Japan's tertiary and machine orders suggest strong rebound in Q4

Chris Scicluna
Emily Nicol

PBoC cuts rates and provides liquidity as Chinese authorities seek to bolster growth
After the People’s Bank last month cut the reserve required ratio (RRR) by 50bps and the 1-year Loan Prime Rate by 5bps, it announced further policy easing today. In particular, the PBoC reduced its 1-year Medium-term Lending Facility for the first time since April 2020 and by 10bps to 2.85%, with the 7-day Reverse Repo Rate down by the same amount to 2.1%. The Bank also injected additional liquidity. The policy announcement came before the publication of the latest Chinese economic activity data, which were decidedly mixed. Despite a stronger-than-anticipated showing for GDP in Q4, retail sales were particularly weak at the end of the year while the adjustments in the real estate sector intensified. With the zero-Covid policy and property sector troubles to persist, further stimulus of both monetary and fiscal policy seems likely in due course.

Chinese Q4 GDP beats expectations despite slowest annual rate in 6 quarters
Within the detail of the data, Chinese GDP in Q4 rose 4.0%Y/Y, well ahead of the consensus forecast of 3.3%Y/Y albeit down from 4.9%Y/Y in Q3. Not least due to base effects associated with the initial pandemic rebound, that was the softest annual rate since Q220. However, while producer price pressures and the renewed spread of Covid-19, including lockdown in Xi’an, took their toll, quarterly growth picked up to 1.6%Q/Q from just 0.7%Q/Q in Q3, benefiting not least from measures to ease the power crunch. Overall, the economy grew 8.1%Y/Y in 2021, up from 2.2%Y/Y in 2020, the fastest rate in a decade and comfortably exceeding the Chinese government’s relatively modest official target of at least 6%. Within the detail, despite the pickup in the manufacturing PMI from Q3, secondary industry slowed 1.1ppts to 2.5%Y/Y, again the softest since Q120. Tertiary sector activity also slowed, down 0.8ppt to 4.6%Y/Y. And growth in primary industry moderated 0.7ppt to 6.4%Y/Y.

IP growth picks up as autos production improves
Perhaps encouragingly, the monthly data for December reported a pickup in industrial production growth of 0.5ppt to a four-month high of 4.3%Y/Y. Manufacturing output growth rose 0.9ppt to 3.8%Y/Y, also the best since August, benefiting from a pickup in autos production, whose annual growth rate returned back to positive territory and to its strongest since April (up 2.8%Y/Y), suggesting an easing of supply bottlenecks. Mining and quarrying output also continued to accelerate, up 7.3%Y/Y, the strongest rate in more than two years. Power generation growth moderated to 7.2%Y/Y.

Weaker retail sales and property sales adjustment merits the PBoC’s action
Most disappointing among the monthly data was the slowdown in nominal retail sales, for which growth fell a marked 2.2ppts to a sixteen-month low of 1.7%Y/Y. Sales were again weighed by auto sales (down 7.4%Y/Y) while growth in auto fuel and food was in double-digits. Given the 2.2%Y/Y increase in the associated rate of inflation, that implies a decline in sales in real terms, no doubt impacted by the renewed pandemic-related lockdowns. Moreover, the property sector adjustment continued. Home sales were down almost 20%Y/Y in value terms, while property investment was down 14%Y/Y. Real estate investment from property developers fell more than 19%Y/Y too. On a year-to-date basis, fixed asset urban investment slowed 0.3ppt to a 12-month low of 4.9%YTD/Y with property investment slowing 1.6ppts to 4.4%YTD/Y.

BoJ to keep policy framework unchanged, but revise up its assessment for risks to inflation
Tomorrow’s BoJ Policy Board meeting is likely to prove largely uneventful in terms of substantive policy announcements at least. Certainly, with Japanese inflation still extremely subdued and in light of the recent surge in coronavirus cases, there seems no reason right now for the BoJ to amend its policy framework – the short-term policy rate will be left at -0.1%, as will the commitment to purchase JGBs to maintain 10Y yields at around 0%. Nevertheless, the Bank is widely expected to revise up its GDP growth and inflation forecasts for the coming year, with the median forecast for core inflation expected to be increased by 0.2ppt to 1.1%Y/Y in FY22 and by 0.1ppt to 1.1%Y/Y in FY23, from 0.1%Y/Y in FY21. Moreover, for the first time since 2014, the Bank is expected to drop its assessment that the balance of risks to the inflation outlook are skewed to the downside.

This should not be interpreted as a move towards policy normalisation. Indeed, while Friday's CPI release is expected to show that headline inflation rose 0.3ppt to 0.9%Y/Y in December, this will principally reflect higher food and energy prices. When excluding fresh food, the BoJ's forecast measure of core CPI is expected to rise just 0.1ppt to 0.6%Y/Y. Moreover, on the internationally comparable core measure of inflation – excluding food and energy – the rate is expected to remain firmly in negative territory (-0.6%Y/Y). As such, like with the ECB, preconditions for a rate hike seem bound to be some way off and unlikely before 2023. Indeed, the BoJ’s 2% target still seems highly unlikely to be met over the policy horizon. And tomorrow’s policy statement might well retain the BoJ’s commitment to “take additional easing measures if necessary”.

