Japanese exports disappoint as tourists retreat

Emily Nicol

While US equities eked out a modest increase yesterday to close at a new record high, Asian equities today were more mixed. A broadly disappointing Japanese trade report (see more details below) saw the TOPIX close ½% lower on the day, while the main Chinese CSI 300 similarly slipped back (-0.2%). In the contrast, the Aussie ASX 200 closed marginally higher even as the latest job vacancy figures raised further doubts about the near-term jobs outlook. In bond markets, despite the weaker data Aussie government bonds sold off, with 10Y ACGB yields 5bps higher to 1.2%. Meanwhile, JGBs were marginally stronger (10Y yields down less than 1bp to -0.029%). And while S&P last night revised the outlook on the UK’s sovereign credit rating from negative to stable, sterling has continued to depreciate this morning and 10Y Gilt yields have opened lower still as markets continue to respond to yesterday’s news that PM Johnson was seeking to rule out an extension to the Brexit transition period beyond end-2020. Looking ahead, today will bring final November inflation figures from the euro area and UK, as well as the German ifo survey.

Contrasting with yesterday's more upbeat euro area trade report, the overnight release of Japan’s goods trade figures suggested that manufacturers in that country continued to struggle in the face of soft global demand and geopolitical tensions. Indeed, this showed that export values fell in November (-0.3%M/M) for the fourth month out of the past five to leave them almost 8% lower than a year earlier – admittedly a modest improvement from the more-than 9%Y/Y decline recorded in October. But today’s report also suggested that domestic demand remained subdued, with a further fall in the value of imports (-0.1%M/M) leaving them down 15.7%Y/Y, the steepest such drop for more than three years. Overall, this caused a slight widening of the adjusted trade deficit to ¥61bn.

Within the detail, there was a further weakening in demand for Japanese goods from the US, with the 12.9%Y/Y decline – the steepest since August 2016 – largely reflecting a near-17%Y/Y drop in autos shipments. In contrast, demand for Japanese cars from the EU improved in November (+12%Y/Y), although growth in total exports to the region still remained in negative territory (-7.5%Y/Y). But while the decline in shipments to China moderated in November (down 5ppts to -5.4%Y/Y), a further notable fall in exports to South Korea (-17.0%Y/Y) further emphasised the impact of continued strains in relations. Indeed, the direct impact of the trade dispute between the countries was again evident, with shipments of chemicals down 27%Y/Y to account for more than 40% of the year-on-year drop, while exports of semiconductor machinery was down 40%Y/Y and car shipments down a whopping 89%Y/Y in November.

When adjusting for price and seasonal effects, the BoJ’s series suggested a more notable deterioration in exports in November, with volumes down more than 1½%M/M for the second successive month. So exports appear on track for a notable contraction in Q4 – indeed, in October and November volumes were trending 2½% below the Q3 average. Nevertheless, with import volumes down a steeper 3.3% on an equivalent basis, on balance, today’s report suggests that net trade might well provide some much needed support to GDP growth in Q4.

But the outlook for services remains uncertain. Certainly, the impact of the Japan-Korea dispute was again clearly evident in the latest overseas visitor numbers, with the number of Korean visitors (205k) in November down a whopping 65.1%Y/Y. So, despite a notable increase in tourists from elsewhere in Asia – for example, visitors from China were up 21.7%Y/Y to 751k, Taiwan up 11.4%Y/Y to 392k, Thailand up 36.3%Y/Y to 140k – and solid growth in visitors from the US (up 17.3%Y/Y to 149k) and UK (up 37.5%Y/Y to 38k), the total number of overseas visitors was down compared with a year earlier in November, by 0.4%Y/Y to 2.44mn. As such, total visitors so far in 2019 were up just 2.8%Y/Y.

Euro area:
After Monday’s disappointing German flash December PMIs, a key data focus today will be the ifo survey, which will be closely watched for further insight into business conditions in the largest member state heading into year-end. This morning will also bring revised euro area inflation figures for November. Last week saw equivalent figures from Germany, France and Spain align with their preliminary estimates, to show the respective headline CPI rates increasing 0.3ppt from October to 1.2%Y/Y, 1.2%Y/Y and 0.5%Y/Y. So, while Italian figures saw the 0.2ppt increase in the flash estimate revised away (leaving headline CPI unchanged from October at 0.2%Y/Y), we continue to expect euro area aggregate figures to confirm that headline inflation rose 0.3ppt in November to 1.0%Y/Y, with core inflation 0.2ppt higher at 1.3%Y/Y. Euro area construction output figures for October are also due.

Ahead of tomorrow’s BoE policy announcement, today’s inflation release is likely to confirm that price pressures in the UK remain relatively subdued in November – indeed, we expect headline inflation to decline 0.1ppt to 1.4%Y/Y, which would be the weakest rate for three years. While this in part reflects an anticipated easing in food price inflation, non-energy industrial goods inflation is also expected to fall back, suggesting that the core CPI rate might also drop from the 1.7%Y/Y level seen in the previous two months. Wednesday will also bring the ONS house price index for October. Today might also bring the government’s nomination of Mark Carney’s successor as Governor at the BoE.

Ahead of tomorrow’s ABS labour market report, today’s DEWR release of monthly skilled vacancy figures made for disappointing reading. In particular, vacancies fell for the eleventh consecutive month in November (-1.3%M/M) to leave them down a whopping 10.7%Y/Y, the steepest annual decline for more than six years. And the weakness was widespread, with a more than 16%Y/Y decline NSW and near-12%Y/Y decline in Victoria, while there were double-digit year-on-year falls in job advertisements for managers, technicians, sales, machinery drivers and labourers, with the number of vacancies in the latter at their lowest since the series began in 2006.

On a quiet day for US economic releases, today will just see Fed Governor Brainard speak at an ECB conference in honour of departing Executive Board member Cœuré.

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