Japanese data continue to disappoint

Emily Nicol
Chris Scicluna

Pandemic risks have certainly not dissipated, with Arizona now following Texas and Florida in reimposing controls on certain types of economic activity, and localised lockdowns re-imposed elsewhere, from Anxin in Hebei China, to Leicester England and parts of Melbourne Australia.

However, buoyed by yesterday’s stronger-than-expected US data and gains on Wall Street, by and large the major Asian bourses ignored the coronavirus and advanced today to lock in (mostly) substantive gains over the second quarter as a whole. So, for example, despite some much weaker than expected Japanese production data, and a range of other soft domestic economic figures (see below for more details), the Topix closed up 0.6% to end Q2 up 11.1% from end-Q1. With China’s official PMIs edging up, the major mainland indices rose too (the CSI300 was up 1.3% on the day and 12.9% over the quarter). But with China’s NPC Standing Committee having approved the new Hong Kong Security Law, raising concerns of retribution from the US, the Hang Seng has struggled to advance today, and is currently up little more than 3% on the quarter.

European stocks have also failed to make much headway while S&P500 futures are currently down a touch. And while JGBs largely lost ground today, USTs and the major European bond markets have largely posted modest gains, not hindered by a downside surprise in this morning’s French inflation data following upside surprises in yesterday’s equivalent figures from Germany and Spain. With this morning’s UK economic data having shown that GDP fell even further than previously thought in Q1, and the household saving ratio rose to the highest level in four years, support for Gilts has pushed 2Y yields to a new record low close to -0.10%.

Today’s Japanese figures were on the whole disappointing and consistent with an economy reeling from the blow of the pandemic. This was particularly evident in the manufacturing sector, where production fell a further 8.4%M/M in May following a 9.8%M/M drop in April to its lowest level for more than eleven years. This left output down by one quarter compared with a year earlier and more than 20% since the start of the year.

Within the detail, the weakness was once again driven by the autos sector, where the temporary closure saw production fall a further 22½%M/M after a 43%M/M decline previously, to leave it down by almost two-thirds compared with a year earlier. The production machinery subsector also suffered a notable decline (-12.0%M/M), as did the iron, steel and non-ferrous metals subsector (-13.8%M/M).

While the METI survey forecasts a rebound in production in June (up more than 5%M/M), risks to this assessment seem skewed to the downside not least given the ongoing weakness of demand both at home and overseas. Certainly, the inventory-shipment ratio leapt a further 6.9%M/M in May to the highest level since the series began in the late 1970s, with the equivalent ratio in the autos sector almost 90% higher than a year earlier, implying the likelihood of significant annual rates of decline in production over the coming six months at least. Indeed, adjusting for the usual bias, METI assessed that production would rise just 0.2%M/M in June, which would leave output down a whopping 17%Q/Q in Q2, the most since the height of the global financial crisis.

The latest labour market figures suggested that domestic demand is likely to remain lacklustre for the time being too. Admittedly, the number of people employed rose for the first month in three in May, by 40k. But this followed a decline of almost 1.2mn in the previous two months, to leave those in employment down more than 750k compared with a year earlier. Unsurprisingly, the most notable declines were seen in the hospitality-related sectors (by a combined 670k), while retailers and manufacturers also reported significantly diminished workforces too.

So, the unemployment rate rose 0.3ppt to 2.9% in May, the highest for three years. Admittedly, this would have been significantly higher in the absence of the government’s employment subsidy programme. Nevertheless, near-term job prospects remain highly uncertain, with a further notable decline in job offers – to the lowest level since 2012 – to leave the job-to-applicant ratio falling to its weakest since mid-2015.

While concerns persist about the (admittedly relatively limited) Beijing second wave, China’s official PMIs for June posted modest improvement to suggest ongoing steady, but relatively gradual, economic recovery from the shock of the pandemic. Most notably, the manufacturing PMI slightly outperformed expectations, rising 0.3pt to a three-month high of 50.9, implying positive but still far-from-vigorous growth in the sector. Within the detail of the manufacturing survey, the output PMI rose 0.7pt to 53.9, also a three-month high. And the index for new orders rose 0.5pt to 51.4, likewise the best since March, even as new export orders remained weak (the respective index rose 7.3pts to 42.6). Among other indicators, the PMIs for employment, imports, stocks and backlogs were all sub-50. But while the PMI for activity expectations slipped back from May’s four-month high, at 57.5 it remained consistent with expectations of stronger growth in the sector ahead.

