A weak end to 2019 for Japanese spending, German & French IP

Emily Nicol
Chris Scicluna

Overview:
While US and European equities yesterday hit fresh highs, Asian markets ended the week on a softer note as investors took a more cautious stance ahead of today’s US labour market report and the forthcoming weekend. Admittedly, the 0.3% drop in the TOPIX was modest and left the index still up 2.8% on the week, despite a tripling in the number of coronavirus cases on board the cruise ship anchored off Yokohama to more than sixty, as well as some disappointing Japanese data on household spending and still anaemic wage growth (see more details below). China’s CSI 300, meanwhile, closed the day unchanged nevertheless ending the week down more than 2½%, while the Chinese government delayed publication of January’s trade figures until the release of February data next month. But some disappointing Taiwanese trade figures for January – exports were down a whopping 7.6%Y/Y, with shipments to China and Hong Kong down a touch more than that – saw the Taiwan TAIEX fall more than 1%.

In bond markets, with an eye on today’s payrolls data, USTs strengthened, with 10Y yields down around 3bps back to around 1.61%, just a couple of bps up from this time yesterday. JGBs also made gains, with 10Y yields down almost 2bps to -0.04%, while Aussie yields (down 5bps) reversed some of the surge seen over recent days despite RBA Governor Lowe suggesting that the risks to additional easing now likely outweigh the benefits, reinforcing the view that policy will remain unchanged for the time being. Meanwhile, European bond markets have opened higher as some terrible German and French IP data suggested that the euro area’s manufacturing sector ended 2019 on a very weak note (see below).

Japan:
There was a disappointing end to the year for Japanese private consumption, at least according to the Statistics Bureau’s family income and expenditure survey, which today showed that household spending unexpectedly declined in December, by 1.7%M/M, to leave it down a steeper 4.8% compared with a year earlier. Admittedly the weakness largely reflected the more volatile items. In contrast, spending on household appliances edged slightly higher in December, as did clothing sales (despite unseasonably mild weather that month). As such, core spending was down a more modest ½%M/M (following growth of 3½%M/M in November), to leave it down 3.8%Y/Y.

Of course, given the initial plunge in spending in the aftermath of October’s consumption tax increase, consumption was always expected to contract in Q4. But while today’s figures implied a fairly steep retrenchment, it was nevertheless smaller than in the equivalent quarter after the 2014 tax hike. Indeed, the 6.5%Q/Q drop in total spending was just two-thirds of that recorded in Q214, while the 5.8%Q/Q decline in core spending compared with a fall of 8½%Q/Q last time around. But it is worth recalling that this release has not provided the best guide to the national accounts measure of consumption over recent years – certainly, the increase in Q319 (2.4%Q/Q for total spending and 1.4%Q/Q for core) suggested much stronger front-loading of spending ahead of the tax hike than was evident in the national accounts (consumption rose just 0.5%Q/Q).

The BoJ’s consumption activity index has been a better guide than household spending. And today’s release suggested a further modest recovery heading into year-end, with the headline index rising 0.2%M/M in December, to leave it down 2.1%Y/Y, less than half the pace of decline than October. The improvement principally reflected consumption of non-durable goods (the relevant index was up 0.8%M/M). In contrast, the durable goods index disappointingly slipped back in December (-1.1%M/M) following a double-digit increase in November. And this left it down more than 20%Q/Q in Q4, a similar pace of decline to the post-tax plunge in 2014. Overall, the consumption activity index was down a little more than 4½%Q/Q, compared with a drop of more than 5%Q/Q in Q214. But having risen by just 0.8%Q/Q in Q3, this release looks to have over-egged the weakness in Q4. It is also worth noting that this series has been subject to sizeable revisions of late.

With respect to the near-term consumption outlook, today’s wage figures were not overly encouraging. In particular, average wage growth was merely flat compared with a year earlier in December, following a rise of just 0.1%Y/Y in November. While the weakness in part reflected a further fall in overtime earnings (-2.6%Y/Y) with a notable drop in manufacturing and utilities firms, winter bonus payments also disappointed (-0.2Y/Y). Regular earnings were at least more positive, with growth (0.4%Y/Y) the strongest for a year as scheduled wages at manufacturers jumped 1.3%Y/Y, while those at retailers were positive (albeit +0.1%Y/Y) for the first time in a year.

