Morning comment: Japan GDP, China trade, European manufacturing data

Chris Scicluna
Emily Nicol
Mantas Vanagas

The ECB was very much in dovish mode yesterday, downgrading its economic forecasts, extending its forward guidance to rule out a rate hike this year and announcing its intention to hold a new phase of very long-term liquidity operations (TLTRO-III). The initial market response to the policy announcement was favourable, but the subsequent unveiling of the ECB’s economic projections – with a marked write-down to its forecast for growth this year, the expectation that inflation will still fall short of target in 2021, and a recognition that the risks to the outlook are still skewed to the downside – saw investors take fright, particularly given the inference that, in line with our central forecast, the ECB will struggle to raise rates even next year. So, euro area equities went into reverse, with bank stocks leading the charge. And investors in the US also seemed disheartened by the commentary from Frankfurt, with the S&P500 eventually closing down 0.8% – albeit a little above the session lows. The 10-year Treasury yield closed at 2.64%, having traded slightly lower, while the pessimism regarding Europe (including the UK) was reflected in the outperformance of the US dollar and the yen.

That price action has continued into Asia today, where bourses were sharply weaker in a number of markets. In addition to reacting to those developments elsewhere, Japan’s TOPIX fell 2.0% after GDP growth in Q4 was revised up marginally more than the market expected, but with that revision accounted for by higher inventories (discussed in more detail below, along with a raft of other data releases). In China the CSI300 fell 4.0% with investors there seemingly unnerved by reports that Citic Securities had issued a rare sell recommendation to clients holding shares in People’s Insurance Company (Group) of China, which may indicate that China’s regulators are becoming uncomfortable with the size and unrelenting nature of this year’s recovery in domestic equity markets. A much weaker-than-expected China trade report for February helped to lock in losses (more on this below too). Equities in Hong Kong are also down about 2%, but losses in South Korea, Singapore and Australia were smaller. In bond markets, the 10-year Treasury yield returned to its session lows, while Japan’s 10-year JGB yield has fallen almost 3bps to -0.034%. Yields have also fallen sharply in Australia, where economists at another of the major domestic banks joined the increasing throng of analysts picking that the RBA will be forced to cut its cash rate by a further 50bps this year. Meanwhile, the risk-off tone in Asia has seen $/¥ threaten 111 for the first time this month.

The negative news-flow has continued this morning in Europe, with some weak German factory orders data and a subdued UK jobs survey, although French and Spanish IP beat expectations. But the main data focus of the day, of course, will be the US labour market report, which is bound to show a moderation in growth in non-farm payrolls but might also show a further decline in the unemployment rate and a tickup in wage growth.

A very busy day in Japan has seen the release of updated information on the economy’s performance in Q4, together with a number of more up-to-date – and therefore arguably more important – indicators of how the economy is tracking in the early months of this year.

Turning first to the second release of the national accounts for Q4, it now appears that GDP growth was slightly firmer than first estimated. The revised estimates indicate that real GDP increased 0.5%Q/Q (1.9% in annualised terms), compared with the preliminary estimate of 0.3%Q/Q (1.4% annualised) and bang in line with our expectations. This growth follows a contraction of 0.6%Q/Q in Q3 – 0.1ppt smaller than estimated previously. These revisions mean that GDP grew 0.3%Y/Y in Q4 – previously there had been no growth estimated whatsoever – while the level of real GDP in Q4 was 0.2ppt higher than estimated previously, i.e. cumulative revisions through to Q318 were negligible. Growth in real gross national income (RGNI), which better measures residents’ spending power, was revised up 0.1ppt to 0.4%Q/Q but was still down 0.5%Y/Y, with the annual decline reflecting the fact that investment income outflows have grown much faster than investment income receipts.

With respect to the detail, unfortunately the driver of today’s upward revision to GDP growth was private inventories, which are now estimated to have made no contribution to growth in Q4 rather than the 0.2ppt negative contribution initially estimated. As a result, final sales rose an unrevised 0.5%Q/Q and were up just 0.2%Y/Y – the latter actually 0.1ppt weaker than in the preliminary release. A recovery in business investment was also confirmed with news that non-residential investment increased 2.7%Q/Q in Q4 – a modest 0.3ppt firmer than first estimated – lifting annual growth to 3.9%Y/Y. Within the new detail, the need for labour-saving technology spurred a 7.5%Q/Q lift in non-transport machinery investment to a new high (up 7.7%Y/Y), while spending on transport equipment rebounded 6.9%Q/Q after falling sharply in Q3 (now up 8.6%Y/Y). Spending on buildings fell a further 3.3%Q/Q (now down 2.8%Y/Y) while that on intellectual property rose a very modest 0.2%Q/Q (and 0.7%Y/Y). Working in the opposite direction, growth in private consumption was revised down a disappointing 0.2ppt to 0.4%Q/Q, lowering annual growth to 0.6%Y/Y. In addition, public consumption grew 0.7%Q/Q – 0.1ppt less than estimated previously – while a 1.7%Q/Q decline in public investment was 0.5ppt larger than estimated previously. Residential investment rose an unrevised 1.1%Q/Q in Q4 and net exports made an unrevised 0.3ppt negative contribution to GDP growth, with a 1.0%Q/Q lift in exports outpaced by a 2.7%Q/Q lift in imports.

