Japan's real consumer spending declines

Chris Scicluna

Asian equity markets rebound as Wall St hits new high and USD rally continues
Wall Street returned to its winning ways on Thursday with the S&P500 advancing 1.1% to a new record closing high, with sentiment boosted by corporate earnings news, better than expected factory orders and jobless claims data, and a continued downtrend in new coronavirus cases from the highs seen in the first half of January. Moreover, futures have crept fractionally higher since after the Treasury Department issued a statement expressing regulators’ satisfaction with the performance of core market infrastructure in the face of recent volatility, which on Thursday included a further 42% decline in GameStop stock. The statement also noted that the SEC and Commodity Futures Trading Commission have been tasked with reviewing whether trading practices are consistent with investor protection and fair and efficient markets.

In the bond market, the 10Y Treasury yield hit an intraday high of 1.16% on Thursday as the BoE-inspired sell-off in Gilts impacted markets elsewhere, but has since retraced to 1.13%. Of greater interest, the greenback enjoyed gains against almost all counterparts, with the dollar index (DXY) returning to levels not seen since early December – a development that will be welcomed by a number of central banks in the industrialised economies if not among emerging markets. The only notable currency not to submit to dollar strength was sterling, which remained underpinned by the strong gains that followed the BoE’s optimistic commentary about the UK economic outlook.

Against that background, and following a soft session on Thursday, most bourses in the Asia-Pacific region have enjoyed solid gains today. In Japan, the TOPIX closed up 1.4% at a new high, with consumption data confirming a further recovery in Q4, even as rising coronavirus cases dampened spending around the end of year. In South Korea the KOSPI advanced 1.1%, while China’s CSI300 increased 0.8% and the Hang Seng rose similarly. In Australia, the ASX200 increased 1.1% as retail sales volumes increased by more in Q4 than the market had expected. Stocks were also helped by a decline in Aussie bond yields and the Aussie dollar after the RBA’s dovish outlook for policy was emphasised in the latest Statement on Monetary Policy and in Governor Lowe’s testimony to a parliamentary committee.

Japan’s consumer spending softened in December but still up solidly in Q4
Today’s Japanese economic data presented a mixed picture of consumer spending at the end of Q4. Most importantly, the BoJ released its Consumption Activity Index – second only to the Cabinet Office’s synthetic consumption index as the most reliable indicator of the national accounts based measure of private consumption. Following an unrevised 0.9%M/M lift in November, the real index declined 0.6%M/M in December – the first fall since July and causing the annual decline in spending to rise to 5.0%Y/Y. In the detail, doubtless driven by rising coronavirus cases, spending on services fell 2.6%M/M and so was down 12.2%Y/Y. Meanwhile, with people returning to their homes, spending on durable goods increased 4.5%M/M and so was up 14.6%Y/Y. Spending on non-durable goods increased 0.3%M/M but fell 0.2%Y/Y.

Despite the decline in December, the level of real spending increased 2.7%Q/Q in Q4, suggesting that private consumption will likely make a strong positive contribution to GDP growth during the quarter (based on the first two months of the quarter, the synthetic consumption index was on track for a similar advance). Of course, the outlook for Q1 is not nearly as rosy, with the pattern seen in December likely to have been amplified by the restrictions on activity that were introduced last month and which are likely to be maintained at least until early March.

In related news, the MIC released its monthly survey of household spending and incomes for December, which as is often the case presented a contrasting monthly picture to the BoJ’s data, even if the series generally mimics the broader-trend. The MIC’s estimate of total real household spending increased an unexpected 0.9%M/M – reversing half of the decline reported in November. While this still meant that spending was down 0.6%Y/Y – compared with a 1.1%Y/Y lift in November – this result was much firmer than the 1.8%Y/Y decline that the market had expected. The MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, increase 0.4%M/M following a 2.9%M/M slump in November so was also down 0.6%Y/Y. Even so, core spending increased 3.8%Q/Q in Q4, confirming that consumer spending is likely to have increased at a robust pace in Q4. Meanwhile, ahead of this coming Tuesday’s release of the Monthly Labour Survey, the survey’s measure of workers’ real disposable incomes fell 1.3%Y/Y in December, compared with the 0.4%Y/Y decline reported in November. The Monthly Labour Survey is expected to point to an even steeper decline in labour earnings, which will be weighed down by a slump in bonus earnings.

In other news, the Cabinet Office released its preliminary business indicators for December. As expected, the coincident indicator decreased for a second consecutive month by 1.2pts to 87.8. Meanwhile, the leading index suffered its first decline since May, falling a slightly greater than estimated 1.2pts to 94.9 – now back below the average reading over the past two decades.

German factory orders fall more than expected at end-2020 pointing to softer New Year for the sector
Following seven successive months of growth, it was no surprise that German factory orders took a step back at the end of last year. The decline of 1.9%M/M in December was almost double the expected drop and pointed to a softer near-term outlook for the sector which had provided significant to economic activity in Q4. Nevertheless, it still left orders up 7.0%3M/3M, 6.4%Y/Y and 2.6% above February’s pre-Covid level.

