Japanese wages weaker again

Emily Nicol

While US stocks saw modest increases yesterday, Asian markets were more positive today and on the whole more than reversed yesterday’s losses. Despite some weaker Japanese wage figures (see below for more details), the yen fell back through ¥108/$ and the Topix was among the better performers, rising 0.8%. The main Chinese CSI 500 was up 0.2%. And the Aussie S&P 200 closed 0.5% higher, while the RBA’s Assistant Governor Kent noted that the central bank was a long way from unconventional policy measures.

Shorter-dated USTs made losses as a bi-partisan agreement was reached in Congress late yesterday to suspend the US debt ceiling and boost spending levels for the next two years. But while this afternoon will bring the Commission’s flash euro area consumer confidence indicator, European markets will likely remain in wait-and-see mode ahead of Thursday’s ECB announcement. Meanwhile, sterling was a touch weaker this morning as today will likely confirm the populist Brexiter Boris Johnson as Theresa May’s successor as the next Conservative Party leader.

After last week’s inflation figures saw the BoJ’s forecast measure of core CPI (excluding fresh foods) fall to a near-two-year low, today’s final wage figures for May will have made for disappointing reading for the BoJ, suggesting that its long-awaited boost to prices from labour market tightness will continue to remain elusive. Indeed, these suggested that the decline in average wages in May was actually steeper than initially thought, by 0.3ppt to -0.5%Y/Y, to mark the fifth consecutive year-on-year drop. The downwards revision reflected weaker bonus payments, with a 0.5%Y/Y decline in May comparing with the 2.5%Y/Y increase previously reported. Meanwhile, the drop in scheduled earnings was unrevised at -0.6%Y/Y, the biggest since 2014. And, when adjusting for inflation, real wages were down 1.3%Y/Y.

Of course, some of the weakness likely still relates to sampling issues – data based on a common sample suggest that average labour earnings growth rose 0.2ppt to 0.9%Y/Y in May, with regular wage growth at 0.4%Y/Y. But this still remains well below rates required to shift inflation onto a higher path. Moreover, the near-term outlook remains clouded by reported weaker summer bonus payments this year, as well as another relatively subdued outcome from this year’s Shunto, which delivers the same pay rises as last year (2.07%Y/Y) – and this headline figure exceeded actual total wage growth in 2018 by about 1.8ppts.

Euro area:
Ahead of Thursday’s ECB policy announcement, today brings the first of this week’s sentiment surveys for July, with the flash estimate of the Commission’s euro area consumer confidence index. Having declined to a near-two year low in December, this indicator ticked a touch higher at the start of the year before oscillating around a broadly sideways trend. And after slipping slightly in June, we expect only modest improvement in the July reading. Today will also bring the ECB’s latest quarterly Bank Lending Survey.

Of course, all eyes in the UK today will be on the announcement of the new Conservative Party leader later this morning, although the populist Brexiter Boris Johnson seems highly likely to replace Theresa May as head of the ruling party. And so, once Theresa May formally resigns after Prime Minister’s questions tomorrow afternoon, Johnson will be confirmed as the new Prime Minister, allowing him to deliver a first speech from Downing Street later that day.

Data-wise, today brings the CBI’s latest Industrial Trends survey, which will take stock of conditions in the manufacturing sector at the start of Q3. Unsurprisingly given persistent Brexit uncertainty, the survey is expected to signal continued weakness in manufacturers’ orders books, with the relevant index having declined in June to its lowest level since 2016. In the bond market, the DMO will sell 10Y Gilts.

In the US, today’s calendar will be dominated by housing market releases, with existing home sales figures for June expected to decline following a stronger showing in May. The FHFA house price index for May is also due. In the bond markets, the US Treasury will sell 2Y Notes.

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