Sluggish Japanese wages, slumping German output

Chris Scicluna
Emily Nicol

While Draghi tried his best to sound dovish yesterday, mooting the possibility of another rate cut or more QE, the ECB’s announcement of its conditions attached to its forthcoming TLTRO-III operations was not quite as generous as markets had hoped. So, a weaker showing by financials weighed on euro area equity indices, while the euro strengthened and shorter-dated euro govvie yields also rose. But US equities rose for a third day in a row, with the S&P500 closing up 0.6%. And while VP Pencesaid the US administration will follow through with its threat to impose 5% tariffs on Mexican imports on Monday, reports of concessions being offered by officials from South of the border maintained optimism that a deal might eventually be reached to ensure such measures might be short-lived.

So, US equity futures are pointing higher today. And while markets in China, Hong Kong and Taiwan were closed for public holidays, most other major equity indices in the Asia-Pacific made gains today. Most notably, Japan’s Topix closed up 0.5% despite some mixed domestic data, which showed continued weakness in wage growth and a muddled picture on consumer spending (detail below).

A busy of day of data in Europe, meanwhile, has got off to a disappointing start with some very weak German production and export data (see more on this below too), supporting our expectation of a moderation in euro area GDP growth in Q2. And while the latest German labour cost data were stronger than of late, there was certainly no breakout from the range of the past few years, suggesting no new impetus to underlying price pressures. Looking ahead to the rest of the day, of course, all eyes will be on the US May labour market report, with a slowdown in payroll growth expected, an increase in the unemployment rate possible, and wage growth to be closely watched.

With persisting concerns about the likely resilience (or lack thereof) to the legislated consumption tax hike (assuming it will indeed go ahead), a focus today in Japan was the latest income and spending figures. But these provided mixed messages. At face value, April’s labour earnings figures were much improved, with the year-on-year decline of 0.1% smaller than expected and the best such reading this year. But it still marked the fourth consecutive decline. And while scheduled earnings posted a modest rise (0.1%Y/Y) for the first time this year, this was well below the average growth seen in 2018 (0.9%Y/Y). Indeed, overtime and special payments remained very weak in April, down 1.1%Y/Y and 3.2%Y/Y respectively. And when adjusting for inflation, real wages were still down more than 1%Y/Y.

Within the detail, the weakness stemmed from part-time workers where average earnings were down 1%Y/Y, the most since March 2017, while average earnings of full-time workers rose 0.6%Y/Y. As always, however, we caution that the preliminary results of this survey can be subject to substantial revision. And some of the weakness in the headline earnings measure likely still relates to sampling issues and the employee count. Indeed, on this survey, the number of full-time employees rose a steady 1.0%Y/Y while the number of part-time employees rose 3.8%Y/Y, to leave the total number of regular employees up 1.9%Y/Y, well in excess of the 0.5%Y/Y rise in total employment suggested by alternative MIC labour force data. If these employee counts are revised lower, earnings-per-person would be revised higher. Indeed, MHLW data based on a common sample, suggest that average labour earnings were up 0.5%Y/Y in April. And the MIC’s expenditure survey was more positive with respect to disposable income growth too, up 0.8ppt to a three-month high of 1.5%Y/Y.

But the MIC’s survey was much more downbeat about household spending at the start of Q2. In particular, its measure of total spending declined 1.4%M/M in April, to leave the year-on-year increase falling 0.8ppt to 1.3%Y/Y, the softest pace this year. And the weakness was widespread, with core spending similarly down almost 1½%M/M. It is worth noting, however, that this measure of consumption has provided a particularly poor guide to the national accounts measure of household expenditure over the past year. Indeed, in Q1, core spending was up 1%Q/Q compared with the 0.1%Q/Q decline recorded in the national accounts consumption measure.

Certainly, the BoJ’s consumption activity index aligned more closely to actual consumption in Q1. And today’s BoJ figures for April were much more positive, with the headline consumption activity index rising 1.4%M/M, fully reversing the declines seen in the previous two months. Moreover, when adjusting for spending by overseas visitors, consumption activity increased 1.6%M/M, the most since the consumption tax hike in 2014. Spending on durable goods jumped in April, with the relevant index up 4½%M/M, while the equivalent indices for non-durable goods and services were up around 1%M/M. While some of the strength at the start of the quarter no doubt reflects payback for the weakness in Q1, we would expect spending to remain well supported in May as households celebrated the extended Golden Week holiday. And consumption is likely to maintain a steady upward trend over the remainder of Q2 and Q3 as consumers front-load spending on big-ticket items as the consumption tax hike approaches.

