Japanese and German data underwhelm

Chris Scicluna
Emily Nicol

The news-flow on the coronavirus and its impact remains perturbing, from the evidence of a levelling off in high-frequency US economic data over the past couple of weeks due to the wave of infections across the south and west, to the six-week lockdown today re-imposed on metropolitan Melbourne, and a sixth successive day of 100-plus new cases in Tokyo too.

Moreover, while activity has inevitably rebounded somewhat as and when lockdowns have been relaxed, the economic data beyond the US remain mixed. In Japan, today brought some weaker-than-expected Japanese spending and labour earnings figures. Elsewhere, the RBA was cautious in assessment of the outlook as it predictably left policy unchanged. And in Europe, a rather tepid German IP report this morning contrasted an upwardly revised judgement from the Bank of France (see more on all these releases below).

So, after yesterday’s strong start to the week, most of the major Asian-Pacific equity indices moved either sideways or backwards today while those in Europe have opened lower and US stock futures are down too. And major government bonds are largely firmer too. In Japan, the Topix closed down 0.3% while JGBs firmed a touch across the curve, with the closely-watched 30Y auction having seen decent market appetite. The exception in stock markets was China, although the rise of 0.6% in the CSI300 index was tepid following yesterday’s gain of more than 5½%. Elsewhere in the bond markets, 10Y yields on most European govvies are down 1-2bps so far this morning, while 10Y USTs are down about 1bp to just below 0.67%.

The Japanese data published overnight were disappointing. Certainly, following the double whammy of last year’s consumption tax hike and the pandemic, consumption struggled for momentum as the national state of emergency was lifted in May. And today’s household spending figures fell well short of expectations, with total spending down a further 0.1%M/M, to leave it down 16.2%Y/Y, the steepest annual drop since the series began in 2001.

Admittedly, this partly reflected a sharp fall in spending on housing. So, when excluding expenditure on this and other typically volatile items, “core” spending posted a modest recovery, rising 2.4%M/M. Within the detail, there were rebounds in expenditure on clothing (40.8%M/M) and household appliances (10.5%M/M), albeit reversing only part of the contraction seen in the previous two months. Indeed, overall, core spending was still down more than 8% compared with the pre-pandemic level, with total spending down more than 10%.

The message from the BoJ’s consumption activity indices was similar – a rather paltry recovery following a marked slump. For example, the headline index (adjusted for spending by overseas visitors) increased just 1.2%M/M in May, following a cumulative decline of 15½% between February and April. The improvement was most evident in expenditure on non-durable goods (2.9%M/M), while spending on durable items (-0.6%M/M) fell for the third consecutive month. And a negligible increase in spending on services left it still almost one quarter lower than the pre-Covid level.

Today’s labour earnings figures offered little encouragement for the near-term consumption outlook. In particular, total wages fell a much sharper-than-expected 2.1%Y/Y in May, the steepest decline for almost five years. Admittedly, this principally reflected another large drop in overtime earnings (-25.8%Y/Y) as firms reduced operating hours – indeed, the most notable declines were reported in the manufacturing, retail, construction and transport subsectors. But bonus/special payments were also down by more than 11%Y/Y and scheduled regular earnings remained subdued, up just 0.2%Y/Y following growth of 0.1%Y/Y previously. Moreover, when adjusting for sample inconsistencies, MHLW suggested that regular wages were actually down for the second successive month, therefore also implying a steeper drop in total wages too (-3.2%Y/Y).

Overall, today’s figures implied a marked decline in household consumption so far in Q2 and therefore a considerable contraction in GDP growth. This tallied with the Cabinet Office’s latest composite indicator of business conditions too, with the coincident index falling a further 5.5pts in May to 74.6, close to the lows seen during the global financial crisis. And while there was a modest increase in the forward-looking leading index (up 1.6pt to 79.3), it still marked the second-lowest reading for more than eleven years and consistent with a very subdued recovery over the near term.

Like yesterday’s factory orders data, Germany’s industrial production figure came in somewhat weaker than expected, with a rise of 7.8%M/M in May leaving it still a whopping 19.0% below February’s pre-pandemic level and down a similar rate from the level a year earlier.

Within the detail, manufacturing and mining output rose a larger 10.3%M/M but was down more than 22% from February’s level. Improvement was led by the autos sector, as production lines came back on stream. But the near-tripling of output of motor vehicles over the month still left the level little better than half that ahead of the pandemic. Growth in other sub-sectors was less marked. For example, production of machinery and equipment rose a little less than 10% on the month, to be still down more than 17% from February’s level. Metals output rose just 5.4%M/M to be down almost 25% from before the pandemic hit. And output of chemicals and pharmaceuticals fell back.

