Japanese trade and Aussie employment improve

Emily Nicol
Chris Scicluna

The mood surrounding China’s coronavirus turned negative once again today, after yesterday’s decision by the authorities to prevent residents from leaving Wuhan and uncertainty persisting about quite how the threat to public health might evolve. So, ahead of the extended closure of its markets for the Lunar New Year holiday, China’s stocks fell sharply today, with the CSI300 closing down 3.1% to the lowest level since Christmas. So, although Japan’s trade report for December saw a better performance for exports (albeit not quite as strong as had been anticipated), the Topix closed down 0.8% with most other major stock indices in the region down too.

Against that risk-off backdrop, in the bond markets USTs unsurprisingly made gains, with 10Y yields falling 3bps to below 1.74%, the lowest since the first week of December. As the yen rose to ¥109.5/$ for the first time in ten days, JGBs were also firmer, with 10Y yields edging down about 1½bps to -0.025%. But while ACGBs also made modest gains at the longer end of the curve, they were significantly weaker at the short end (2Y yields up 3bps to close to 0.75%) as the latest Australian labour market report beat expectations to prompt investors to pare back bets of a rate cut in the first week of February. (See the detail on these figures and the day’s other data below).

Looking ahead, the main event of the day will be the ECB’s latest policy meeting. But there will be no change to policy or forward guidance, or indeed probably the overall assessment of the state of the economy. So, the focus might well be the rather dry topic of how the Governing Council will organise its strategic policy review over coming months.

While the BoJ earlier this week assessed the downside risks to overseas economies to have decreased somewhat recently and there have been some signs of improvement in global demand towards the end of last year, Japan’s trade figures for December somewhat disappointed expectations. Despite a modest recovery on the month (0.5%M/M), export values were still down a steeper-than-expected 6.3%Y/Y, to mark the thirteenth consecutive year-on-year drop. And this occurred despite a surge in shipments of semi-conductor machinery to China – up 60%Y/Y to that country and 26%Y/Y in total. Indeed, despite the improved performance in the tech sector sector, which tallies with evidence from other countries of a clear turn for the better in the global semiconductor cycle – shipments of other good types remained weak. Notably, there was another particularly disappointing showing for the Japanese autos sector – shipments of transport equipment was down more than 10½%Y/Y to account for roughly 40% of the total annual drop.

This principally reflected persistent subdued demand from the US, with transport accounting for more than half of the near-15%Y/Y decline in the value of total exports to that country, which was the second steepest drop since the Global Financial Crisis. Shipments to the EU remained on a downward trend too, with the 8.1%Y/Y decline principally reflecting a sharp drop in general machinery (and construction machinery in particular). And despite a pickup in demand for electrical machinery, overall shipments to South Korea continued to decline at a double-digit annual rate (16%Y/Y). In contrast, exports to China saw positive growth for the first time in thirteen months, up 6.1ppts to 0.8%Y/Y. And when adjusting for price effects the improvement in export volumes to China was more striking, up 9.4ppts to 5.8%Y/Y, the strongest growth since July 2018. Of course to what extent this reflects front-loading of demand ahead of an earlier Lunar New Year in 2020 remains to be seen.

When adjusting for seasonal and price effects, the BoJ’s series suggested a more noticeable improvement in exports at the end of last year, with volumes up 1.8%M/M in December, the largest increase for six months. But coming on the back of two months of decline, exports were still down more than 2%Q/Q in Q4, more than reversing the increase in Q3. This notwithstanding, despite a pickup in December, import volumes tracked weaker domestic demand to be down almost 3%Q/Q in Q4, suggesting that, on balance, net trade should at least provide support to GDP growth in the final quarter of 2019.

Of course, given the weakness in domestic demand in the aftermath of October’s consumption tax hike and super-typhoon, Japan’s economy undoubtedly went into reverse in Q4. This was supported by the latest all industry activity figures. Indeed, despite signs of recovery in November – activity rose 0.9%M/M on the back of growth in the tertiary sector, as well as private and public sector civil engineering work – total activity was on track to decline more than 3% in Q4 compared with the Q3 average, compared with an equivalent decline of 2½% in the quarter after the 2014 tax hike. Of course, it is worth noting that this series has not been a particularly reliable guide to GDP growth over recent years.

