Morning comment: Japanese CPI & wages, German GDP & RBA signalling

Chris Scicluna
Emily Nicol
Mantas Vanagas

While the commentary surrounding US-China trade talks remained mostly positive, Wall Street closed slightly lower yesterday – the S&P500 fell 0.35% – and credit spreads widened slightly as investors absorbed some downbeat economic data related to capex orders, home sales and the Philadelphia Fed’s manufacturing survey. Even so, the Treasury market was somewhat weaker – the 10Y yield rising 4bps to 2.69% – and the US dollar was mostly slightly firmer. And, against that slightly contradictory backdrop, today's markets in Asia were very much a mixed bag.

Indeed, ahead of today’s scheduled meeting on trade issues between President Trump and China’s Vice Premier Liu He, China’s CSI300 rose vigorously in the afternoon session to close up a strong 2.25%. Hong Kong made more moderate gains, however, as did Australia, where support nevertheless came from RBA Governor Philip Lowe as he reiterated the Bank’s positive central forecast for the economy (more on this below). In Japan, meanwhile, the TOPIX fell 0.25% after the January CPI report provided no surprise but estimated growth in labour earnings in December was revised lower (also more on these reports below).

In currency markets, the New Zealand dollar weakened after RBNZ Deputy Governor Geoff Bascand acknowledged that the central bank’s proposal to force domestic banks to hold more tier 1 capital could lead those banks to raise their lending margins by more than the RBNZ presently estimates – a move that could impact the economic outlook and require an offsetting decline in the Official Cash Rate. But the Australian dollar was little impacted by Lowe’s aforementioned commentary while a 4bp lift in the 10Y ACGB yield mirrored the overnight move in the US Treasury market.

As far as economic data were concerned, the domestic focus in Japan today was on the CPI report for January. In summary, all of the key CPI aggregates printed in line with market expectations. The headline index rose a seasonally-adjusted 0.3%M/M, more than reversing a 0.2%M/M decline in December. However, base effects meant that the annual inflation rate fell a further 0.1ppt to just 0.2%Y/Y, marking the weakest outcome since October 2017. A 6.2%M/M rebound in fresh food prices contributed to the increase in the headline CPI in January. But, importantly, the measure used by the BoJ in its quarterly Outlook Report forecast – which excludes fresh food prices from the CPI – also rose a solid 0.2%M/M in January. This was the largest increase in six months and raised the annual inflation rate for this measure by 0.1ppt to 0.8%Y/Y.

Within the detail, a further decline in petroleum product prices provided downward impetus to the CPI this month, although this was partly offset by higher prices for electricity. So while energy prices still fell 0.7%M/M in January, the BoJ’s preferred measure of core prices, which excludes both fresh food and energy prices, also rose 0.2%M/M on a seasonally-adjusted basis in January. This marked the first increase of any description since August and meant that annual inflation on this measure also edged up 0.1ppt to 0.4%Y/Y – nonetheless, still unchanged from where it had stood a year earlier. The measure of core prices that strips out prices of all food items and energy (as monitored closely in many other major countries) also rose 0.2%M/M, lifting annual inflation in that measure by 0.2ppt to a 10-month high of 0.3%Y/Y. Elsewhere in the detail, prices for non-energy industrial goods rose 0.2%Y/Y, up from 0.0%Y/Y previously. While prices in the service sector edged lower in January, favourable base effects lifted annual inflation in this sector to a 5-month high of 0.5%Y/Y.

Despite the modest rise in January, core inflation remains nowhere near the BoJ’s 2% target despite ongoing extreme tightness in the labour market. And with recent activity and sentiment indicators suggesting that near-term growth in the economy may struggle to reach trend, and with pipeline inflation pressures also easing of late, the prospects for the target being met in the foreseeable future remain very slight at best. In these circumstances it remains difficult to see the BoJ withdrawing monetary stimulus, even given increasing concerns amongst some Board members about possible negative side effects on the financial sector from sustained ultra-accommodative policy settings. Indeed, as Governor Kuroda intimated earlier this week, if the inflation outlook deteriorates further policy easing cannot be ruled out. That said, we think the hurdle to further policy easing is quite high.

In other news, the MHLW released the final results of its Monthly Labour Survey for December. The labour earnings figures came in slightly softer than originally estimated, with total average wage growth revised lower by 0.3ppt to 1.5%Y/Y – also down 0.2ppt from the final November reading. The increase in scheduled earnings was revised down 0.2ppt to a 3-month low of 0.6%Y/Y, while growth in bonuses was revised down 0.3ppt to 2.4%Y/Y. Growth in employment was unrevised at the aggregate level – a gain of 0.8%Y/Y – but, as usual, revisions cast full-time employment in a weaker light, with growth revised down 0.4ppt to just 0.1%Y/Y. Growth in part-time employment was revised up to 2.5%Y/Y, however. 

Euro area:
Today will bring further economic survey results for February with, most notably, the German Ifo business climate indices. While yesterday’s PMIs saw the German composite index rise to a four-month high of 52.7, that reflected an upbeat reading for services, while the manufacturing PMI dropped more than 2pts to a very weak 47.6, the lowest since 2012, with a particularly dire reading for new orders. So, a further modest decline in the headline Ifo business climate index to a four-year low would not be a surprise.