Japanese labour earnings figures have been subject to sampling issues over the recent years. But like-for-like figures suggested only modestly stronger wage growth in December, at 0.2%Y/Y. And this left full-year labour earnings down 0.3%Y/Y in 2019, compared with growth of 1.7%Y/Y in 2018 and the first negative reading since 2013. While regular earnings were up a firmer 0.6%Y/Y in December, bang in line with the average for the year, this is unlikely to provide a significant boost to the recovery in consumption over coming months. And that pace of growth won’t generate essential inflationary pressures either.

Despite the weaker spending figures, the Cabinet Office’s composite indicator of business conditions did at least suggest today that overall there had been no further deterioration at the turn of the year. Indeed, the coincident index was unchanged on the month at 94.7, admittedly its lowest level since early 2013 and consistent with a significant weakening in GDP growth over the fourth quarter as a whole. Indeed, our colleagues in Tokyo now expect GDP to have contracted by a little more than 1%Q/Q in Q4. But the leading index rose for the first month in eight in December offering some cautious optimism that economic conditions were starting to improve heading into 2020. (Of course, this index will reflect data largely collected before the outbreak of the coronavirus took greater prominence.)

Euro area:
This morning’s industrial production figures from Germany and France were shockingly poor. Most notably, following the dire retail sales and factory orders figures released over recent days, the German data significantly raise the probability that the GDP report due a week today will, like the equivalent French and Italian data, show a contraction in the fourth quarter in the euro area’s largest member state. At the same time, however, some of the detail was so extraordinarily weak that eventual upwards revisions seem near-inevitable. And we would certainly bet on a rebound in the January data.

In particular, total industrial production in December reportedly fell 3.5%M/M, the steepest drop since January 2009, to the lowest level since August 2014. Within the detail, manufacturing output fell 2.9%M/M similarly to the lowest level in more than five years. Production of capital goods was down 3.5%M/M, with autos down a similar 3.6%M/M, also to the lowest level since August 2014. Production of consumer (-2.0%M/M) and intermediate goods (-2.6%M/M) fell sharply too. But the decline in the manufacturing sector was nothing compared to construction, where this morning’s data suggest that production fell an unfeasibly large 8.7%M/M to the lowest level since February 2018. Given the strong fundamentals and sentiment in the sector, as well as mild weather, that seems implausible, and we fully expect an upwards revision in due course.

Nevertheless, looking at the fourth quarter as a whole, according to today’s figures German construction activity fell 1.9%Q/Q, the most since Q118. And with production of motor vehicles down 4.7%Q/Q, overall capital goods down 4.4%Q/Q, and other major categories down too, manufacturing output was down for a sixth successive quarter and by 2.3%Q/Q, the most in seven years. So, total industrial production (including construction) supposedly fell 1.9%Q/Q, also the most since the euro crisis in Q412.

The French data were not much better, with manufacturing production down 2.6%M/M, the most since January 2018 to the lowest level in almost three years. Production of capital goods was down a marked 4.6%M/M, with other major manufacturing categories falling too. There was similarly a big drop in construction output, down 2.7%M/M. Given growth over previous months, the French performance over the fourth quarter as a whole was not as bad as in Germany. Manufacturing output fell 0.4%Q/Q while construction rose 0.2%Q/Q. But given a weak quarter for mining, energy and other utilities, overall IP fell for a second successive quarter and by 0.6%Q/Q.

UK:
In the UK, the overnight publication of the REC/KPMG report on jobs was predictably more upbeat about labour market prospects at the start of the year. Indeed, there was a further pickup in the number of permanent job placements in January, with the relevant index rising 0.4pt to 52.3 to imply the first consecutive months of growth for more than a year as demand for permanent staff rose to its highest since last March as firms appeared more confident about conditions against the backdrop of reduced political uncertainty. As a result and likely reflecting the upcoming anti-avoidance tax legislation amendments on contractors, the survey suggested that the number of temporary billings fell for the first time since 2013. But despite the improved job prospects for permanent staff, and still relatively weak supply of candidates, starting salaries continued to soften, with the relevant index at its lowest for 3½ years.

US:
Of course, all eyes today will be on the US payrolls report, which is currently expected to show a slightly stronger increase in January (160k) than December, albeit a touch below the average for the past year as whole. But the surprising strength of the ADP report released on Wednesday – the 291k increase was the largest since May 2015 – suggests that risks to this forecast are skewed to the upside. Meanwhile, the unemployment rate is expected to move sideways at 3.5%, while average weekly earnings growth is expected to be little changed at 2.9%Y/Y. This afternoon will also see the Fed publish its semi-annual Monetary Policy Report, which will be followed by Chair Powell’s testimony to the Senate and House committees next week.

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