The non-manufacturing survey also suggested gradual improvement over the past month, with the headline PMI for the sector rising 0.8pt to a seven-month high of 54.4. Within the detail, the survey also pointed to ongoing growth of domestic new orders (respective PMI up 0.1pt to 52.7) and a slower pace of decline in new export orders (up 2pts to a five-month high of 43.3). However, as for manufacturing, the respective employment indicator (up just 0.2pt to 48.7) suggested that firms continue to cut jobs. Given the improvement in both manufacturing and non-manufacturing surveys, the composite PMI rose 0.8pt to a two-year high of 54.2.

Euro area:
Today will bring euro area flash inflation data for June. While yesterday’s German and Spanish figures surprised on the upside, there was a notable downside surprise to this morning’s French release. In particular, this showed headline inflation – on both the EU-harmonised and national measures – declining 0.3ppt to 0.1%Y/Y, the weakest rate for more than four years. While there was slight moderation in the annual drop in energy costs, food price and services inflation slowed (the latter down 0.3ppt to 0.9%Y/Y), while there was a steeper pace of decline in the prices of manufactured goods (down 0.4ppt to -1.1%Y/Y), suggesting a further drop in core inflation this month.

Of course, there is still a significant amount of uncertainty with regards to the accuracy of the French price data, with INSEE noting that roughly one quarter of the basket was still being estimated due to the impact of the coronavirus. As such, there is greater uncertainty than usual with respect to the aggregate euro area figure. On balance, we still expect a modest upwards tick in the headline CPI rate from the 0.1%Y/Y reading in May, while core inflation might well have nudged lower from 0.9%Y/Y previously.

This morning also brought French consumer spending data for May, which confirmed a larger than expected increase in consumption of goods compared with April, up 36%M/M. But this still remained well below the pre-pandemic level (7%) and significantly weaker than a year earlier (-8.3%Y/Y).

In other news, we will hear from the ECB’s Vice President De Guindos and Executive Board member Schnabel who are speaking at separate events.

The updated Q1 GDP figures provided no major surprises, although they showed that economic output dropped slightly more (by 0.2ppt) than previously thought as the initial shift to lockdown hit activity. Indeed, the decline of 2.2%Q/Q in GDP in Q1 was a touch sharper even than during the worst quarter of the global financial crisis and thus the steepest since Q379. Of course, the magnitude of this drop will be dwarfed by Q2, when GDP is likely to have dropped by more than 15%Q/Q.

Within the detail, private consumption is now estimated to have dropped by significantly than previously thought, with the pace of decline revised by 1.2ppts to -2.9%Q/Q, also the worst since 1979. With empoyee compensation having risen 1.1%Q/Q, the most in five quarters, the drop in consumer spending was matched by a sharp rise in the households’ saving ratio, up 2ppts to a four-year high of 8.6%. Meanwhile, government spending (-4.1%Q/Q) also fell more steeply than thought previously as did gross fixed investment (-1.1%Q/Q), with business investment (-0.3%Q/Q) now down for the sixth quarter put of the past nine. Exports (-13.5%Q/Q in volume terms) and imports (-9.4%Q/Q on the same basis) fell sharply. And principally due to shifts in non-monetary gold and other precious metals, today’s data showed that the current account deficit widened substantially in Q1, by almost £12bn, to £21.1bn, or 3.8% of GDP (from 1.7% of GDP the prior quarter). The deficit on primary income also widened, as UK earnings on foreign investment dropped sharply in response to lockdowns elsewhere.

Likely of most interest will be BoE Chief Economist Haldane’s webinar this morning discussing ‘the second quarter’, followed by BoE Deputy Governor Cunliffe on ‘central banking in the age of Covid19’ in the afternoon.

In the US, the S&P Corelogic home price index for April will be published, as well as the Conference Board’s consumer confidence survey for June. In terms of policy commentary, Chair Powell and Treasury Secretary Mnuchin will testify before the House Financial Services Committee on the CARES act, while New York Fed President Williams and Fed Governor Brainard will appear at online events.

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