Japanese exports predictably weak

Emily Nicol
Chris Scicluna

Overview:
Financial markets have started the week in somewhat underwhelming fashion. A further drop in the price of WTI crude to below $15 for the first time since early 1999 weighed on US stock futures, while Asian equity markets largely posted a mix of modest gains and losses. A weaker-than-expected March trade report (see below) provided no favours for Japanese stocks (the Topix closed down 0.7%). But the prospect of additional policy stimulus in China – where the 1Y loan prime rate was set at 3.85%, down 20bps from last month – saw the Shanghai Composite close up 0.5%.

European stocks are opening higher too, supported by some improved data on coronavirus cases in the region. Indeed, ahead of today’s reopening of some smaller stores in Germany, the number of cases there fell to the lowest since last month. And with the number of Spanish fatalities down more than one third from the peak, PM Sanchez suggested a very slight relaxation of the country’s extremely stringent lockdown rules to allow children to leave their homes, even though most restrictions will extend into next month.

In the bond markets, USTs are slightly firmer despite a further slowing in the pace of Fed purchases this week, halved to $15bn per day. 10Y UST yields have edged down to about 0.64%, in the bottom half of the range of the past few weeks. JGBs were little changed, with 10Y yields close to 0.01%. Despite further comments by leading ECB policymakers (Villeroy de Galhau and de Guindos) that the Bank remains ready to provide additional monetary policy support if necessary, euro area govvies are weaker across the board this morning, with BTPs underperforming (10Y yields up about 7bps so far to above 1.86%). The vulnerabilities of Italy and Spain to future refinancing risk should be in focus at this week’s leaders’ videoconference, where efforts to finance recovery from the current crisis will be discussed.

Japan:
Today’s Japanese goods trade report was predictably downbeat, with the adjusted trade balance at the end of the first quarter recording the deepest deficit (¥190bn) since last May. This in part reflected a more than 4%M/M decline in the value of exports, leaving them down 11.7%Y/Y, the steepest annual decline since mid-2016. But the value of imports also jumped in March, by more than 7%M/M, to leave them down 5%Y/Y following a near-14%Y/Y slump in February.

Given the hit to global demand, the weakness for Japanese goods was widespread. For example, exports to the US were down 16½%Y/Y, the most since the Great East Japan earthquake, as weaker demand for autos (down 24%Y/Y) and general machinery (down 20%Y/Y) weighed on overall shipments. Exports to the EU were down 9½%Y/Y as shipments of general machinery similarly fell at a double-digit annual pace and exports of ships were down 74%Y/Y. There was also a steeper rate of decline in exports to elsewhere in Asia, with shipments to China and South Korea down 8½%Y/Y and 10½%Y/Y respectively.

When adjusting for price and seasonal effects, the BoJ’s trade figures implied a similar trend in March – a drop in the volumes of exports (3.4%M/M) and a surge in the volume of imports (13½%M/M) following very weak demand at the start of the year. Over the first quarter as a whole, this left goods exports down 1.7%Q/Q, a slightly steeper pace than that seen in Q4 and the largest drop since Q318. However, with the volume of imports down almost 4%Q/Q - the most since the post-consumption tax hike slump in Q214 – today’s report suggested that Japanese net goods trade might provide welcome support to GDP in Q1. Of course, this will be offset to some extent by the plunge in spending by overseas visitors in the first quarter, which was down more than 40%Y/Y. And overall, another sharp contraction in GDP in Q1 looks inevitable, leaving Japan firmly in technical recession.

