Chinese PMIs beat expectations

Emily Nicol
Chris Scicluna

After Wall Street got off to a positive start to the week (the S&P500 closed up 3.4% yesterday), China’s PMIs today beat expectations by rising above the key 50 level, and ruling-party thinking for Japan’s forthcoming bumper fiscal package started to crystallise on a busy day for domestic data (see detail below). Nevertheless, despite a weakening yen, Japanese stocks fell back today, with the Topix closing down 2.3%, to finish the quarter down a whopping 18%, the worst since 2008. Elsewhere in the region, however, stocks were firmer (e.g. the Hang Seng is currently up more than 1%), while European markets have opened higher and US stock futures are up too.

In the bond markets, yields on USTs have fallen back from yesterday’s US close (10Y yields back below 0.70%). But the improved mood in Europe has seen core euro govvies and Gilts reverse yesterday’s gains, while BTPs are firmer ahead of today’s flash euro area inflation data, which seem bound to report a sharp drop in the headline CPI measure as a step towards a possible negative print next month. German jobless data for March, due shortly, will also be watched. While likely to show a jump in claims, these will be nowhere near as horrendous as last Thursday’s equivalent US figures, reflecting in no small measure the effectiveness of Germany’s labour market support measures.

With concerns surrounding the coronavirus outbreak having intensified last month, China’s economy on shutdown and overseas visitors numbers to Japan having plummeted, today’s Japanese spending and activity figures for February beat expectations. In particular, the value of retail sales rose for the fourth consecutive month and by 0.6%M/M, to leave them 1.7% higher than a year earlier. But this in part reflected a surge in sales at drugstores (18.9%Y/Y) on the back of increased demand for face masks, toilet paper and other health products. Food store sales were also firmer (growth of 3.8%Y/Y was the strongest since October 2015), as were sales at fuel stores (2.8%Y/Y). In contrast, general merchandise and clothing sales were notably weaker (down 4.7%M/M). With visitor numbers having obviously remained weak this month, major sporting and cultural events cancelled, and Tokyo Governor having advised residents to stay at home last weekend after a jump in the number of Covid-19 cases in the capital, underlying spending seems bound to have weakened significantly further in March.

The latest IP figures also exceeded expectations, with total output rising in February for the third consecutive month and by 0.4%M/M. But the detail of the report suggested that this was more than fully accounted for by a surge in production of electronic parts and devices (10.7%M/M) possibly reflecting a lack of supply from China. In contrast, output from other key sectors fell back – e.g. production of autos was down 2½%M/M, production machinery down more than 2%M/M and business oriented machinery down 4½%M/M. And overall, manufacturing output was still down more than 4½% compared with a year earlier. Furthermore, while there was a modest improvement in the inventory-shipment ratio in February, it still continued to imply a steeper pace of year-on-year declines in production over the coming six months.

The latest labour market figures suggested little change in February with the unemployment rate unchanged at 2.4% for the second successive month and only just above the four-decade low of 2.2% seen at the end of 2019. But the detail of the report suggested some underlying softening. For example, the rate of annual employment growth slowed to just ½%Y/Y, just half the pace seen in January. And there was a notable drop in employment in the manufacturing and hospitality sectors (-1½%Y/Y), while perhaps bizarrely the number of jobs in the retail sector jumped more than 4%Y/Y. But the near-term outlook obviously remains downbeat, and this was illustrated by a further notable drop in the job-to-applicant ratio, down to 1.45x the weakest reading for almost three years as the number of job offers fell to the lowest since mid-2016.

While February’s figures suggested that the economy held up relatively well, conditions have inevitably deteriorated significantly further in March, with surveys pointing to record declines in services activity in particular. But while the government has not yet called a state of emergency, today saw the LDP’s policy panel propose a record fiscal support package worth ¥60trn to support the economy through the devastating impact of the Covid-19 outbreak. The headline figure would incorporate roughly ¥40trn in corporate funding measures along with ¥20trn in new direct fiscal measures, with more than ¥10trn (circa 2% of GDP) of cheques, subsidies and spending vouchers for the public. Of course, reports yesterday suggested that we should expect the package to imply an extra ¥16trn of new JGB issuance over the coming fiscal year on top of existing plans. PM Abe is reportedly due to unveil the package on 7 April.

