Morning comment: Japanese confidence, Chinese inflation & credit

Chris Scicluna
Mantas Vanagas

With further provocative remarks from US President Trump at a campaign rally last night ahead of the arrival of Chinese Vice Premier Liu He in Washington DC today for further trade negotiations – among other things Trump exclaimed that China “broke the deal” and said that there would be “nothing wrong with taking in $100bn a year” in tariffs on Chinese imports if a trade deal couldn’t be reached – it’s no surprise that risk appetite was thin on the ground in Asian markets today. With some weaker domestic credit data not helping the mood amid a predictable pickup in inflation, China’s CSI300 closed down 1.85% while CNY weakened through 6.80/$ for the first time since January. And declines of about 1% or more were the norm among other major Asian equity markets, e.g. the Topix closed down 1.4% as the yen strengthened further and Japan’s latest consumer confidence survey suggested a deterioration in sentiment for a seventh successive month. Reports from South Korea that the North has 'fired unidentified projectiles' seems unlikely to ease investors' jitters.

Against that unsettling backdrop, unsurprisingly, major bond markets have gained additional support, with 10Y UST yields at around 2.45% and 10Y Bund yields down further this morning to -0.06%, with BTPs underperforming on what is set to be a quiet day for euro area economic data. Gilts have made gains too, as UK political uncertainty persists amid the slow-motion disintegration of Theresa May’s premiership. Looking ahead, while trade-war fears will dominate, a busy day for economic news in the US will bring plenty of top-tier data as well as some public remarks from Fed Chair Powell. 

After what looks to have been a weak first quarter for household spending in Japan, the latest consumer confidence survey failed to provide any hope of a near-term improvement in momentum. Indeed, the headline sentiment index fell for the seventh consecutive month in April. And while the decline this month was just 0.1pt, at 40.4 the index was at its lowest in more than three years and below the long-run average. Within the detail, consumers were more confidence about their employment prospects, although the respective index remained near the bottom of the range of the past couple of years despite the tightness of the labour market. Meanwhile, confidence about incomes edged down to the lowest since late 2016. And the survey index measuring consumers’ willingness to buy durable goods fell for the fourth successive month and by a hefty 1.1pts to 38.8, the lowest since January 2015, suggesting that households currently feel no urgent need to bring forward purchases ahead of the scheduled consumption tax hike in October. The week’s Japanese dataflow will conclude tomorrow with March household spending and the preliminary estimates of labour cash earnings for the same month – both sets of data seem likely to be similarly underwhelming.

Today brought Chinese inflation and lending data for April. The former provided little in the way of notable surprises, with the increases in consumer and producer prices providing no obstacle to further policy easing not least given a weakening in credit growth. Certainly, the headline outcome for CPI came in bang in line with market expectations, with an increase of 0.1%M/M following a drop of 0.4%M/M in March pushing the annual inflation rate up 0.2ppt to a six-month high of 2.5%Y/Y. Predictably, the upside pressure came from food, where inflation rose 2.0ppts to a three-year high of 6.1%Y/Y, having been as low as 0.7%Y/Y as recently as February. This in turn reflected a further sharp lift in prices for both fresh vegetables (up 1.2ppts to 17.4%Y/Y) and pork (up 9.3ppts to 14.4%Y/Y) – the latter reflecting supply constraints relating to the outbreak of swine fever. In contrast, non-food inflation fell back 0.1ppt to 1.7%Y/Y with services inflation unchanged at March’s 35-month low of 2.0%Y/Y. 

Further up the supply chain, the PPI rose 0.3%M/M in April, lifting annual inflation by 0.5ppt to a four-month high of 0.9%Y/Y. Inflation in the mining sector rose again, up 1.1ppts to a five-month of 5.3%Y/Y from 1.2%Y/Y as recently in February, and inflation in the manufacturing sector rose 0.5ppt to 0.9%Y/Y, similarly a five-month high. At the PPI level, inflation in consumer goods prices rose 0.4ppt, also to 0.9%Y/Y, principally reflecting higher food prices. Prices for durable consumer goods fell 0.6%Y/Y.