The weakness in demand in December came from the rest of the euro area, for which new orders dropped a steep 7.5%M/M. Domestic orders were also softer, down 0.9%M/M while orders from other countries rose 0.5%M/M. By sub-sector, orders of consumer goods jumped 6.4%M/M and orders of intermediate goods rose 0.8%M/M. But orders of capital goods dropped 4.6%M/M weighed by a drop of 5.1%M/M in the auto sector back below the February level, likely due to the end of Germany’s VAT cut and the global semiconductor shortage. Most categories of goods, however, including chemicals, metals and mechanical engineering, ended the year at or above the pre-Covid level.

Meanwhile, this morning’s data also showed that manufacturing turnover rose for the fourth successive month in December and by a firm 2.1%M/M. While that left it still 1.8% below February’s pre-Covid level, it suggests that Monday’s production data for December should confound the current consensus of a decline. Nevertheless, given the orders figures, that would now seem highly likely to be followed by a drop in manufacturing production in January.

Non-farm payrolls key focus in the US today; trade and credit data also due
Today most attention in the US will be centred on the official employment report for January. Daiwa America Chief Economist Mike Moran forecast a modest 50k increase in non-farm payrolls – this following a 140k decline in December – and a steady unemployment rate of 6.7%. The ISM and ADP data released over the course of this week might suggest that the risks are now skewed to the upside. It is worth noting that the report will also incorporate annual benchmark revisions, which based on preliminary estimates would reduce the level of payrolls by 173k. Today will also see the release of the full trade balance for December – which should report a smaller deficit than November given the $3bn narrowing already reported in the goods sector – together with consumer credit data for December.

Aussie retail pullback in December confirmed, but Q4 volumes up strongly
Today the ABS released the final estimate of retail spending in December, which confirmed a significant pullback after the re-opening of stores in Melbourne and Black Friday sales had helped to drive a 7.1%M/M surge in spending in November. Spending fell 4.1%M/M in December, just 0.1ppt less than suggested by the preliminary data, but nonetheless remained up a very robust 9.6%Y/Y. As the preliminary data had suggested, the decline was led by steep falls in spending at department stores (12.5%M/M) and on household goods (-8.3%M/M), which had recorded even larger increases in November. Reflecting the ongoing influence of the pandemic, spending at cafés and restaurants remained down 2.2%Y/Y – the only category not to record strong growth.

Given today’s result, nominal spending increase 2.5%Q/Q in Q4, following a 7.0%Q/Q in Q3. And given the absence of any inflation in the retail sector, the volume of spending also increased 2.5%Q/Q – slightly above market expectations – lifting annual growth by 2.2ppts to a 16-year high of 6.4%Y/Y. This outcome bodes well for a further solid lift in private consumption spending when the national accounts for Q4 are released in early March. Moreover, with the labour market mending, asset prices inflating and consumer confidence returning, prospects remain positive for continued growth in consumer spending this year.

RBA forecasts reinforce Board’s expectation of unchanged cash rate until 2024
This week’s extensive RBA communication concluded today with the release of the quarterly Statement on Monetary Policy (SMP) and the appearance of Governor Lowe before the House of Representatives Standing Committee on Economics. As one would hope, this communication was consistent with Tuesday’s post-meeting statement and Lowe’s speech on the economic outlook the following day i.e., it emphasised that despite further upside surprises to key activity indicators, the RBA considers that sustained monetary accommodation will be required until at least 2024 in order to achieve its full employment and inflation mandate.

As far as the SMP was concerned, the main interest today was in the detail of the Bank’s forecasts. Rounded to the nearest ½ppt, the Bank now expects the economy to have contracted 2%Y/Y last year – a sharp improvement on the 4½Y/Y contraction forecast in November and implying that the Bank expects Q4 GDP growth of around 2-2½%Q/Q (in our view, a reasonable estimate). Thereafter, the Bank now expects GDP to grow 3½%Y/Y this year (1ppt less than previously) and an unchanged 3½%Y/Y in 2022. Given the outlook for activity, the unemployment rate is now expected to end this year at 6% and next year at 5½% (in both cases down ¾ppts from the November forecast). The Bank’s forecast for the end of June 2023 – the end of the forecast horizon – is 5¼%, which would remain slightly above the pre-pandemic level that had generated insufficient wage growth to allow the RBA to achieve its inflation mandate.

Not surprisingly, therefore, the Bank’s forecast for trimmed mean inflation remains soft, with the forecast for the end of next year unchanged from the 1½%Y/Y forecast in November and the forecast for June 2023 just slightly firmer at 1¾%Y/Y – still outside of the Bank’s 2-3% inflation target. Given the Bank’s commitment not to raise the cash rate until actual inflation is sustainably within the target range, these forecasts make clear why the Bank does not expect to raise the cash rate until 2024 at the earliest. Moreover, even the Bank’s suggested upside scenario indicates that the unemployment rate would fall no lower than 4¾% by June 2023, so that wage growth would remain short of pre-pandemic levels and trimmed mean inflation slightly below 2%Y/Y. Of course, this is but one possible scenario. However, it does illustrate that there will be no quick turnaround in the Bank’s dovish view, not least due to worries about imparting upside pressure on the exchange rate given ultra-accommodative monetary policy settings elsewhere.

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