Surge in spending in Japan as wages tick higher

Emily Nicol

After US stock markets rose to fresh record highs yesterday on increased optimism surrounding the phase one of the China-US trade agreement and associated comments surrounding potential tariff rollbacks, Asian equities started the day on the front foot. But this marked the high point of the day for many. Indeed, China’s main CSI 300 ended the day ½% lower, as the latest Chinese trade report provided mixed messages – an encouraging softer pace of decline in exports in October (-0.9%Y/Y), was offset by a still steep pace of decline in imports (-6.4%Y/Y) implying still weak domestic demand at the start of Q4. The Hang Seng was down a steeper 1% on the day, while the KOSPI fell 0.3%. In contrast, the TOPIX posted a modest gain (0.3%) taking support from some stronger than expected Japanese spending and wage figures at the end of Q3 (see more details on the data below).

In bond markets, Asia-Pacific markets took their cue from the further significant sell in global markets yesterday. For example, 10Y JGB yields rose to -0.05% the highest since May, to leave them 12bps higher on the week, the largest weekly gain since May 2013. But despite a relatively dovish RBA Monetary Policy Statement, which despite suggesting that the economy had reached a turning point, also noted that “the Board was mindful that rates were already very low and that each further cut brings closer the point at which other policy options might come into play”, 10Y ACGBs rose 8bps to 1.3%.

In Europe, bond markets have opened a touch stronger this morning, as Germany’s trade report suggested a limited contribution to GDP growth from net trade despite a pickup in exports at the end of Q3. The latest French IP figures also disappointed (see more details on both these releases below). Finally, after the BoE yesterday was decidedly more downbeat about the economic outlook further along the forecast horizon and two MPC members voted for a rate cut, today’s REC/KPMG Report on Jobs continued to suggest very weak labour market conditions at the start of Q4, with a further solid decline in permanent staff placements in October, while vacancy growth was the weakest since 2012.

While a Reuters corporate survey suggested that more than 70% of Japanese firms surveyed assessed the pre-tax hike surge and subsequent retrenchment in demand to have been smaller than the previous consumption tax increase in 2014. This notwithstanding, the latest consumption-related figures published overnight reported a headline-grabbing increase in September. In particular, household spending rose 5½%M/M that month, to leave it 9½% higher compared with a year earlier, the largest annual increase since the series began in 2000, albeit the annual rate was no doubt flattered by low base effects following the natural disaster-related disruption in September 2018.

While the improvement was broad based, there was a sizeable 13.7%M/M increase in spending on household appliances. And when excluding the more volatile items – i.e. housing/autos etc. – core spending was up by a whopping 9.3%M/M, close to the record high seen in the run up to the 2014 tax hike. This notwithstanding, the increase in core spending over the third quarter as a whole stood at just 1.4%, much softer than the near-4½%Q/Q increase in Q114. And total spending on the same basis was similarly more modest than in 2014, nevertheless rising 2.4%Q/Q in Q3.

The BoJ’s consumption activity index, also published today, has more recently provided a more accurate guide to the national accounts measure of consumption. And this showed the headline index rising 3.6%M/M in September, following a 2.6%M/M rise previously to leave it 5½% higher than a year earlier. Within the detail, there was a striking surge in the durable goods component, with the 17½%M/M increase following a more than 12%M/M rise in August to leave it almost 30% higher compared with a year ago. And this left the index in Q3 more than 6% higher compared with Q2, a touch stronger than the pre-2014 tax hike increase.

The BoJ’s series also suggested that consumption of non-durable goods and services was also firmer in September, although this left the respective quarterly indices merely 0.3% higher and 0.4% lower compared with Q2. And overall the consumption activity index rose just 0.7%Q/Q in Q3. When adjusting for spending by overseas visitors, consumption activity growth was a touch firmer at 0.8%Q/Q, the largest quarterly increase for five years. While this was less than half the increase seen in the quarter preceding the 2014 tax increase, it nevertheless still suggests a solid contribution from private consumption to GDP growth in Q3.

Today’s labour earnings figures were also more positive at the end of the third quarter, with headline wage growth rising a stronger-than-expected 0.9ppt to 0.8%Y/Y, the strongest pace since January. This in part reflected a jump in special/bonus payments (14.2%Y/Y). But regular wages were also somewhat more encouraging, recording the third consecutive year-on-year increase and a firmer 0.5%Y/Y. And when adjusting for sampling errors, regular wage growth was even stronger at 0.8%Y/Y.

Euro area:
While yesterday’s German IP figures signalled ongoing contraction in the manufacturing sector at the end of Q3, today’s trade report provided a somewhat more upbeat assessment for external demand for German goods in September. Indeed, the value of exports rose for the fourth month out of the past six and by a sizeable 1½%M/M, to leave them more than 4½% higher than a year. But with the value of imports up 1.3%M/M, the adjusted trade surplus widened only very slightly to €19.2bn.

When adjusting for price effects, Germany’s export performance was also encouraging in September, with the 1.3%M/M increase the strongest for six months. But while this left export volumes up ½% over the third quarter as a whole, with import volumes rising by the same magnitude in Q3, today’s data suggested that net trade provided no contribution to GDP growth last quarter.

In France, meanwhile, today’s IP figures fell slightly short of expectations in September. In particular, the 0.3%M/M increase merely reversed one-third of the decline in August to leave output just 0.1% higher than a year earlier. The weakness in part reflected a further drop in energy production (-2.1%M/M), while production of intermediate goods fell for the sixth month out of the past seven. Manufacturing output (+0.6%M/M) in September was, however, supported by a surge in production of consumer durables (+6.9%M/M) and non-durables (+2.1%M/M). But this was not enough to offset weakness earlier in the quarter. As such, manufacturing output was down for the second successive quarter in Q3 and by a steeper 1%Q/Q, with total industrial production similarly contracting by 1.2%Q/Q, the largest such decline since Q118.

In the US, the end of the week will bring the University of Michigan’s latest consumer sentiment survey for November, along with wholesale inventories and trade sales figures for September. Elsewhere, the Fed’s Daly and Bostic are due to speak publicly.

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