Japanese wages and UK retail survey disappoint

Chris Scicluna
Emily Nicol

After equities in most major markets retreated yesterday (the S&P500 closed down almost 0.5%), Asian stock indices have dropped again today, e.g. with China’s CSI300 down 0.3%, as investors appear to await a possible new steer on Fed policy tomorrow from Jay Powell’s Congressional testimony and the latest FOMC minutes. With new Japanese wage data offering little cause for cheer – the headline growth rate posted a fifth consecutive year-on-year decline (see detail below) – the Topix closed down 0.2% despite a further weakening of the yen to around ¥109/$ for the first time since end-May. Australia’s ASX also saw a modest decline while ACGBs made gains as the latest NAB business survey reported a deterioration in confidence. USTs, meanwhile, remained broadly steady (10Y yields just above 2.03%). On the whole, European equity markets have opened down, while government bond markets are little changed.

Beyond the markets, in the UK, MPs might have another go today at taking legislative action to prevent the next Prime Minister (presumably Boris Johnson) leaving the EU without a deal. Data-wise, the June BRC retail sector survey released overnight added to evidence of a notable weakening of UK demand in Q2. While it’s set to be a relatively quiet day for economic data from the euro area, a Twitter Q&A this afternoon from ECB Chief Economist Philip Lane – who is arguably now the key member of the Governing Council – should be watched for hints as to the likely timing and substance of the ECB’s likely near-term monetary policy easing measures.

Japan’s labour earnings figures have persistently disappointed since the start of the year. And while the decline in May reported today was not as steep as expected, at 0.2%Y/Y it still represented the fifth consecutive year-on-year drop. When adjusting for inflation, real wages were therefore down 1.0%Y/Y. Moreover, the drop in scheduled earnings (0.6%Y/Y) matched the weakest reading since early 2014. In contrast, overtime earnings were up (0.8%Y/Y) for the first month since November, while bonus payments rose 2½%Y/Y.

The weakness in May once again stemmed from part-time workers, whose average earnings were down more than 2%Y/Y, the most since comparable data began in 2013. In contrast, average earnings of full-time workers rose 0.3%Y/Y. But some of the weakness in the headline earnings measure likely still relates to sampling issues. Indeed, data based on a common sample suggest that average labour earnings growth accelerated 0.5ppt to 1.2%Y/Y in May, with regular wage growth at 0.6%Y/Y. The May data also appear to have been distorted to some extent by the extended Golden Week holiday, with the number of scheduled hours worked down more than 4½%Y/Y, the most since the series began in 1991. This notwithstanding, a sudden pickup in labour earnings over coming months seems highly unlikely, not least given expected weakness in summer bonuses – indeed, Keidanren recently suggested that such payments at major firms were down 2½% compared with last year.

We have already seen the only release of note from the UK today, with the BRC’s retail sales monitor once again presenting a bleak assessment of household spending at the end of the second quarter. In particular, total sales were down 1.3%Y/Y in June following a 2.7%Y/Y decline in May and like-for-like sales fell 1.6%Y/Y after a 3%Y/Y drop previously – the worst June performance on record. Admittedly, some of this weakness represents unfavourable weather conditions this year compared with last, while sales in June 2018 were also reportedly boosted ahead of the World Cup.

But even smoothing out monthly volatility, sales continued to trend lower – indeed, on a three-month basis, total sales were down 0.1%3M/Y, the first such decline since December 2008, while on a twelve-month basis, sales were up just 0.6%12M/Y, the worst performance since the series began in 1995. The weakness was driven by in-store sales of non-food items which were down more than 4%3M/Y, while total non-food sales fell 2%3M/Y, the steepest drop since early 2009. So, combined with a disappointing CBI survey last month – which saw its headline index fall to its lowest March 2009 – today’s release further supports our view that household consumption remained subdued in the second quarter, and further supports our expectation that UK GDP contracted in Q2.

Euro area:
It should be a relatively quiet day for euro area economic data, with just Italian retail sales figures for May due for release. However, a Twitter Q&A this afternoon from ECB Chief Economist Philip Lane – who is now looks to be pivotal member of the Governing Council – should be closely watched. In the markets, Germany will sell 5Y and 10Y index-linked Bunds.

The economics focus in Australia today was on the NAB’s monthly business survey for June, which on balance continued to signal a loss of momentum over the past year. In terms of business confidence, today’s survey was more downbeat, with the relevant indicator largely reversing the election-related jump in May, falling 5pts to +2. And while the survey suggested that business conditions improved slightly in June from the more-than 4½-year low recorded in May, the index remained well below its long-run average, with conditions reportedly weakest by some margin in the retail sector. The associated trading and employment indices improved last month, while profitability remained flat. But the forward-looking indicators suggested that conditions would remain weak over coming months, with the orders component recording the seventh negative reading out of the past eight.

In the US, today will bring the NFIB small business optimism survey for June, as well JOLTS job opening figures for May.

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