The remainder of the week will bring the flash PMIs for April on Thursday, which seem bound to point to a further significant deterioration in economic conditions as the country entered a state of emergency (the composite PMI plunged in March to just 36.2, the lowest since the Great East Japan Earthquake and Tsunami). These will be followed by department store sales figures for March, which will report a further sizeable double-digit decline in annual growth as Covid-19-related concerns weighed on household spending and the number of overseas visitors plummeted. All industry activity data for February will flag weak economic growth even before Covid concerns intensified. Friday will also bring March CPI figures, which are forecast to show that headline inflation moved sideways at 0.4%Y/Y, in part due to higher fresh food prices. Indeed, when excluding such items, the BoJ’s forecast measure of core CPI is expected to have fallen 0.2ppt to 0.4%Y/Y, a five-month low.

Euro area:
This week will see EU leaders’ hold a teleconference on Thursday – the fourth of its kind – to discuss further the EU’s response to the current Covid-19 crisis. Most difficult will be the discussion on how to fund support for the post-crisis recovery. French President Macron will argue for the establishment of a joint fund “that could issue common debt with a common guarantee” to provide up to €400bn for the worst affected member states. But Germany and the Netherlands seem highly likely to remain opposed.

Certainly, the data flow will provide a gloomy economic backdrop, with April sentiment surveys, perhaps most noteworthy the flash PMIs on Thursday, set to point to extreme contraction. With lockdown measures remaining in place across much of the euro area, these are expected to show a further decline in both the headline services and manufacturing indices, with the former to drop to a new record low and the latter to reach its weakest since the global financial crisis. And so the composite PMI will similarly fall further from the record-low 29.7 reading in March, consistent with an unprecedented contraction in output at the start of the Q2. National business sentiment surveys due, including the German ZEW (tomorrow), French INSEE (Wednesday) and German ifo (Friday) will similarly paint a gloomy picture of conditions in April, with record declines likely in the key headline sentiment indices.

The European Commission’s preliminary consumer confidence indicator on Wednesday will also shed some light on household sentiment at the start of Q2. Unsurprisingly, the indicator is forecast to have declined sharply, albeit merely to a level above the troughs seen during the global financial and euro crises. Germany’s latest GfK consumer confidence survey will also be published on Friday, while the weekly updates of applications to the German and French wage subsidy payment schemes should be published on Wednesday and tomorrow respectively – so far more than 720k firms in each country have applied for support. Of less interest with respect to recent economic developments will be today’s release of euro area goods trade and current account figures for February.

UK:
Like in the euro area, the flash April PMIs will be a key focus in the UK and are set to provide further insight into the marked deterioration in economic conditions since the official lockdown came into effect in the final week of March. Having fallen by a record 18.6pts to 34.5 in March, the headline services PMI is once again set to see the most striking decline in April. The manufacturing PMI will also point to marked contraction, albeit the headline index will be held up to some extent by a further lengthening of supplier delivery times. Indeed, the CBI’s industrial trends survey (due the same day) will likely point to the steepest drop in manufacturing orders for decades. Overall, the composite PMI will fall to a new record low and a level consistent with a deep.

US:
In the US, the data flow kicks off later today with the latest Chicago Fed national activity index for March, followed by existing and new home sales figures for the same month tomorrow and Thursday respectively. Of course, Thursday’s weekly release of jobless claims numbers will gain more attention and is likely to reveal another alarming increase in initial claims, albeit probably down from the past three weeks (the current median forecast on the BBG survey is 4.5mn). The flash Markit PMIs for April are highly likely to report further significant declines in the headline indices. That day will also bring the Kansas Fed manufacturing activity index for April. And the week will end with durable goods orders for March, which are expected to report a double-digit monthly drop last month. And when excluding the volatile transportation items, orders are likely to post the steepest monthly decline since the global financial crisis.

Australia:
It will be a relatively quiet week for Aussie economic news, with the minutes from the RBA’s 7 April policy-setting meeting tomorrow arguably the most noteworthy release. While some observers had interpreted Governor Lowe’s statement earlier this month as a hint of tapering to come, we would expect the minutes to reaffirm the RBA’s commitment to its new yield curve control framework with the current policy measures likely to remain in place until significant progress has been made towards achieving its targets for full employment and inflation.

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