Japanese IP posts a substantial decline

Chris Scicluna
Emily Nicol

Japanese IP slumps in May as autos production remains in reverse and output remains hindered by persisting supply constraints
Today’s Japanese industrial production figures fell massively short of expectations. Indeed, manufacturing output fell a whopping 7.2%M/M in May, the most since May 2020, while the median forecast on Bloomberg survey had predicted a drop of just 0.3%M/M. This left output trending so far in Q2 more than 4% below the Q1 average. The weakness was broad based, with noteworthy declines in production of autos (down for the fifth month out of the past six and by 7.6%M/M), ICT equipment (-11.4%M/M), air conditioners (-17.3%M/M) and batteries (-16.7%M/M), largely driven by persisting supply constraints that were exacerbated by China’s lockdowns.

Certainly, inventories continued to decline in May, falling for the third consecutive month (albeit by just 0.1%M/M) to their lowest level since October, with stocks of transport equipment down more than 6½%M/M. So, while manufacturers were particularly upbeat about the production outlook for June, not least reflecting the easing of lockdowns in China, the forecast rebound of 12%M/M seems far too optimistic to us. Indeed, even assuming that pace of recovery, this would leave factory output still down by more than 1½%Q/Q in Q2. So, while the lifting of domestic restrictions should see a more pronounced recovery in services, today’s figures raise some concerns about the pace of bounce back in Japan’s GDP over the past quarter.

Chinese PMIs signal return to moderate expansion in June
With pandemic restrictions easing (for now) and additional policy support announced at the end of last month, China’s official PMIs for June signalled a return to moderate expansion at the end of Q2. Admittedly, judging from the headline manufacturing PMI, which rose just 0.6pt to 50.2 (vs the BBG median forecast of 50.4), the improvement in the factory sector looked a damp squib. However, the manufacturing output PMI suggested a firmer rebound in production, rising more than 3pts to a fifteen-month high of 52.8. While less striking than that, the manufacturing indices for overall orders (50.4) and new export orders (49.5) also rose more than 2pts and 3pts respectively. A jump in the supplier delivery times index to above 50 for the first time in fifteen months suggested a notable easing in supply-chain challenges. And cost pressures in the sector reportedly eased significantly too, with the respective PMI down almost 4pts to 52.0, the lowest so far this year.

Moreover, the improvement in the non-manufacturing PMI was far more marked, rising almost 7pts to 54.7, a thirteen-month high. New orders in the sector were the strongest in fifteen months, and business expectations for the coming year were also the most positive in more than a year. Activity reportedly picked up in services and construction alike, with 19 out of 21 subsectors in expansion territory (but logistics very much standing out from the pack) with a similar picture for firms of all sizes. However, services employment continued to decline. And more than half of firms in the sector still reported concerns about the inadequacy of demand.

French inflation rises to new multi-decade high in June on food and petrol prices
In marked contrast to yesterday’s downside surprise in Germany (which we attribute entirely to temporary factors), and more consistent with the increases reported in Spain and Belgium, French inflation rose further in June to new multi-decade highs. Broadly in line with expectations, French prices on the national CPI measure rose 0.7%M/M to push the annual rate up by 0.6ppt to 5.8%Y/Y, the highest since 1985. And the French EU-harmonised HICP inflation rate rose 0.7ppt to 6.5%Y/Y. The pressures came again in non-core items. On the national measure, higher petrol prices pushed up energy inflation more than 5ppts to above 33%Y/Y, while food inflation rose 1.4ppts to 5.7%Y/Y. But the services component was steady at 3.2%Y/Y, and manufactured items component slowed 0.4ppt to 2.6%Y/Y, hinting at a welcome, albeit slight, decline in French core inflation.

Modest rise in German retail sales in May won't prevent sharp drop in Q2
Broadly as expected, German retail sales volumes rose 0.6%M/M in May, a very modest improvement after the drop of 5.4%M/M in April, as high inflation continued to erode purchasing power. In nominal terms, sales rose 2.0%M/M. The modest rebound in May left sales in real terms down 3.6%Y/Y and less than 1.0% above the pre-pandemic level in February 2020. And it meant that the average level of real sales in the first two months of Q2 was almost 4% below the Q1 average, underscoring the inevitability of a marked contraction in spending on goods over the second quarter as a whole. Weakness in May was notable in sales at food stores, where price pressures are particularly intense (inflation in the sector was up above 11%Y/Y last month). Indeed, real food-store sales fell 0.6%M/M while non-food store sales rose 2.9%M/M thanks to stronger sales of clothing and shoes.

Looking ahead, this morning will also bring euro area unemployment figures for May. These are expected to show that the region’s jobless rate remained at a series low of 6.8%. The latest German labour market numbers will provide an update on developments in the largest member state in June.

UK real household disposable income declined for fourth consecutive quarter in Q1, while another business survey signals slowing momentum in June
While updated Q1 GDP figures confirmed seemingly solid growth of 0.8%Q/Q and 8.7%Y/Y in the UK’s economy at the start of the year, this masked the loss of economic momentum as the quarter progressed. And while today’s release confirmed that private consumption growth was unrevised (0.6%Q/Q), the ONS also noted that real disposable income declined for the fourth consecutive quarter (-0.2%Q/Q) even ahead of the latest leap in inflation, surge in household energy bills and increase in national insurance contributions at the start of Q2. Meanwhile, the drop in business investment was a touch larger than previously thought at 0.6%Q/Q, leaving the level still some 9½% below where it was ahead of the Brexit referendum six years ago.

Separately, today’s Lloyds business barometer aligned with the deterioration seen in other recent UK surveys. In particular, the headline confidence index fell 10pts in June to 28, a fifteen-month low, with firms also moderating their hiring intentions for the coming twelve months slightly too. And so, we maintain our view that UK GDP contracted in Q2 against the backdrop of a significant weakening in household spending.

Personal income and spending figures today’s US highlight
A key US highlight today will be the latest monthly personal income and spending numbers for May. Respectable gains in employment and earnings suggest that wages and salaries performed well – our colleagues in Daiwa America forecast growth of 0.4%M/M. But on the spending side, a drop in sales of new vehicles will restrain outlays for durable goods. And while total spending is expected to have recorded modest growth (0.3%M/M), this will in large part reflect prices, with real personal spending is forecast to have fallen for the first month in five. Indeed, the core PCE deflator is expected to have risen a further 0.4%M/M in May, with the headline index boosted further by energy prices.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.