Turning to the current price estimates, the revisions to nominal GDP were generally in line with the revisions to the real aggregates. Growth in nominal GDP was revised up 0.1ppt to 0.4%Q/Q but was still down 0.1%Y/Y (the latter revised from a 0.3%Y/Y decline previously). The implicit GDP deflator fell 0.1%Q/Q and was down 0.3%Y/Y – unrevised from the preliminary reading. Similarly, the domestic demand deflator rose an unrevised and meagre 0.1%Q/Q and 0.5%Y/Y.

To conclude, while in the current environment any upward revision to growth is perhaps to be welcomed, the fact that today’s revision was driven by higher inventories rather than increased final sales means that the BoJ will take little comfort from this report. Mathematically, while the BoJ’s most recent forecast for real GDP growth in FY18 – a median expectation of 0.9%Y/Y – is helped marginally by today’s release, this forecast still seems too optimistic given how prospects are shaping up in Q1. Indeed, even if the economy was to grow a further 0.5%Q/Q – perhaps a brave forecast at this point – growth in FY18 would only round up to 0.7%Y/Y.

Turning to today’s more timely news, MIC’s household survey pointed to a surprisingly large uplift in spending during January. After adjusting for a discontinuity caused by changes undertaken to the survey last year, MIC reported that real spending amongst two-or-more person households increased 0.7%M/M, lifting annual growth to a 6-month high of 2.0%Y/Y – well above market expectations. Core spending – which excludes housing, auto sales and certain other expenditures – rose a similar 1.8%Y/Y. Unfortunately, while these results suggest a very positive start to the year, the MIC survey has proven to be an unreliable guide to the developments in the national accounts measure of private consumption. Yesterday’s BoJ Consumption Activity Index pointed to only a slight increase in spending in January. The release of the Cabinet Office Synthetic Consumption Index, possibly sometime next week, will provide the most accurate indication of how consumer spending has started the year.

Elsewhere in today’s very upbeat MIC survey it was reported that real disposable income for workers’ households rose an unlikely 3.9%Y/Y in January, marking the strongest outcome since June. However, perhaps more reliable – and less positive – news on developments workers’ incomes (all-important for the BoJ’s inflation-raising strategy) was provided by the MHLW’s release of the preliminary results of the Monthly Labour Survey for January. As always, we caution that the preliminary results can be subject to substantial revision. For now at least, growth in the headline measure of total labour cash earnings (per person) slowed 0.3ppt to 1.2%Y/Y – a result that simply matches the average growth recorded over the second half of last year. Taking a matched sample of business respondents – to try to look through the impact of recent sampling changes – growth in total labour cash earnings (per person) was slightly weaker at 0.8%Y/Y (also close to its average through H218). After allowing for a decline in the rate of inflation, growth in real total cash earnings (per person) was steady at 1.1%Y/Y.

Unfortunately for the BoJ, as was the case last month, the detail of the survey suggests that the potential impulse through to inflation might be weaker than suggested by the headline figures. Growth in total earnings was again largely attributable to bonus payments – presumably linked to productivity – which rose 12.7%Y/Y in January. Growth in contracted earnings was steady at a more subdued 0.6%Y/Y, with growth in scheduled earnings (i.e. ordinary time) slowing 0.1ppt to 0.6%Y/Y and non-scheduled earnings (i.e. overtime) declining 1.0%Y/Y compared with a 1.1%Y/Y decline in December. The preliminary estimates indicated that scheduled earnings of part-time workers rose 2.2%Y/Y on a per hour basis, down 0.1ppts from December. Growth in scheduled monthly wages for full-time workers was steady at 1.0%Y/Y – a result that was only in line with the average growth recorded in 2018.