In terms of credit, however, the latest data were softer than expected. The monthly expansion in aggregate social financing (ASF) eased by CNY1.5trn to CNY1.36trn yuan, some CNY300bn less than the consensus forecast. This principally reflected weaker bank lending as new yuan loans fell to CNY1.02trn from CNY1.69tn the previous month and about 20% below the Bloomberg consensus forecast. Judging from these data, a further cut in reserve requirement ratios might be expected sooner rather than later, particularly if and when President Trump decides to push ahead with increased tariffs.

Politics will no doubt once again remain centre-stage in the UK today. Theresa May yesterday gained a stay of execution from her backbench MPs, with the key 1922 Committee Executive deciding not yet to change Conservative Party rules to facilitate an early leadership challenge and instead agreeing to meet with the PM next week to talk about a timetable for her resignation. That partly reflected her (seemingly odd) insistence that there has been progress in her cross-party Brexit talks, and also her suggestion that she expects to bring the Withdrawal Agreement Bill to Parliament for consideration by MPs as soon as next week. But the PM’s position has undeniably weakened further, with ‘maverick’ backbench Tory MP Johnny Mercer yesterday withdrawing support for May and the Government over issues related to the criminal prosecution of former military personnel particularly in Northern Ireland, reinforcing the Conservatives’ minority position in Parliament. Meanwhile, although the Government and main opposition both last night claimed progress in their cross-party Brexit talks, there seems no reason for Labour to do a deal to relieve pressure on the PM.

Data-wise, the message from the RICS Residential Market survey, which was released overnight, was that conditions in the UK housing market remain little changed from the recent trend. The survey’s national house price net balance moved sideways in April at -23%, only 4ppt above the eight-year low of -27% seen in February, with survey respondents citing ongoing Brexit uncertainty and a lack of available stock as key factors. New vendor instructions remained on a downward trend for a tenth consecutive month, with the survey’s respective net balance down to -35%, the lowest level since the Brexit referendum. Meanwhile, new buyer enquiries also reportedly fell again, although the relevant indicator was slightly stronger, at -26%. And against the backdrop of weakness on both sides of the market, market activity remained low with the agreed-sales indicator also remaining in negative territory.

Looking ahead, RICS survey respondents think that this downward trend in sales will be maintained in the near term, although the expectations index was less negative rising from -22% in March to -11%. Near-term price expectations were also a little less negative. And looking further ahead, expectations for price rises over the next twelve months increased to the highest level since last July suggesting that market participants remain hopeful of at least some recovery over the coming year. Of course, developments in the Brexit process and the broader political backdrop will be the most important forces driving sentiment in the UK housing market over both the short and medium term.

Euro area:
A quiet day for economic data from the euro area has already brought the most notable new release. Following an upward surprise to Germany’s industrial production figures yesterday, this morning’s equivalent release from Spain came in below expectations. Total production fell 1.2%M/M in March, which represented a fourth decline in five months. Most major components, including output of consumer goods, capital goods and energy, fell on the month. The only exception was production of intermediate goods, which reported a small increase of 0.2%M/M. Looking at Q1 as a whole, however, with output having risen by 3.6%M/M in January, the biggest jump since 2001, the March figures still left growth in IP at a firm 1.0%3M/3M, the highest for more than a year. And so, as in Germany, despite downbeat signals from surveys, the industrial sector seemingly provided a solid contribution to Spanish GDP growth (0.7%Q/Q) at the start of the year. 

Beyond the data, in the markets Spain will sell 5Y, 10Y, and 30Y bonds today, the first such offerings since the ruling Socialists significantly boosted their standing in Parliament at last month’s general election.

In the US, today will bring producer price data for April along with the full March trade report, wholesale trade and inventory data for the same month, and the usual weekly jobless claims figures. In addition, Fed Chair Powell will give the opening remarks at a Fed Community Development Research Conference, where Fed members Evans and Bostic will also speak.

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