Friday’s better tone to equity markets has proved to be short-lived with certainly little cause for optimism on the trade-war front. Indeed, while there had been hopes of a more conciliatory mood, yesterday brought further recriminations regarding the US action to raise tariffs from 10 to 25% on $200bn-worth of Chinese imports, with Chinese state media pointing the finger of blame at the US but Donald Trump repeating that China ‘broke the deal’. While there are suggestions of a Trump-Xi bilateral in the margins of the G20 summit at end-June, we might now expect little tangible progress until then. In the meantime, the US administration looks set later today to release details of its tariff intentions for the remainder of Chinese imports.
Against that backdrop, most markets in the Asia-Pacific made losses today, with the CSI300 closing down 1.65% to reverse a little less than half of Friday’s gain. In Japan, meanwhile, the Topix closed down 0.5%, as the downbeat regional market trend combined with some weak private consumption data and the Government made its most negative assessment of the state of the economy in more than six years. Against that backdrop, perhaps unsurprisingly, European equities have also opened lower (Euro Stoxx 50 so far down a little more than ½%) while USTs have made gains (10Y yields down below 2.42% for the first time since end-March) with Bunds also stronger (10Y yields down to -0.06%). FX markets are broadly stable, however.
The coming week will bring plenty of top-tier economic data (including IP and retail sales figures from the US and China, German GDP, UK and Aussie labour market figures) and ongoing political noise, not least from the UK where the timetable for Theresa May’s departure as Prime Minister might well be clarified before the end of the week.
Ahead of the first estimate of Q1 GDP on 20 May, this morning brought further data to provide insight into momentum (or the lack thereof) in Japan’s economy at the end of the first quarter. And, after Friday’s especially weak wage data, these extended a newsflow that has been largely (if not entirely) downbeat of late. For example, even though last week’s household survey pointed to steady growth in spending in the first quarter, the BoJ’s consumption activity indices – figures that are only bettered by the Cabinet’s Office’s synthetic consumption index as a reliable guide to the national accounts measure of private consumption – suggested that growth in spending was all-but absent.
In real terms, the BoJ’s consumption activity index fell 0.7%M/M for the second successive month in March to leave growth over Q1 as a whole at zero. And adjusting for net spending by foreigners, the real consumption activity index fell 0.5%M/M in March following a drop of 0.9%M/M the previous month to leave growth over the quarter at just 0.1%Q/Q. Within the detail, real consumption of durable goods and services was judged to relatively steady in Q1 at 0.5%Q/Q and 0.2%Q/Q, spending on non-durable was down 0.4%Q/Q.
Today’s Cabinet Office composite business conditions indicators – based on 29 series of indicators including production, employment, spending and financial indices – were even more downbeat. Most notably, the preliminary coincident indicator fell 0.9pt in March to 99.8, the lowest level since September 2016, while the leading indicator fell more than 1pt to 97.5, similarly the weakest reading in 2½ years. And strikingly, having the previous month identified “a turning point towards a downgrade”, the Cabinet Office downgraded its assessment of the economy to “worsening” for the first time since January 2013, to flag the risk of recession. To be sure, the first quarter was indeed weak – our colleagues in Tokyo currently forecast a contraction in GDP of 0.2%Q/Q annualised. However, a return to expansion in Q2 is expected with our colleagues’ current forecast at 1.6%Q/Q ann. Nevertheless, the Government’s downbeat assessment will further fuel speculation that Abe might yet be tempted to postpone October’s consumption tax hike.
Looking ahead to the rest of the week, the Cabinet Office’s synthetic consumption index – the best guide to the national accounts measure of household expenditure – should also be released. Meanwhile, April’s Economy Watchers survey is due tomorrow and will be watched for further indications of activity at the start of Q2. Bank lending data for the same month are also due tomorrow. In terms of inflation, April’s goods producer price figures will be published on Thursday. Finally, Friday brings tertiary activity figures for March. In the markets, the MoF will sell 30Y JGBs on Tuesday and 5Y JGBs on Thursday.
The week’s dataflow in the euro area has got off to a softish start with this morning’s Bank of France business sentiment survey slightly weaker than expected. The headline indicator for industrial sector sentiment inched down in April by 1pt to 99, a level below its long-term average and the lowest since October 2016. Within the details, output reportedly slowed in automobile and rubber production, but pharmaceuticals and electrical equipment maintained their recent strong pace. The survey respondents expected some pick up in coming months, with order books also pointing to a small improvement.
News from other sectors was similar. Indeed, the headline survey indices for services and construction also lost 1pt each, falling to 100 and 105 respectively, with the former representing the lowest level since July 2017. The forward-looking indices from these sectors were also consistent with somewhat stronger momentum in May. So, given the expectation of some a reversal of the today’s deterioration, the Bank of France expected that GDP growth will remain unchanged this quarter at 0.3%Q/Q, a pace that matches our own forecasts.