Elsewhere in the survey, the number of regular employees rose 0.1%M/M in January – in line with the recent trend – although base effects associated with an odd decline last year meant that annual growth picked up to a misleading 1.8%Y/Y from 0.8%Y/Y previously. The preliminary estimates suggested that the number of full-time employees increased 1.6%Y/Y, following growth of just 0.1%Y/Y in December, while growth in part-time employment slowed to 2.3%Y/Y from 2.5%Y/Y previously. Given the usual tendency for subsequent revisions to boost part-time employment at the expense of full-time employment, this finding is likely to be substantially overturned when the final estimates are released. Finally, aggregate hours worked (per person) were reported to have declined 1.3%M/M in January – with overtime hours down 1.0%M/M – to be down 2.4%Y/Y, thus continuing the long-term trend decline.

Moving to the latest indicators of sentiment, the Cabinet Office’s Economy Watchers survey for February was a mixed bag. On the one hand, the overall current conditions index increased 1.9pts to a 3-month high of 47.5, which was slightly better than market expectations but still indicating weaker conditions than that experienced on average over the past couple of years. Almost all of the improvement in February was driven by the household sector, with the household-related index rebounding 2.5pts to 47.1. By contrast, the business-related index rose a modest 0.3pt to 46.9. Meanwhile, while the forward-looking components pointed to expectations of some improvement relative to current conditions, the degree of improvement expected was slightly less than last month. The overall outlook index fell 0.5pt to 48.9, with the household sector index declining 1.5pts to 48.5 but the business sector index rising 1.9pts to 48.7. Within the latter, of particular note was a 4.7pt lift in the manufacturers index to a 5-month high of 49.9, indicating some hope that this sector will soon stabilise after a difficult few months.

Finally, the BoJ reported that growth in bank lending slowed 0.1ppts to 2.3%Y/Y in January. Loan growth at the major city banks slowed 0.1ppts to 1.5%Y/Y, while growth at shinkin banks – serving SMEs – slowed 0.2ppts to 1.7%Y/Y (the latter the slowest pace since March 2015). Growth in lending at regional banks was steady at 3.1%Y/Y, however.

The main focus in China today was the trade report for February, notwithstanding the fact that these data are hard to interpret at this time of year due to the additional volatility caused by significant national holidays in the region. Taken at face value, the report cast the traded goods sector in a far weaker light than had been expected, following an opposing surprise in January, and so re-establishing a weakening trend. Of particular note, China’s trade surplus narrowed to just $4.1bn in February from $39.2bn previously – a much greater narrowing than the market had expected and the worst result since the small deficit recorded in march last year.

The largest surprise was on the exports sides of the ledger, where shipments fell 20.7%Y/Y – much worse than the 5.0%Y/Y decline that analysts had expected. Even if one accepts holiday-related volatility, in the three months to February exports fell 4.6%Y/Y, which is the weakest outcome for any three-month period since December 2016. Imports fell 5.2%Y/Y, which was also somewhat weaker than had been expected, and worse than the 1.5%Y/Y decline in January. In the three months to February imports fell 4.7%Y/Y, which is the weakest three-month outcome since August 2016. While lower oil prices have contributed to this result, it does fit well with the pre-existing ‘slowing growth’ narrative.

Looking at the export data by region, exports to the US fell 28.6%Y/Y, representing a sharp weakening from 2.8%Y/Y decline reported in January. By contrast, exports to the EU fell 13.2%Y/Y and exports to Japan fell 9.5%Y/Y. Meanwhile, China’s import data also provided some early pointers on the yet-to-be reported export performance of some of its key trading partners. For example, imports from Japan rose just 0.2%Y/Y in February, implying growth of about 5%Y/Y in yen terms. By contrast, China’s imports from the US fell 26.1%Y/Y – an improvement on the 41.1%Y/Y decline reported in January. As a result, with trade negotiations ongoing, China’s bilateral surplus with the US fell to a 2-year low of $14.7bn in February.

Euro area:
Following yesterday’s ECB announcements (see yesterday’s euro wrap-up for more details:, today has brought an update on conditions in the manufacturing sector at the start of the year. And tallying with the continued downbeat tone of various business surveys, this morning’s Germany factory orders release was disappointing, with orders down a much steeper-than-expected 2.6%M/M in January (the largest monthly drop since June). The previous month’s reading was, however, revised significantly higher, from -1.6%M/M to 0.9%M/M. Nevertheless, that still left the level of orders down by nearly 4% compared to a year ago, which represented an eighth consecutive negative reading. Excluding volatile major orders, the situation was little different, with rates of decline of 2.5%M/M and 3.4%Y/Y. Within the details, domestic and foreign orders were both weaker, with the decline of 3.6%M/M in the latter category reflecting decreases in orders from the euro area (-2.6%M/M) and other countries too (-4.2%M/M). Meanwhile, manufacturing turnover data reported an increase of 0.6%M/M in January following a particularly steep 3.2%M/M rise at the end of last year. Normally these figures can provide a good indication of the likely changes in German IP). But last month they were an unreliable guide, and so there is rather more uncertainty than normal about what to expect when the January production report is released on Monday.

