Japanese manufacturers more downbeat as exports tumble

Chris Scicluna
Emily Nicol

Overview:
Following yesterday’s rally in equities in the wake of the Fed’s corporate bond buying announcement, Japanese stocks closed down today after Jay Powell repeated his dovish mantra about the economic outlook, concerns about covid-19 in China and certain Southern US states were maintained, skirmishes on the borders between China and India and North and South Korea injected additional cause for caution, and the domestic dataflow remained very weak (see below).

Nevertheless, given the vigour of Tuesday’s rally, the drop of just 0.4% in the Topix was relatively modest. And elsewhere, markets elsewhere in the region eventually largely reversed earlier losses, while US stock futures are now up too and European equities opened higher. USTs are little changed following the bear-steepening earlier in the week while European govvies are weaker.

Japan:
While Japan’s containment measures started to ease gradually in May, today’s trade figures for that month illustrated the continued significant impact the pandemic at home and abroad is having on economic activity. For example, export values fell a further 5.8%M/M, following the 15½% cumulative drop in the previous two months. This left them down 28.3%Y/Y, the steepest annual decline for more than a decade and the eighteenth consecutive such decline, the longest negative run since the 1980s. But with the value of imports having slumped more than 10½%M/M on the back of weak domestic demand, the trade deficit narrowed slightly to ¥601bn.

Within the detail, the weakness was once again most striking in shipments to the US, with the drop of a little more than 50%Y/Y accounting for more than one third of the total decline in Japanese exports. And while the weakness was broad based, the steepest decline was once again seen in shipments of autos (-79%Y/Y) as sales remained highly subdued. Exports to the EU were also down by one third compared with a year earlier, with transport equipment similarly providing the largest drag. While they account for a relatively small share, exports to Australia were also down almost 60%Y/Y, and exports to most Asian countries continued to decline at a double-digit rate. The exception was China, which saw the annual rate of decline ease to just 1.9%Y/Y.

When adjusting for seasonal and price effects, the BoJ’s series offered a similarly downbeat assessment. Export volumes were down almost 6%M/M to leave them on average so far in Q2 more than 18% lower than in Q1. And despite a double-digit monthly drop in import volumes in May, this still left them trending 4½% higher than Q1, suggesting that net goods trade is on track to provide the largest drag on GDP growth (in excess of 2ppts) since the height of the global financial crisis.

Separately, today’s overseas visitor numbers were inevitably exceptionally low, providing a reminder that services exports will similarly have provided a substantial drag on growth this quarter. The number of tourist arrivals stood at just 1.7k in May, a drop of 99.9%Y/Y and the lowest level since the series began in the early 1990s – indeed, this resulted in a monthly average of just 2.3k so far in Q2, compared with an average of 1.3mn arrivals in each month in Q1.

Meanwhile, today’s Reuters Tankan survey suggested no material improvement in business conditions for key export-oriented manufacturers in June. For example, the headline sentiment diffusion index (DI) fell a further 2pts to -46, the lowest reading for eleven years, with double-digit monthly declines in the respective autos, electrical and precision machinery sub-sector indices as orders reportedly continued to decline sharply. There was, however, a modest recovery in the headline non-manufacturing DI, up 4pts to -32. But this merely reflected a notable improvement in assessment of conditions among retailers as the relaxation in containment measures saw shops resume operations – and the pessimists still unsurprisingly outweighed the optimists in the sector.

Overall, today’s survey suggested that the more comprehensive quarterly BoJ Tankan survey (due to be published 1 July) will (perhaps inevitably) see the headline indices drop considerably in Q2 from Q1 (the respective manufacturing DI was at -8, while the non-manufacturing DI stood at +8), and point to only modest recovery in Q3 too.

UK:
Broadly in line with expectations, UK inflation weakened in May as the lagged effects of earlier falls in global oil prices pushed petrol prices lower and as the pandemic weighed on prices of certain other goods. In particular, headline CPI inflation dropped 0.3ppt to 0.5%Y/Y, the lowest level since June 2016. And core inflation dropped 0.2ppt to 1.2%Y/Y, the lowest since October 2016. As elsewhere in Europe, however, restrictions on economic activity created difficulties collecting data, requiring a large number of prices to be inputed by the statisticians. Excluding such items, the ONS stated that headline inflation would have been 0.1ppt lower at just 0.4%Y/Y.

Within the detail, energy inflation dropped more than 2ppts to -11.6%Y/Y, a series low. Not least due to lower prices of computer games and consoles and other recreational items, as well as furniture and other household equipment, inflation of non-energy industrial goods fell 0.4ppt to 0.1%Y/Y. Inflation of food and beverages rose 0.4ppt to 2.1%Y/Y as higher lockdown demand provided a boost to prices of alcohol. And services inflation was unchanged at 2.0%Y/Y, albeit with the estimate most affected by the need for the statisticians to impute data.

Looking ahead, energy inflation is likely to pick up in response to higher global oil prices. But the impact of the pandemic on demand for non-energy industrial goods and services will likely to push both core and headline inflation closer to zero towards the end of the year. Failure to reach a trade agreement with the EU, resulting in the imposition on tariffs on imports from the bloc represents an upside risk from January.

Euro area:
This morning’s euro area car registrations figures showed that, while the drop was not as steep as in April (-79.6%Y/Y) when lockdown measure were most stringent, sales remained extremely weak in May as demand remained highly subdued. In particular, registrations fell 52.4%Y/Y with the number of units sold down to just 502k, by far the lowest outturn for May since the series began in 1989. This left sales in the year to May down more than 43%Y/Y, at just 2.8mn. While the drops were less striking than in April, double-digit declines were seen in all member states, with Spain continuing to lead the way among the larger member states (down 72.7%Y/Y), while declines in excess of 70%Y/Y were also seen in Portugal and Ireland. Registrations in Germany, France and Italy were all down by roughly one half.

Final euro area CPI data for May are due later this morning. Yesterday’s German data aligned with the flash estimate that showed headline inflation (on the EU harmonised measure) declining 0.3ppt to 0.5%Y/Y. But given the upwards revision in France, up 0.2ppt to 0.4%Y/Y, there is a risk that headline euro area inflation will also be revised slightly higher from the preliminary estimate, which had suggested that inflation fell from 0.3%Y/Y to 0.1%Y/Y, the lowest rate since 2016. Core inflation might also be nudged higher from the flash figure of 0.9%Y/Y.

Euro area construction output data for April will also be published this morning. And these are bound to confirm that lockdown restrictions again weighed heavily on activity in most member states. In France, for example, we already know that production in the sector fell by almost one third having already dropped more than 40%M/M in March. In Germany, however, construction output saw only a modest impact, dropping 4.1%M/M following a rise in March.

Finally, in terms of fiscal policy, Germany’s cabinet should approve the further supplementary budget, to facilitate an additional €62.5bn of Bund issuance this year of on top of the €156bn approved in March. In the markets, meanwhile, Germany will auction €5bn of 10Y Bunds.

US:
In the US, as Fed Chair Powell repeats his semi-annual Congressional testimony before the House Financial Services Panel, housing starts figures for May will be published and the Treasury will sell 20Y Bonds.

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