Looking ahead to the rest of the week, the dataflow includes euro area IP for March (tomorrow), euro area and German GDP, euro area employment (all for Q1 and due Wednesday) and final euro area inflation (for April and due Friday).
With output down in France, Italy and Spain but up in Germany, tomorrow’s figures look set to show a drop of about ½%M/M in euro area industrial production (excluding construction) at the end of Q1. Thanks to strong growth at the start of the year, however, that would imply a rise of about ½Q/Q over the first quarter as a whole.
Meanwhile, on Wednesday, the updated estimate of euro area GDP growth is expected to align with the flash estimate of 0.4%Q/Q. But Germany will publish its Q1 data for the first time. And thanks to the rebound in retail sales, car registrations, industrial and construction output in the first quarter, we expect Germany’s economy to have returned to growth in Q1, with our expectation for an increase of 0.3%Q/Q and risks to that estimate to the upside. Notwithstanding the acceleration in economic growth, however, euro area labour market figures might well show a moderation in employment growth in Q1 from 0.3%Q/Q in Q4.
Euro area inflation, meanwhile, is likely to align with the preliminary release showing a marked rise in April, with the headline CPI rate up 0.3ppt to 1.7%YY, a five-month high, and core inflation up 0.4ppt to 1.2%Y/Y, a six-month high. (The final national inflation numbers are due from Germany and Spain (Tuesday), France (Wednesday) and Italy (Thursday).) In the markets, Germany will sell 30Y bonds on Wednesday.
With the Government-Labour talks on Brexit set to resume today, polls on the weekend having suggested a further increase in support for the Brexit Party and the Conservatives in fourth place in terms of voting intentions for next week’s European Parliament elections, and an ever-increasing number of Tory MPs expressing their dissatisfaction with Theresa May’s leadership, politics will remain in the spotlight in the coming week. We would certainly not be surprised to see the talks with Labour fall apart. And all eyes should be on the outcome of a meeting on Thursday between the PM and the backbench 1922 Committee Executive to discuss a timetable for Theresa May’s resignation.
The only notable new UK economic data this week will be tomorrow’s employment figures for March. While business sentiment surveys suggested some weakening in the labour market, jobs growth remained strong in the first two months of the year, reporting 222k3M/3M and 179k3M/3M increases. A further moderation in growth to around 140k3M/3M is on the cards this time, but that level would still be above the average of the last twelve months. The three-month unemployment rate should remain unchanged at 3.9%, the lowest level since mid-1970s, for a third consecutive month. But growth in average weekly earnings might inch slightly lower from the post-global-financial-crisis high of 3.5%3M/Y seen in the previous three months. Among other noteworthy events, MPC member Jonathan Haskel, who joined the Committee last September, is scheduled to speak on Thursday, and the DMO will issue 35Y Gilts on Monday.
In the US, Wednesday will bring the likely data highlights of the week, with industrial production and retail sales figures for April due. Following a surprise drop in March, IP should post a modest increase at the start of Q2. In contrast, after a surprisingly strong end to the first quarter, underlying retail sales growth is expected to be much softer last month. That day will also bring the Empire Manufacturing index for May, which follows tomorrow’s release of April’s NFIB small business survey and precedes May’s Philly Fed index (Thursday) and the Conference Board’s leading index for April (Friday). Friday also brings the preliminary University of Michigan’s consumer sentiment survey. And housing market indicators due include May’s NAHB housing index on Wednesday and April’s housing starts figures on Thursday. There are no UST bond auctions due this week.
In China, the key economic releases in this week will be Wednesday’s monthly activity figures for April. After a surge in IP at the end of the first quarter, these figures are likely to show that growth moderated at the start of the second quarter, in line with the latest manufacturing PMIs. In contrast, retail sales growth is expected to have remained solid close to the 8.7%Y/Y pace seen in March. And fixed investment growth is expected to have edged slightly higher too, to the firmest pace for a year.
In Australia, ahead of Saturday’s Federal Election – where the latest polls still give the opposition Labor Party a modest lead over the incumbent Liberal-National coalition – and following last week’s RBA meeting where policymakers left the cash rate unchanged but downgraded its forecasts to raise the likelihood of a cut in the second half of the year, the main economic focus in the coming week will be the labour market, with Q1 wage indices due Wednesday and April’s employment figures due Thursday. In line with the recent trend, expectations are for another solid increase in employment. But this would still leave the unemployment rate stubbornly unchanged at 5%. The NAB’s business survey for April, due tomorrow, will also be closely watched for insights into the recent economic performance at the start of the second quarter.