Finally, the BoJ also published its latest senior loan officer survey, which showed a marked decline in demand for loans from households, with a net percentage of 11% of banks reporting lower demand in the three months to January, down 19ppts over the quarter and the most for a decade. And this reflected a net decline in demand for both housing and consumer loans, on the back of declining residential investment and consumption. More encouragingly, banks reported that demand for business loans was little changed – a net percentage of 2% reporting an increase – with a pickup in demand from large firms for the first time since October 2018 in part relating to higher funding requirements for fixed investment.

Australia’s labour market report for December beat expectations to prompt a significant drop in the market-implied expectation of an RBA rate cut on 4 February. Contrary to the consensus view of no change, the unemployment rate fell 0.1ppt to 5.1%, the lowest since March. With the labour force participation rate unchanged, the drop in the unemployment rate reflected another firm month of job growth. Indeed, following the increase in November of 38.5k, downwardly revised but still the most in more than a year, employment growth of 28.9k in December was also well above the consensus forecast.

However, the detail of the labour market report was not quite so positive as the headline numbers suggested. The underemployment rate was unchanged at 8.3%. And job growth in December was more than fully accounted for by part-timers, with full-time employment down 300. So, part-time job growth of 2.7%Y/Y continued to significantly outpace growth in full-time positions of 1.8%Y/Y. Moreover, total employment growth of 2.1%Y/Y left the quarterly average still 0.3ppt below the RBA’s forecast of 2.3%Y/Y.

Meanwhile, despite the drop in the unemployment rate in December, the outturn for Q4 as a whole of 5.2% was bang in line with the RBA’s forecast. The Bank had expected it to remain steady at 5.2% over the coming year, and so admittedly the December reading came in below that profile. But with job growth in January likely to see some negative payback for the strength at the end of last year, we would not be surprised to see a pickup in the unemployment rate over the near term too.

Of course, the intensification of the bushfires in January adds to uncertainty about current economic conditions. Indeed, the ABS suggested that its data collection this month has been more severely affected than in December, suggesting that the interpretation of the statistics might require somewhat greater caution. And, crucially, the increased severity of the fires this month has harmed economic sentiment. In this respect, the RBA will want to study tonight’s flash PMIs for January as well as next Tuesday’s NAB business survey for December. But as a number of key recent datapoints (including November’s retail sales figures) beat expectations, and there is likely to remain a distinct lack of clarity about Australia’s underlying economic trends – and those of key trading partners such as China – for a while yet, we now think the RBA will wait a few more months yet before cutting its Cash Rate by a further 25bps to 0.5%.

Euro area:
The main event in the euro area today will be ECB’s latest Governing Council policy announcement and press conference, only the second for new President Christine Lagarde. But this seems likely to be relatively uneventful. There seems no reason whatsoever for a change of monetary policy or forward guidance. And with no new economic forecasts to be published, the Governing Council’s overall assessment of economic conditions will not change substantively either. We would expect Lagarde again to take comfort from signs of stabilisation in the growth slowdown and note a mild increase in underlying inflation in line with previous expectations. And, as in December, she might judge the downside risks to the economic outlook from events abroad to have become even less skewed to the downside.

Most notable might be what Lagarde has to say about the ECB’s strategic policy review. But with the work barely underway she will certainly not preempt its findings. Instead, she will likely merely announce how the work will be organised. According to a Bloomberg story yesterday, the review will be split into two parts. The first would revisit the monetary policy framework, instruments and inflation target. The second would consider broader issues such as financial stability, climate change and communication.

This afternoon will also bring the European Commission’s flash consumer confidence indicator for January. In December, the index fell to its lowest level since early 2017, with the deterioration led by French consumers, likely reflecting the impact of the strikes among workers in transport and certain other sectors. And only modest improvement is anticipated at the start of the New Year.

In the US, today will bring the Conference Board’s Leading Index for December, the Kansas Fed manufacturing activity indicator for January and the latest weekly jobless claims figures.

It should be a quiet day for UK economic news with no top-tier data due for release.

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