Beyond manufacturing where the initial hit to activity had been more modest, the improvements in May were relatively tepid. Construction output rose just 0.5%M/M to be 4.0% below the February level. And energy production rose 1.7%M/M to be down 13.9% from the pre-pandemic level.

Looking ahead, led again by cars (for which, on the VDA data, production was down 20%Y/Y in June compared to the drop of 66%Y/Y in May), German manufacturing output seems bound to have seen significant further growth last month. That’s certainly the message from surveys as well as other high-frequency data. However, new orders remain disappointingly subdued. And some indicators, such as truck-toll mileage data, point to a notable levelling off in activity over the past few weeks. So, while the cut in VAT from this month will likely support production for the domestic market, overall we anticipate a notable slowing in output from the current month on, and a shortfall from the February level to persist well into next year, and possibly beyond.

With signs of a swifter-than-expected rebound in spending and broader economic activity in France, the country’s central bank has become more upbeat about the economic outlook. While it previously estimated that French GDP was on average down about 17% from the pre-crisis level in May, based on its latest monthly survey, the Bank of France now estimates that the equivalent shortfall in French GDP in June was around 9%. As a result, bang in line with our baseline scenario, the Bank now forecasts a contraction of GDP over Q2 as a whole of about 14%Q/Q, following the drop of 5.3%Q/Q in Q1.

The Bank noted that all subsectors of industry had seen stronger-than-anticipated growth in June led by producers of autos, machinery and equipment. And the recovery in construction was judged to be even more marked. In services, however, the picture was mixed. While some subsectors are judged to be returning to ‘normal’ levels of activity, others (e.g. hospitality) remain far from that status. But those weaker areas expect to see the strongest growth in July, while the improvements in the subsectors where the recoveries are already well advanced are expected to be far more modest. Indeed, the survey flagged concerns about the low level of orders.

Given the findings of its survey, the Bank of France forecasts that the July level of GDP will be about 7% below the pre-pandemic level. Assuming a levelling off over the remainder of the quarter, it thus forecasts a rise in GDP of 14% in Q3 as a whole. And it then envisages only a gradual improvement thereafter, marking a “bird’s wing” shape, such that full-year GDP in 2020 still drops by 10%Y/Y – a little less than our own forecast – and the pre-pandemic level of GDP is reached only in the second half of 2022.

Elsewhere in Europe:
Following yesterday’s euro area retail sales release, the equivalent Italian figures due today are similarly expected to have risen in May, albeit leaving the annual growth rate still significantly negative. Italy’s statistical agency will also publish its monthly economic bulletin. And the European Commission will publish updated economic forecasts. Meanwhile, it should be a quiet day on the UK economic data front, with just final productivity and labour cost figures for Q1 scheduled for release. Elsewhere, BoE Chief Economist Haldane will participate in a virtual fireside chat.

There were no surprises whatsoever from the conclusion of the latest RBA policy meeting, where the key policy parameters – in terms of both the cash rate and 3Y yield target – were kept unchanged at 0.25%. And with government bond markets having been operating smoothly, and 3Y yields anchored at the target, the RBA confirmed again that it had not purchased government bonds for some time, with the total purchases to date still at A$50bn. The RBA also noted that banks had so far drawn about A$15bn from its special Term Funding Facility, up from about A$6bn at the time of the previous policy meeting, with additional use expected over coming months.

In terms of the economic outlook, Governor Lowe was somewhat more optimistic, noting that conditions had recently stabilised and the downturn has been less severe than previously expected. This notwithstanding, Lowe also reiterated that the economy had undergone the deepest economic contraction since the 1930s, while the outlook remained highly uncertain, both domestically and internationally, with the global recovery expected to be bumpy and dependent on containment of the coronavirus.

Against this backdrop, it was not surprising to see the RBA again note that monetary and fiscal support would be required for some time. Indeed, Lowe restated that the Board would not increase the cash rate until there were signs that progress towards full employment was being made, as well as confidence that inflation will be sustainably within the 2–3% target band. And, of course, he repeated the RBA’s readiness to step in to the bond market again to support liquidity and maintain the 3Y yield at target if that became necessary.

In the US, a relatively quiet day for economic news will bring only the release of job openings data from JOLTS.

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