Indeed, on the whole, Japan’s economy appears to have had a more encouraging start to the second quarter compared with the weakness at the end of the first. Certainly, the Cabinet Office’s preliminary composite business conditions indicators – calculated from 29 data series related to production, jobs, spending and financial conditions – reported an improvement in April, with the index increasing 2.5pts to 101.9, a five-month high. But the improvement was not enough to justify a revision to the government’s assessment of the economy that it was still “worsening”. Indeed, the leading indicator of economic conditions fell further in April to 95.5, its weakest level since Abe took office at the end of 2012.

Euro area:
Having risen 0.5%Q/Q over the first quarter, it was no surprise that German industrial production went into reverse in April. But this morning’s figures were much weaker than expected, with the decline of 1.9%M/M the most since 2015, and the drop in manufacturing and mining output steeper still at 2.5%M/M to leave it 2.0% below the Q1 average level. Dispiritingly, production of capital goods was down a hefty 3.3%M/M, similarly the biggest fall in almost four years, while output of intermediate and consumer goods fell too. Energy output was also down -1.1%M/M) leaving construction – for some time the most buoyant sector in Germany – the sole source of production growth (albeit up just 0.2%M/M). Compared to a year earlier, total IP fell 1.9% with manufacturing and mining output down 3.5%. While we expect to see a return to positive growth in May supported not least by an increase in car production, these data, coupled with yesterday’s sluggish factory orders numbers and downbeat surveys, strongly suggest that IP will contract over Q2 as a whole for the third quarter in four.

Weakness of external demand is, of course, a key factor behind the trials in Germany’s manufacturing sector, and this morning’s goods trade report for April was also exceptionally disappointing. The value of exports fell a steeper than expected 3.7%M/M, the most since August 2015, while imports fell a more moderate 1.3%M/M to leave the trade surplus down about €3.0bn on an adjusted basis at a ten-month low of €17.0bn. Adjusting for prices as well as seasonal effects, Bundesbank data show that the decline in the volume of goods exports (down 3.6%M/M) was much steeper than that of imports (down 1.6%M/M) to raise the likelihood that net trade will subtract from German GDP growth in Q2 having provided modest support in Q1.

Germany’s latest labour cost data were at least more upbeat, up in Q1 by 1.1%Q/Q, the most since Q416. However, that appeared little more than payback for weakness the prior quarter (just 0.2%Q/Q) related to typical volatility in non-wage costs. Indeed, compared to a year earlier, labour cost growth picked up just 0.5ppt to 2.5%Y/Y, still well within the range of the past four years, suggesting no significant new impetus to underlying price pressures from the labour market.

In contrast to the German numbers, this morning’s French IP figures were, at face value, more encouraging, with total production rising 0.4%M/M in April. That left it more than 1% higher than a year earlier, the strongest annual rate for three months. But this principally reflected a rise of more than 3%M/M in energy production. In contrast, construction output fell for the second successive month and by more than 2%M/M. And manufacturing output was flat in April, with a further notable drop in production of intermediate and capital goods offset by a rebound in the consumer goods sector. Moreover, coming on the back of a marked decline in March, this left the level of manufacturing output ½% below the average level in Q1, with total output down 0.2% on the same basis. 

A relatively quiet day for UK economic data has seen the KPMG/REC report on jobs maintain a downbeat assessment of near-term labour market prospects. In particular, recruitment agencies reported that permanent placements continued to decline in May and at a faster pace than April, while temporary placements rose at the slowest rate for over six years. Demand for staff remained subdued, with vacancy growth reportedly close to a multi-year low, while the pool of potential candidates fell as Brexit uncertainty made employees unsurprisingly more risk averse.

All eyes today, of course, will be on the US labour market report for May. Expectations are for a slowdown in nonfarm payroll growth from 263k in April to close to 180k (Daiwa America forecast 160k). And the private sector ADP figure (just 27k) suggests that the risks might be skewed to the downside. Meanwhile, the unemployment rate might tick up 0.1ppt to 3.7% due to an increase in the labour force, while the annual rate of growth in average hourly earnings is expected to remain unchanged at 3.2%Y/Y. Wholesale trade and inventories data for April are also due.

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