Japan's trade data disappoint again

Chris Scicluna
Emily Nicol

With ongoing unease about the lack of progress on US-China trade issues compounded by the US Senate passing a bill supportive of Hong Kong’s protestors, the mood in the main Asian-Pacific markets was downbeat today with declines in all major equity indices. While Shinzo Abe marked his 2887th day in office to become his nation’s longest-serving Prime Minister (overtaking Taro Katsura from more than a century ago), Japan’s markets were far from immune from the negative trend, with the Topix closing down 0.3% as the latest macro data reported the steepest drop in Japanese exports since 2016. In China, meanwhile, the CSI300 fell 1.0% while the Hang Seng is currently down 0.7%.

In the bond markets, meanwhile, USTs made further gains, with 10Y yields down about 5bps to below 1.74% for the first time since 1 November. So, JGBs were also stronger (10Y yields down 2½bps to below -0.12%). And ACGBs rallied as Australian bank stocks were hit by reports that the financial crimes agency had lodged a lawsuit against Westpac while the latest job vacancy data added to the case for another RBA rate cut. Against this backdrop, unsurprisingly euro area govvies have opened firmer (10Y Bund yields down 4bps to -0.38%).

Gilts are similarly stronger this morning while sterling is little changed after yesterday evening’s pre-election televised leaders’ debate proved a predictably unedifying spectacle. PM Johnson and Labour leader Jeremy Corbyn both failed to make a compelling case why they deserved anyone’s vote. Neither landed a meaningful punch against their opponent. And perhaps more than anything, neither looked fit for highest office.

Looking ahead, the day’s economic calendar is relatively light, with the release of Fed’s minutes of the end-October FOMC the highlight.

Against the backdrop of soft global demand, geopolitical tensions and, of course, Typhoon Hagibis-related disruption, the latest Japanese goods trade figures were even weaker than expected, with the value of exports declining for the third month out of the past four in October and by 1.7%M/M. This left them down more than 9% compared with a year earlier, the eleventh consecutive year-on-year drop and the steepest for three years. Nevertheless, the value of imports was down a larger 2.2%M/M and 14.8%Y/Y, in part reflecting base effects from oil prices, a drop in shipments from China during its holiday period, and perhaps also the impact of the consumption tax hike. As such, the headline trade balance recorded its first surplus (¥17bn) for three months, while the adjusted trade deficit narrowed to ¥35bn.

Within the detail, the weakness in the value of exports appeared widespread, with a steeper pace of decline in shipments to China (-10.3%Y/Y), the US (-11.4%Y/Y) and the EU (-8.4%Y/Y). Against the backdrop of continued strains in relations, there was also a further marked weakening in exports to South Korea, with the 23%Y/Y drop the largest for more than a decade. And the direct impact of the trade dispute between the countries – with Japan having imposed additional export controls on certain items – was clearly evident, with shipments of chemicals down 28%Y/Y to account for almost one third of the year-on-year drop, while exports of semiconductor machinery was down a whopping 49%Y/Y. But exports of Japanese cars to that country have also been significantly hit, with a drop of more than 70%Y/Y in October. And with further notable weakness in demand from the US for Japanese autos, overall exports of transport equipment were down 7½%Y/Y. Meanwhile, total shipments of manufactured goods and general machinery were down around 13%Y/Y.

When adjusting for price effects, the BoJ’s export volumes measure was down 1½%M/M in October. But this resulted in a more modest year-on-year decline (just 2½%Y/Y) than implied by the values data. And with import volumes down more than 2½%M/M and 4½%Y/Y, today’s release suggests that net trade provided a positive contribution to GDP growth at the start of Q4.

The impact of the Japan-Korea dispute was also clearly evident in the latest overseas visitor numbers, with the number of Korean visitors (197k) in October down a whopping 65.5%Y/Y. So, despite a modest increase in tourists from elsewhere in Asia – for example, visitors from China were up 2.1%Y/Y to 731k, Taiwan up 9.0%Y/Y to 414k, Thailand up 23.2%Y/Y to 145k – and a Rugby World Cup associated boost from the UK (up 85.6%Y/Y to 68k) and other participating nations, the total number of overseas visitors was down compared with a year earlier in October, by 5½%Y/Y to 2.5mn.

Euro area:
A quiet day for euro area economic data saw the release this morning of German PPI figures for October, which continued to illustrate disinflationary pressures down the price pipeline. In particular, producer prices fell for the fourth month out of the past six, to leave the annual PPI rate down 0.5ppt to -0.6%Y/Y, the steepest drop for more than three years. Of course, this principally reflected a further fall in energy prices, down 1.2ppts to -3.1%Y/Y, the steepest decline for three years. In contrast, consumer non-durable price inflation rose ½ppt to 2.3%Y/Y, the strongest rate for almost two years. Nevertheless, with prices of intermediate goods still falling and capital goods little changed, the core PPI rate moderated further at the start of Q4, to just 0.3%Y/Y, indicating that underlying price pressures are effectively non-existent.

Later this morning we will see the ECB publish its latest Financial Stability Report tomorrow, while ECB Chief Economist Philip Lane is due to speak in Milan. In the markets, Germany will sell longer-dated Bunds.

While yesterday evening’s televised debate between PM Boris Johnson and Labour leader Jeremy Corbyn predictably provided no further clarity on the election party platforms of the two main parties, politics will certainly continue to dominate the news flow. Data-wise, however, today will bring the previously delayed estimate of unit labour cost growth in Q2. Given weak economic growth but a pickup in wage growth and still-positive employment growth, expect an acceleration in unit labour costs to suggest that domestically generated price pressures increased in the second quarter. Of course, labour market momentum in Q3 has shifted into reverse and unit labour cost growth also likely eased last quarter too.

In the US, the main release today will be the minutes from the Fed’s October policy meeting, which seem likely to reiterate the message from Powell’s post-meeting press conference and testimony to Congress last week, that monetary policy is on hold for now.

Most attention in Australia today was on the news that Westpac had been accused by the country’s financial intelligence agency of breaching anti-money laundering and counter-terrorist financing laws. But coming just a day after the minutes from the RBA’s Melbourne Cup day policy meeting revealed that policymakers had seriously considered a further rate cut earlier this month, the latest skilled job vacancies data supported the case for additional easing. In particular, job openings advertised online fell 0.9%M/M in October, representing the tenth consecutive month of decline and with falls reported in every major category of work. That left them down 8.6%Y/Y, the steepest annual drop in six years. With employment down last month by the most in more than three years, and the unemployment rate up to a sixteen-month high of 5.32%, well above the RBA’s estimate of the NAIRU, today’s data therefore added to evidence that Australia’s labour market is heading in the wrong direction.

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