Japanese exports remain extremely weak

Chris Scicluna
Emily Nicol

Later this afternoon (4pm CET), EU leaders will resume negotiations for a fourth successive day on proposals for a recovery package that, if eventually agreed, will see the European Commission borrow and disburse to the member states about €750bn over the coming few years. A compromise package envisaging that €390bn of the funds should take the form of grants – down from the original Commission proposal of €500bn and Friday’s draft compromise of €450bn and also shy of the Franco-German redline of €400bn, but still substantial in light of the previous outright opposition to grants by the so-called ‘frugal four’ – has been put forward by EU President Michel and looks to have a decent chance of success. If agreed, the leaders will then have to settle on the precise mechanism for disbursement and conditionality of the funds, which seem likely to be equally contentious.

For the time being, however, euro area bond markets appear relatively encouraged by the progress, with BTPs a touch firmer this morning (10Y yields down about 3-4bps across the curve) and Bunds a touch weaker (1-3bps higher across the curve), while the euro has firmed in FX markets. Elsewhere, USTs are little changed while JGBs weakened a touch today ahead of tomorrow’s 20Y auction, as the latest Japanese trade data predictably suggested that external demand remains extremely subdued.

In the stock markets, the Topix closed up just 0.2% and European stocks are little changed. But following last week’s weakness, Chinese stocks rallied, with the CSI300 closing up 3.1%. US stock futures are pointing lower, however.

There were no surprises from Japan’s June goods trade report overnight, which suggested that external demand remains very lacklustre as Covid-19 remains at large in several major export partners and weak domestic demand weighed on imports too. Certainly, the pickup in the value of exports (1.4%M/M) did little to offset the significant weakness seen in the previous three months – indeed, exports were still down by almost a fifth compared with February’s pre-pandemic peak, to leave them 26.2% lower than a year earlier, the nineteenth consecutive annual drop. Meanwhile, the value of imports fell 1.8%M/M following a double-digit monthly drop in May, to leave them down 14.4%Y/Y at their lowest level since mid-2016.

Within the detail, exports to the US continued to provide the largest drag (-46.6%Y/Y), as shipments of cars were down by almost two-thirds compared with a year ago. Exports of general and electrical machinery to that country were also down by 46%Y/Y and 38%Y/Y respectively. Despite the easing of lockdown measures across Europe, and signs that the pandemic was more under control, shipments to the region were still down by 28.4%Y/Y, with ongoing double-digit declines in exports of general machinery and autos accounting for more than half the annual drop. And while exports to China posted the smallest decline so far this year (-0.2%Y/Y), overall shipments to Asia were down more than 15%Y/Y.

When excluding prices and seasonal effects, the BoJ’s measure of export volumes similarly posted a modest increase in June (1.6%M/M). But this still left them down almost 18½%Q/Q in Q2, the largest quarterly drop since Q109. And with imports having risen by 2.1%Q/Q, today’s report strongly suggests that net exports provided the largest negative contribution at least since the height of the global financial crisis, when it subtracted 2.6ppts from quarterly GDP growth in Q408.

Ahead of the national holidays on Thursday and Friday, tomorrow’s release of department store sales data for June will provide insights into domestic expenditure at the end of Q2 although these will also remain severely impacted by the absence of spending by overseas visitors. Tuesday will also bring national inflation figures for June, which are expected to show that headline inflation moved sideways at 0.1%Y/Y. But when excluding fresh foods, the BoJ’s core inflation measure is forecast to have remained in negative territory at -0.1%Y/Y. Meanwhile, Wednesday will bring the flash PMI surveys for July, which will offer some insight into business conditions at the start of Q3.

Euro area:
While all the attention at the start of the week is on the EU Summit, the back end will bring the results of several sentiment surveys for July. Friday’s flash PMIs will likely get most attention, and are expected to suggest a further improvement in business conditions across member states at the start of Q3 as activity in the manufacturing and services sectors continued to move closer to some form of normality. As such, the euro area's composite PMI is expected to rise back above the key-50 level for the first time since February. These figures will be preceded by the Commission's preliminary consumer confidence indicator on Thursday, which is similarly expected to report a further modest recovery in household sentiment despite significant uncertainties regarding the labour market outlook. National sentiment surveys include Germany’s GfK consumer, France’s INSEE business (Thursday) and Italy’s ISTAT consumer and business indices (Friday). Elsewhere, ECB Vice President de Guindos and Chief Economist Lane are scheduled to speak today at separate online events.

After last week’s May GDP report fell short of expectations, a key focus in this week will be the June retail sales figures on Friday – the first official ONS hard data for last month. With outdoor market stalls having resumed business on 1st on the month, and other non-essential stores allowed to reopen from the 15th, we would expect to see a further notable increase in sales on the month following growth of 10%M/M in May. The BRC survey suggested that sales might have risen above their level a year earlier, although the consensus expectation is for a drop of close to 4%Y/Y excluding auto fuel.

Friday will also bring the GfK’s latest consumer confidence survey, as well as the flash PMIs for July. All of these survey indicators are expected to show a further improvement in conditions at the start of Q3 as lockdown measures continued to gradually ease. Indeed, we expect the headline composite PMI to rise from 47.7 in June to back above 50 for the first time since February. Other data due this week include public finance figures for June tomorrow. Before then, BoE Chief Economist Haldane and external MPC member Tenreyro will appear before the Treasury Select Committee this afternoon at their re-appointment hearings. Further ahead, external MPC member Haskel will discuss the economic effects of Covid-19 at an online event on Thursday.

In the US, a quiet start to the week for the economic data calendar, kicks off tomorrow with the Chicago Fed index for June, followed on Wednesday by existing home sales data for June and the FHFA house price index for May. Thursday sees the release of the usual weekly jobless numbers, as well as the June leading index and Kansas City Fed index for July. On Friday, the flash manufacturing and service sector PMIs will be published together with new home sales data for June.

Against the gloomy backdrop of the renewed lockdown in Melbourne and new restrictions on restaurants, cafes and bars in New South Wales, a busier week for economic news from Australia will bring the government’s economic and fiscal update on Thursday. In it, Treasurer Josh Frydenburg looks set to predict a post-war record high budget deficit of roughly 10% of GDP in the current fiscal year. Prior to that, RBA Governor Lowe will give a speech tomorrow on ‘Covid-19: The labour market and public-sector balance sheets’, while the reserve Bank will also publish the minutes of the July policy meeting. Data-wise, preliminary retail sales and goods trade figures for June are due on Wednesday and Friday respectively. As elsewhere, Friday will also see the flash PMIs for July.

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