Japanese tertiary and orders suggest strong rebound in Q4
Today’s Japanese data on the whole suggested ongoing recovery towards the end of last year. Admittedly, growth in tertiary activity (which accounts for a little more than two-thirds of total output) in November was softer than expected at 0.4%M/M, but this still marked the third consecutive increase and followed upwardly revised growth of 1.9%M/M in October when the state of emergency was lifted. So, in the first two months of Q4, activity was trending 2% higher than the Q3 average. Within the detail, activity was unsurprisingly strongest in the recreation and hospitality sub-sectors (4.3%M/M) and travel agencies (45%M/M), after international travel restrictions were temporarily relaxed. But while today’s data suggest a strong rebound in Q4 GDP growth, we would expect to see some weakening at the start of the year since due to the spread of the virus.

The latest machine orders data did at least suggest that private sector investment should hold up well at the turn of the year. In particular, core orders – which provide a guide to capex growth three-months ahead – rose a stronger-than-expected 3.4%M/M in November, to their highest level in two years, to leave them trending so far in Q4 some 4½% higher than the Q3 average. The increase in November reflected a rebound in orders placed by manufacturers (12.9%M/M) while orders placed by non-manufacturers were softer (-0.6%M/M) after strong growth in October. While public sector orders fell in November, they were still trending so far in Q4 10% higher than in Q3. But orders from overseas were more subdued and broadly flat on a similar basis.

Looking ahead, tomorrow’s Japanese IP data are expected to confirm the surge in output of more than 7%M/M recorded in the preliminary release in November. Wednesday’s trade report for December is expected to show a modest narrowing of the goods trade deficit at the end of last year.

Euro area ECB account from December’s meeting to be watched; final December inflation and flash January consumer confidence also due
A key release this week in Europe will be Thursday’s publication of the account of the final ECB monetary policy meeting of 2021 on 16 December, when the Governing Council decided to slow its net asset purchases steadily over the course of this year. In particular, the account will likely confirm that the decision to end the net PEPP purchases at the end of March was widely endorsed but that a range of views existed with respect to the plans for regular APP purchases thereafter. The account will also probably highlight differing views regarding the chances that the preconditions for a rate hike might be met later this year or – more likely – in 2023.

A relatively light euro area dataflow brings final December inflation figures for the region on Thursday. While the figures from Germany (Wednesday) and Italy (today) come ahead of that release, the final numbers are highly expected to align with the flash figures that suggested euro area headline inflation edged up 0.1ppt to a new series high of 5.0%Y/Y. Meanwhile, Germany’s ZEW investor sentiment survey (tomorrow) is expected to align with the Sentix investor confidence survey results and suggest a slightly more upbeat assessment at the start of the New Year, reflecting the view that the economic impact of the Omicron variant will be less severe than previously feared. Friday’s Commission survey of preliminary consumer confidence for January will tell us if households share this optimism – expectations are for a further decline to reflect the surge in coronavirus cases over the festive period. Other data due include euro area new car registrations for December (tomorrow), as well as euro area construction output for November (Wednesday).

UK labour market, inflation and retail sales releases in focus
After last week’s stronger UK GDP report, this week will also bring some key economic data that might firm up the likelihood of a further rate hike at the BoE’s next MPC meeting in early February. Of particular interest will be tomorrow’s labour market data, with the monthly payrolls numbers for December to be closely likely to have slowed from the near-250k increase seen in November due to the Omicron variant and tighter pandemic-related restrictions. But with vacancies still near record highs, wage growth is expected to have eased only slightly further in the three months to November, and remain above the pre-pandemic average. Nevertheless, given rising inflation, real wage growth is likely to have fallen further into negative territory.

In terms of inflation (data due Wednesday), we expect the headline CPI rate to have risen further in December, by 0.3ppt to 5.4%Y/Y, in part reflecting higher food price inflation. Core inflation is forecast to move sideways at 4.0%Y/Y. Meanwhile, turning to retail sales (Friday), December’s release is expected to show that, following strong growth in November and weaker consumer confidence amid the surge in coronavirus cases, sales fell back at the end of last year, albeit not fully reversing the near-1½%M/M increase seen in November. And the latest GfK consumer confidence survey (Friday) seems unlikely to point to any substantial improvement in sentiment at the start of the year either. Other releases include the Rightmove, ONS and RICS housing market indicators.

US housing market in focus on a relatively quiet week for data releases
When US markets reopen after today’s national holiday, it should be a relatively thin on the ground for top-tier releases with the focus on the housing market. Tomorrow’s NAHB housing index for January will be followed by housing starts numbers on Wednesday, which might well see a moderation at the end of last year due to an elevated inventory of unsold homes. Nevertheless, an increase in mortgage applications suggests that existing home sales inched higher in December – data due for release on Thursday. Other releases include the Empire Manufacturing and Philly Fed indices tomorrow and Thursday respectively. Ahead of the FOMC meeting on 26 January, there are no Federal Board members due to speak this week. 

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