The final German Q4 national accounts, released this morning, brought no major surprises – e.g. the figures confirmed that the economy of the largest euro area member state failed to expand at the end of last year, with GDP unchanged in the fourth quarter following the contraction of 0.2%Q/Q in Q3. This left full-year growth in 2018 at 1.4%Y/Y, a five-year low. Within the details, the focus was on the expenditure breakdown released for the first time. Most notably, household consumption rose by 0.2%Q/Q, rebounding modestly from a 0.3%Q/Q drop in Q3. And so, with disposable income rising – the figures reported a healthy 3.5%Y/Y nominal increase – households again increased their savings. Indeed, the household savings ratio (on a seasonally adjusted basis) rose for a third consecutive quarter to almost 11%, the highest in more than a decade.

Meanwhile, fixed investment growth was stronger across the board, posting an overall increase of almost 1%Q/Q. But changes in inventories more than fully offset its contribution to growth in economic output, subtracting 0.6ppt from the headline GDP growth rate. Exports were also stronger after a drop in the previous quarter, but their increase of 0.7%Q/Q was matched by imports to leave net exports neutral from a growth perspective. Looking ahead, we think that the German economy might have regained some momentum in the current quarter. However, the recovery looks set to be far from impressive. Currently, we forecast GDP growth of 0.3%Q/Q in Q1, although yesterday’s flash PMIs suggest a softer performance.

Meanwhile, this morning brings the final estimates of January inflation in the euro area. Like yesterday’s final estimates from Germany, France and Italy, these are strongly expected to align with the respective flash figures, with the headline rate falling 0.2ppt from December to a nine-month low of 1.4%Y/Y and the core rate rising 0.1ppt to a three-month high of 1.1%Y/Y. Beyond the economic data, Bank of France Governor, and credible candidate for next ECB President, Villeroy de Galhau will speak publicly. In addition, in the bond markets, Italy will sell inflation-linked and zero-coupon bonds.

Today will be free of new economic data releases from the US. However, following Wednesday’s publication of the latest FOMC minutes, which among other things suggested that the balance sheet normalisation process could well be brought to a halt in the second half of this year, focus will be on the latest messages from various FOMC members. In particular, the 2019 US Monetary Policy Forum in NYC will see John Williams and Mary Daly discuss prospects for inflation, Fed Vice Chair Richard Clarida give a keynote speech on policy strategies, and Patrick Harker moderate a panel with James Bullard and Randy Quarles on the future of the balance sheet. Elsewhere, Raphael Bostic will be speaking publicly too. In addition, ahead of Chair Jerome Powell’s testimony to Congress next week, the Fed will publish its latest Monetary Policy Report.

As Brexit talks in Brussels, and party politics in Westminster, continue to generate more heat than light ahead of next week’s debate and votes in the House of Commons, the end of the working week for UK economic data will bring only the February CBI Distributive Trades survey. Retail sales rebounded at the start of the year following disappointment in December, when festive-period sales failed to meet retailers’ expectations. The CBI survey will provide early insights into whether sales gained further momentum this month – we doubt that it did.

Today China reported home price data for 70 cities in January. According to Bloomberg’s calculations, the simple average price of new homes rose 0.6%M/M. While this was the smallest increase since April last year, base effects meant that annual growth still picked up 0.2ppt to 10.8%Y/Y. Prices rose 0.4%M/M in 1st tier cities – led by increases in Beijing and Guangzhou – lifting annual growth to 3.3%Y/Y. Prices rose 0.6%M/M in 2nd-tier cities (11.2%Y/Y) and 0.7%M/M in 3rd-tier cities (11.4%Y/Y). Meanwhile the average price of existing homes across all 70 cities rose 0.2%M/M and 7.7%Y/Y.

The main focus in Australia today was on the semi-annual testimony of RBA Governor Philip Lowe, before the House of Representatives' Standing Committee on Economics. Not surprisingly, Lowe’s prepared remarks were very much in line with his most recent speech and the Bank’s Statement on Monetary Policy. As regards prospects for monetary policy, Lowe repeated that the probability that the next move is up and the probability that it is down are more evenly balanced than they were six months ago. However, it was clear from his remarks that the Bank’s policy stance has not moved to a fully neutral position.

Specifically, Lowe stated that “The unemployment rate is forecast to decline further and inflation to increase, although only gradually. If we do make this progress, it remains the case that higher interest rates will be appropriate at some point.” At the same time, Lowe repeated that if there were to be a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. For now, Lowe reiterated that the RBA’s Board does not see a strong case for a near-term change in the cash rate. Rather, he stated that “With monetary policy already providing considerable support to the Australian economy, it is appropriate to maintain the current policy setting while we assess developments. Much will depend on what happens in our labour market.”

During the extensive Q&A that followed Lowe played down the importance for the Australian economy of the previous day’s news that Australian coal imports were being blocked at Dalian port, and also suggested that this may reflect issues in the local steel and coal industries rather than any deterioration in the US-China relationship (a view also expressed by Australian PM Scott Morrison today). In any case, according to Lowe the coal that would have gone to Dalian (or indeed to China if the ban was extended) would likely go to customers elsewhere, albeit perhaps at a slightly lower price. He also played down the importance of the past year’s decline in house prices, arguing that wealth effects on consumption are limited and that, in any case, most home owners are sitting on substantial capital gains given the price increases recorded over the past decade.

Rather, according to Lowe, the first-order concern for the RBA remains prospects for growth in household incomes as the key driver of consumer spending – hence explaining the Bank’s heavy focus on the labour market. And according to him, the RBA’s strategy of driving the unemployment rate lower and wage growth higher is working, albeit gradually. Finally, Lowe stated that the unemployment rate could probably fall to close to 4½% from its current rate of 5% without generating wage growth that would generate upside problems for inflation. 

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