This morning’s French IP figures were, at face value, more positive, with total output rising 1.3%M/M in January, the strongest monthly increase for eleven months. And while this following a notable downwards revision to growth in December when output is now considered to have been flat, IP was 1.7% higher than a year earlier. Within the detail, manufacturing output rose 1%M/M, supported by a near-6%M/M rise in production of machinery and equipment goods, which helped offset a weakness in the transport equipment sector. However, construction output posted a notable drop in January (5.4%M/M). And, notwithstanding the better outturn in January, today’s figures still suggested that total output was down 0.4%3M/3M. Of course, the recent improvement in the French manufacturing PMIs – with the output component rising in February to a six-month high of 51.0 – raises hope that output will continue to pick up over coming months.

There was also a notable upwards surprise to the Spanish IP figures today, with total output rising an impressive 3.4%M/M in January, the largest monthly increase since 2001, following drops of more than 1%M/M in each of the prior two months. And the improvement was widespread, with production of capital goods up more than 5%M/M, intermediate goods more than 2%M/M, and consumer durables by more than 6%M/M. So, output was almost 2½% higher than a year earlier. Later this morning will also bring Italian IP figures for the same month.

Of course, data-wise, all eyes today will be on the US labour market report for February. Non-farm payrolls are expected to have risen by approximately 180k, perhaps inevitably well down on the 304k increase in January. Nevertheless, the unemployment rate is expected to have fallen back below 4%, while average hourly earnings growth is likely to have ticked higher from 0.1%M/M and 3.2%Y/Y in January. Housing starts and building permits data for January are also due for release, while Fed Chair Jay Powell will discuss monetary policy normalisation on Friday evening at the Stanford Institute for Economic Policy Research.

Attention in the UK today will remain on Brexit, with negotiations set to continue in Brussels – and likely extend into the weekend – as the British Government seeks concessions on the Irish backstop ahead of the meaningful vote in the House of Commons on 12 March. Theresa May will make a new speech on the topic, in Grimsby in the Brexit heartlands, pleading for the EU to make new concessions, but we expect no game-changers to emerge over the near term and hence also fully expect May to lose the parliamentary meaningful vote on Tuesday.

No top-tier macroeconomic data are scheduled for release in the UK today, although the February KPMG/REC UK report on jobs – which provides insights into the labour market from recruitment and employment consultancies – was predictably downbeat. While UK jobs growth remained firm at the end of last year, BoE Governor Mark Carney has acknowledged that forward-looking UK labour market indicators have eased in recent months – indeed, earlier this week the composite employment PMI fell to only 48.0, the lowest level since September 2012 to suggest firms were starting to cut back on staffing. And this morning’s the KPMG/REC Report on Jobs brought a similar message once again highlighting that the UK labour market has lost some steam on the back of higher Brexit uncertainty and also perhaps a shortage of suitable candidates. Indeed, the survey’s indicator for permanent staff placements was consistent with zero growth in February, last month having reported the first drop in this series since 2012. Candidate availability continued to fall, albeit at a slower pace, while demand growth was the slowest in almost 2½ years. With companies less keen on expanding their workforces, the indicator for wage growth was also weaker, falling to a seven-month low. Going forward, a similarly subdued situation seems likely to persist, at least unless and until there is increased certainty in the Brexit process.

New Zealand:
The focus in New Zealand today was on further partial indicators of the economy’s performance in Q4, allowing analysts to begin to firm up estimates ahead of the release of the full national accounts on 21 March. First up, the quarterly manufacturing survey revealed that the overall volume of manufacturing sales rose 2.0%Q/Q, thanks to a 4.0%Q/Q rebound in sales in the meat and dairy product sector. However, core manufacturing sales, which exclude the meat and dairy sector, decline 0.4%Q/Q and were unchanged from a year earlier. It is the core measure that is used in the national accounts, with Statistics New Zealand obtaining more reliable meat and dairy volume data directly from industry sources. Core manufacturing finished goods inventories also fell 0.5%Y/Y. Much more positive news was seen in the construction sector, however, with a 5.0%Q/Q lift in the volume non-residential construction helping to drive a 2.7%Q/Q lift in overall construction activity (residential building activity rose 1.2%Q/Q). Overall construction activity rose 3.9%Y/Y, up from 1.8%Y/Y in Q3. Given an earlier-reported 1.7%Q/Q lift in retail spending volumes and a small positive contribution from net exports, at this stage real GDP growth appears on track to beat the soft 0.3%Q/Q outcome reported in Q3. However, it remains to be seen whether growth will be as strong as the 0.8%Q/Q estimate published by the RBNZ last month.

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