China’s official PMIs for March beat expectations with the key indices rising back above 50 from the series lows hit last month. In particular, the headline manufacturing PMI leapt more than 16pts to 52 in March, while the equivalent figure for the non-manufacturing sector jumped more than 22pts to 52.3, compared with a consensus expectation of 42. Since the survey aims to reflect the month-on-month change in conditions, the marked improvement from February, when the lockdown was widespread, should have come as no surprise.

Within the detail, nevertheless, the PMIs for manufacturing output and new orders rose from below 30 to 54.1 and 52.0 respectively, while the employment index also rose back above 50. The impact of the spread of Covid-19 abroad, left the manufacturing PMIs for both new export orders and imports are still below 50, at 46.4 and 48.4, respectively.

Euro area:
This morning brings the euro area’s flash inflation estimates for March. Following yesterday’s figures from Germany and Spain, which reported drops in the EU-harmonised measure of 0.4ppt and 0.7ppt respectively to 1.3%Y/Y and just 0.2%Y/Y, the equivalent figures from France released a little while ago also revealed a steep fall. Indeed, on the EU measure, headline French inflation fell 0.9ppt – the most since 2008 – to 0.7%Y/Y, the lowest since November 2016.

Of course, as in Germany and Spain, the decline in French inflation last month was due principally to the plunge in oil prices. Indeed, on the national measure, French energy inflation fell 5.0ppts to -3.9%Y/Y, the most negative in almost four years. But, while food inflation was a touch firmer, inflation of manufactured goods, tobacco and services also fell, suggesting that the annual rate of French core CPI declined too.

So, a marked decline in euro area headline inflation is bound to come later this morning - we now expect a drop of 0.6ppt to 0.6%Y/Y, the lowest since 2016. Core inflation should also fall back from February’s rate of 1.2%Y/Y. And assuming no sudden recovery in oil prices, there is a decent possibility of negative inflation prints over coming months.

Beyond the inflation numbers, German labour market figures for March are due shortly, and likely to show the biggest monthly increase in jobless claims since 2009 (with the exception of May 2019, which was affected by a change in classification). Nevertheless, support from the government’s short-term working subsidies (Kurzarbeitergeld) should still contain the rise in the unemployment rate, perhaps to just 0.1ppt to 5.1%, which would be the highest rate since 2018. Meanwhile, hawkish Austrian central bank Governor Holzmann, whose comments triggered a massive sell-off in BTPs earlier this month, will speak publicly later this morning. And Italy will hold its biggest sale of BTPs and floating-rate notes so far this year.

The latest GfK consumer confidence survey, released overnight, offered few insights into the spending behaviour as it was conducted in the first two weeks of March, before the coronavirus had a significant impact on activity in the UK. For example, the headline consumer confidence index fell just 2pts to -9, matching January’s level. Within the detail, the survey flagged a worsening in perceptions of the economic outlook for the coming year (down 6pts), as well as a more limited deterioration in assessments on the outlook for personal finances (down 3pts). The eight-point fall in the Major Purchase Index was merely the biggest since mid-2017. Expect next month’s survey to give a more accurate gauge of consumers’ willingness to spend.

The final release of Q4 GDP released this morning confirmed the prior estimate of growth of 0.0%Q/Q and 1.1%Y/Y. Within the detail, private consumption was even weaker than previously thought, now estimated to have failed to grow for the first time in four years. Fixed investment fell 1.2%Q/Q, with business investment down 0.5%Q/Q to remain below end-2017 levels. In contrast, net trade made a third consecutive large positive contribution to growth (+1.5ppts), as vigorous growth in exports (5.0%Q/Q) seemingly related in part to transfers of gold within the banking sector, far outpaced that of imports (0.4%Q/Q). Most happily, perhaps, the stronger headline net trade performance saw the external current account deficit shrink almost £15bn to £5.6bn, the smallest in more than eight years. Given the extraordinary nature of the items which flattered the trade balance, however, the deficit seems likely to have blown out again in Q1.

Two further March surveys – the Conference Board’s consumer confidence indices and MNI Chicago PMIs – are due today and both seem bound to illustrate the significant deterioration in economic conditions over the past month.

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