Japanese wages weaker again

Chris Scicluna
Emily Nicol

While the S&P500 extended its rally yesterday to end marginally up from in the year to-date, most Asian stock-markets advanced further today. The exceptions, however, were in Japan, where equities retreated modestly (the Nikkei 225 closed down 0.4% to be still 1.9% below its level at the end of last year) as the yen continued to appreciate towards ¥108/$, its strongest level in a week, and the latest wage data disappointed (see below for the detail on this and today’s other data). But US futures are down too. And equities are starting the day with a mix of losses and gains in Europe, where April’s trade data were predictably shocking but the latest indicators of activity in France and spending in the UK pointed to a moderate rebound in May.

With risk appetite better contained ahead of tomorrow’s Fed announcements, meanwhile, major government bonds (with the exception of BTPs) are firmer. Indeed, USTs have rallied (10Y yields down a further 5bps this morning to 0.82%, now some 13bps down from Friday’s peak), while the JGB curve flattened markedly (30Y yields down more than 4bps to 0.52%) and ACGBs also stronger after reopening from Monday’s holiday.

While yesterday’s national accounts figures suggested that growth in employee compensation remained positive in Q1, today’s monthly labour earnings data showed headline wage growth slipping back into negative territory in April. In particular, total wages were down 0.6%Y/Y, the first sub-zero reading since December and the steepest for more than a year. Inevitably, the weakness was principally driven by overtime earnings as businesses temporary reduced or closed operations in light of the state of emergency – indeed, such earnings were down more than 12%Y/Y, the most since the global financial crisis. This was particularly evident in the manufacturing and transportation sectors. Meanwhile, in total, scheduled earnings were flat compared with a year earlier, while special/bonus payments were up 10½%Y/Y.

When adjusting for sampling errors, the MHLW figures suggested that wages were weaker than the headline numbers implied – i.e. total average wages were down 1.9%Y/Y, the sharpest fall since June 2015, with scheduled earnings down 0.5%Y/Y, the most for six years. While the government’s wage subsidies will help reduce the impact of the current crisis on the labour market, firms will no doubt remain cautious in their hiring over coming quarters – indeed, job offers in April were down for the eleventh consecutive month and by 8½%M/M to their lowest level since August 2013. And with the Rengo trade union confederation having negotiated the softest increase in wages for the year ahead since 2013, and bonuses expected to be hit by the economic downturn, we would expect overall wage growth to remain very subdued over coming quarters.

Euro area:
Yesterday’s record drop in German IP has been followed by a record drop in German goods exports, which fell 24.0%Y/Y in April to be down 31.1%Y/Y and at the lowest level since 2010. While the drop in imports wasn’t quite so marked, it was also the steepest since reunification, down 16.5%Y/Y and 21.6%Y/Y to the lowest level since 2014. And so Germany’s trade surplus shrank markedly, falling by almost €14bn to just €3.5bn, the smallest in almost 20 years. In France, meanwhile, the hit to trade in April was a touch harder, with goods exports down 32.4%Y/Y and imports down 25.0%Y/Y, widening the trade deficit by €1.8bn to €5.0bn, merely a three-month high.

With the easing of many restrictions, the Bank of France’s latest business sentiment survey for May, also released this morning, inevitably pointed to a rebound in activity in the euro area’s second-largest economy last month, with the improvement most notable in industry and construction but lagging in services. While the average level of French GDP in April was estimated to be down 27% from the pre-crisis level, the Bank of France now judges that the level at end-May was down about 17%. And so, given the expectation of further improvement in June, it now estimates that GDP will drop about 15%Q/Q over Q2 as a whole. The Bank also now forecasts that GDP will drop 10.3%Y/Y overall in 2020, and rebound 6.9%Y/Y next year, with the pre-crisis level achieved around the back end in 2022.

Later this morning, revised euro area GDP figures for Q1 are due. Growth is expected to be little changed from the initially estimated contraction of 3.8%Q/Q, with the recent upwards revision to the French figure largely offsetting a downwards revision to Italian GDP (with both economies now estimated to have contracted 5.3%Q/Q). Today’s figures will provide the first official expenditure breakdown, with private consumption and investment set to have declined sharply, while net trade provided some support as a fall in imports offset weaker exports. They will also report updated employment data for Q1, although these will fail to adequately reflect the labour market impact of the drop in economic output.

Ahead of the reopening of non-essential stores next week, and the possible partial reopening of restaurants and cafés from 22 June, today’s snapshots of UK spending in May pointed to only a modest improvement last month following the record decline in April. Data from Barclaycard, which sees nearly half of the nation’s credit and debit card transactions, suggested that consumer spending was down 26.7%Y/Y, not quite as steep as the fall of 36.5%Y/Y the prior month but still, of course, extremely alarming for many retailers and services providers.

According to the Barclaycard data, spending on essential items was up 0.9%Y/Y, boosted by expenditure at supermarkets, which rose by almost one quarter from a year earlier as consumers sought to make the most of the sunny weather over the Bank Holiday weekend. In marked contrast, spending on fuel almost halved, and spending on non-essentials fell by more than one third. Sales at department stores and clothing shops fell by more than 40%Y/Y. Spending on eating and drinking fell more than 70%Y/Y, while the equivalent figures for entertainment, travel and hotels were down by more than 85%Y/Y. But online purchases at specialist retailers near-doubled from a year earlier, while the equivalent internet-spend at general retailers was up more than four fifths.

Meanwhile, according to the BRC’s latest survey of its members, the value of retail sales at High Street retailers was down 5.9%Y/Y in May, the second-sharpest drop on the series following the fall of 19.1%Y/Y in April.

With the Covid-19 outbreak in Australia having been relatively well contained, and lockdown measures having been eased over the past month, the NAB business survey inevitably reported some improvement in conditions in May, with the headline index rising 10pts to -24. This reflected a modest improvement in firms’ trading opportunities, as well as a slightly less pessimistic assessment for profitability and employment conditions. But new orders remained close to record lows. And overall, all indices remained deeply negative, with conditions remaining extremely weak in the services sector. Indeed, just 5% of respondent firms indicated being unaffected by the virus, with over one third reporting a major impact. As such, firms on average estimated an 11% decline in revenue associated with the coronavirus. And so, while there was a further notable recovery in confidence about the outlook (the index was 45pts above March’s low), this still remained at one of the weakest readings on record and close to the troughs seen during the global financial crisis.

In the US, today will bring the NFIB small business optimism survey for May, along with JOLTS job openings and wholesale trade figures for April.


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