Korea closing little changed on the day. And, having been significantly lower earlier on, Japan’s Topix closed down just 0.1%, despite some very weak domestic wage data which contrasted an upside surprise to the latest household spending figures (detail below).

By and large, FX markets have been unspectacular with CNY, DXY and JPY all moving within yesterday’s ranges. In the bond markets, JGBs were also little changed, as were ACGBs as the RBA did nothing to shift the market’s view that the cash rate will be cut in the second half of the year when it unveiled the detail of its updated – and significantly downgraded – economic forecasts. Bond markets are also little changed in Europe this morning (yields on 10Y Bunds at -0.05% and on 10Y USTs at 2.45%) but major equity markets have opened higher as the latest German export data beat expectations. Looking ahead, while all eyes will remain on the trade war for any further twists and turns as negotiations resume later today, the latest US inflation data will also be closely watched.

Japan:
A busy end to the week for Japanese economic data brought updates on household spending and labour earnings at the end of Q1, with the former surprising on the upside but the latter doing very much the opposite.

Starting with the spending data, contrary to expectations, the MIC’s household survey pointed to a pickup in annual growth in household spending in March. After adjusting for a discontinuity caused by changes undertaken to the survey last year, MIC reported that growth in real spending amongst two-or-more person households rose 0.4ppt to 2.1%Y/Y, the strongest rate since August. And core spending – which excludes housing, auto sales and certain other expenditures to give a better picture of underlying growth in spending – accelerated 0.2ppt, likewise to 2.1%Y/Y, in this case a fourteen-month high. Compared to February, total spending was up just 0.1%M/M while core spending was unchanged. Nevertheless, over Q1 as a whole, total spending on this survey’s headline measure was up 0.9%Q/Q and the core measure was up a similar 1.0%Q/Q, only 0.2ppt softer than in Q4.

Today’s household spending data contrasted significantly with the March retail sales figures, which suggested that nominal spending dropped more than 1%Q/Q in Q1. But, in truth, neither of these data sets provides an accurate guide to the national accounts measure of private consumption. The BoJ’s consumption activity index, due Monday, will be more informative in that respect, as will the Cabinet Office’s Synthetic Consumption Index – the most reliable monthly indicator of private consumption spending – which may also be released sometime next week. But we recall that the results of the Cabinet Office measure over the first two months of the year meant that strong growth (more than 1.0%M/M) would be required in March just to achieve a flat result for private consumption in Q1 as a whole. So, we certainly won’t get too carried away about the strength of today’s household spending data.

Elsewhere in today’s MIC survey, it was reported that real disposable income for workers’ households rose 0.7%Y/Y in March. On this highly volatile series, that marked a turnaround from a decline of similar magnitude the previous month. But, looking through the statistical noise, real disposable income was still up a respectable 1.3%3M/Y. In marked contrast, however, the headline figures on wage developments from the preliminary March Monthly Labour Survey were extremely weak. In particular, the headline measure of total labour cash earnings (per person) fell a startling 1.9%Y/Y, the third successive negative reading and the biggest such drop since June 2015. And that left them down in Q1 by 1.0Y/Y, marking the biggest first-quarter decline for a decade. Contracted earnings fell 1.1%Y/Y in March, the steepest drop since 2013. And hit by an unfavourable base effect, bonuses were down 12.4%Y/Y. In real terms, average wages were down 2.5%Y/Y, similarly the worst reading since 2015.

As always, we caution that the preliminary results of this survey can be subject to substantial revision. More importantly, after irregularities in the past and the introduction of a revised methodology, major concerns about the reliability of these data persist. And it’s clear that much of the weakness in the headline earnings measure related to sampling issues and the employee count. Indeed, on this survey, the number of full-time employees rose a steady 0.6%Y/Y while the number of part-time employees rose a vigorous 4.3%Y/Y, to leave the total number of employees up 1.8%Y/Y, well in excess of the 1.0%Y/Y rate suggested by alternative MIC employment data. Should these employee counts be revised lower, all else equal earnings-per-person would be revised higher, significantly so if the part-time numbers are (as might seem most likely) most exaggerated. Notably, MHLW data based on a common sample, suggest that average labour earnings were down 0.1%Y/Y, undeniably disappointing but by no means as shocking as the headline figures suggest.

UK:
After a week dominated by politics, the UK focus at the end of the week will turn to GDP, with the first estimate of Q1 growth due. A pickup from 0.2%Q/Q in Q4 looks inevitable, not least due to precautionary inventory accumulation and associated economic activity, including related services and goods exports. Indeed, the BoE thinks that GDP growth picked up to 0.5%Q/Q, although we are a little less optimistic. In terms of domestic demand, private consumption growth appears likely to have inched slightly higher from 0.3%Q/Q in Q4, but business investment looks set for a fifth consecutive quarterly drop – perhaps the most damaging economic consequence of the Brexit referendum to-date.

Euro area:
Today’s euro area dataflow focuses on the manufacturing sector. Following the better-than-expected German IP data for March released earlier this week, this morning’s trade figures were also stronger than expected. In March, German goods exports rose by 1.5%M/M, the third best increase since the start of last year, while imports were up only 0.4%M/M to match the average of the past twelve months. As a result, the trade surplus rose to a ten-month high of €20bn. Looking at Q1 as a whole, export growth of 0.7%3M/3M slightly exceeded that of imports (0.5%3M/3M). While shifts in relative prices will complicate matters, these data might suggest that net goods exports provided a small positive contribution to GDP growth in Q1 (data for which are due next week). 

In contrast to the German data, French industrial production figures, also released this morning, disappointed, showing a drop in output of 0.9%M/M in March. Manufacturing output was down by 1.0%M/M, with output of coke and refined oil, pharmaceuticals, chemicals and textiles among the main sources of weakness. Mining and energy production also dropped. And, unsurprisingly following a jump in of 4.7%M/M in February, construction activity was down too, albeit by a relatively moderate 0.9%M/M. Overall, despite the weakness in March, IP growth in the first quarter of the year was decent. Indeed, total output was up by 0.9%3M/3M while manufacturing rose by slightly more than 1.0%3M/3M, both representing the steepest quarterly increases in output since Q417.

Following the weaker March IP releases from France and Spain, and despite somewhat stronger output in Germany, the aggregate euro area data, which are due on Tuesday, will also likely show a decline in March but decent growth over Q1 as a whole. The Italian IP data, due later this morning, are expected to show a decline of -0.8%M/M, which would reinforce our expectations of weaker euro area production on a M/M basis but would also not prevent decent solid growth over the first quarter of the year. Italian retail sales figures for the same month will also be released later this morning.

US:
While trade issues dominate, today will also bring the week’s most notable new US data in the shape of the April CPI inflation figures. Fed Chair Powell last week suggested that much of the recent easing in inflation likely reflected temporary factors, not least those related to recent changes in airfares, portfolio management fees, and apparel prices. But even if some of those factors fade, today’s report is likely to suggest that underlying inflation remains subdued, with increase in the core CPI expected to round up to 0.2%M/M. Due to higher gasoline prices, the headline measure is likely to be stronger, but food prices could restrain that increase somewhat. The monthly federal budget statement is also due, while a number of FOMC members, including Fed Vice Chair John Williams and Atlanta Fed President Raphael Bostic, are set to speak publicly today.

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