Japanese exports continue recovery, UK inflation fell sharply

Chris Scicluna
Emily Nicol

Asian markets mostly muted as investors await today’s Fed commentary
With global economic data continuing to point towards recovery – albeit with activity in most countries remaining well below pre-pandemic levels – US equity markets posted gains yesterday, with the S&P500 up 0.5% to its best close since 4 September. However, markets in the Asia-Pacific region were understandably subdued today with investors awaiting guidance from the Fed at today’s policy meeting (with the BoJ and BoE to follow tomorrow). In Japan, where bourses rose only modestly (the Topix rose 0.2%) , there was no market reaction as freshly-minted LDP leader Yoshihide Suga was predictably confirmed as the country’s new Prime Minister following a vote in the Diet. Suga has now started naming his Cabinet. As expected, Taro Aso and Toshimitsu Motegi have retained their respective key finance and foreign policy portfolios – both appointments reinforce the sense of continuity with the Abe regime. Indeed, Nobuo Kishi, Abe's younger brother and former senior vice foreign minister, has been nominated as defence minister in what will be his first Cabinet post. In addition, former health minister Katsunobu Kato will succeed Suga as Chief Cabinet Secretary. Suga will conduct his first press conference as PM at 9pm local time (noon BST).

Japanese exports continue moderate rebound in August
As far as economic data was concerned, the main focus in Japan today was on the release of MoF’s external goods trade report for August. Consistent with the steady improvement in sentiment-based indicators, this report suggested a further recovery in exports from the pandemic-induced slump recorded earlier this year. Indeed, the 5.9%M/M lift in the value of exports during August was slightly firmer than the market had expected, albeit still leaving exports down 9% from the pre-pandemic level and almost 15%Y/Y. The news regarding imports was less positive, with values almost unchanged during the month and still down 20.8%Y/Y – an outcome that highlights the relative weakness of the domestic economy. Given these outcomes, the adjusted trade surplus expanded to ¥350.6bn in August – the most since February – following an upwardly-revised surplus of ¥41bn in July.

A little later in the day the BoJ released its analysis of the export and import data, adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ, real exports rose 6.5%M/M in August, building on an upwardly-revised 7.7%M/M rebound in July. As a result, for the quarter to date, exports are running just over 10% above the depressed level recorded in Q2. By contrast, the BoJ estimates that real imports fell 2.0%M/M in August. And with this marking a fourth consecutive monthly decline, at present imports are tracking more than 8% lower than in Q2. Taken together, these outcomes suggest that net goods exports are likely to make a sizeable positive contribution to a rebound in overall economic activity in Q3, albeit likely failing to fully reverse the 3.0ppt negative contribution made to GDP growth in Q2.

The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to China remained broadly steady at around 7½%Y/Y in August. Exports to elsewhere in Asia fell just over 7%Y/Y, but this represented an improvement compared with the more than 11%Y/Y decline recorded in July. As was the case last month, the greatest weakness was seen in exports to the pandemic-stricken US and European markets, with exports to the former still down just over 20%Y/Y and exports to the latter down an even greater 28%Y/Y.

BoJ still likely to keep policy settings steady at tomorrow’s meeting
Today’s trade report represents the final piece of local economic news to be received by the BoJ’s Board before it releases the outcome of its latest review of policy settings tomorrow. While the recovery in the domestic economy so far appears very tepid, we imagine that most Board members will take some heart from the improvement in the global trading environment in recent months, especially as regards the unexpectedly rapid improvement in activity in China. As a result, as it did in July, we expect the BoJ to express guarded optimism about the economic outlook. Indeed, it may even convey a hint of greater confidence in that outlook given the latest economic news, declining coronavirus case numbers in Japan and growing optimism that an effective anti-virus vaccine might be relatively close at hand. So we continue to expect that the BoJ will simply reaffirm current policy settings at tomorrow’s meeting, while making clear that it stands ready to act further – working with the government – if downside risks materialize.

UK inflation falls back sharply on policy support for the hospitality sector
As had been widely expected, UK inflation fell sharply in August, with the headline CPI rate dropping 0.8ppt to 0.2%Y/Y, the lowest since December 2015. The principal driver was government policy to support the hospitality sector – the combined effects of the “Eat out to help out” subsidies to cut prices of restaurant meals from Monday to Wednesday, and 15ppt cut in VAT to 5% on the broader sector, pushed inflation in hotels and restaurants down 4.6ppts to a series low of -2.8%Y/Y. And so, with inflation of transport (due to lower airfares) and healthcare also a touch softer, services inflation fell 1.5ppts to a series low of 0.6%Y/Y.

Goods inflation was also a touch weaker, dropping 0.2ppt back to negative territory at -0.2%Y/Y, partly due to belated summer discounting, which pushed inflation of clothing and footwear back down 1.3ppts to -1.4%Y/Y. And so, while food inflation also fell back for a third month, down 0.4ppt to 0.3%Y/Y, and energy inflation was little changed at -6.7%Y/Y, core inflation fell sharply, down 0.9ppt to 0.9%Y/Y, the lowest level since June 2015.

While the “Eat out to help out” scheme has now concluded, the hospitality VAT cut will last to 12 January. And so, inflation would seem unlikely to start picking up noticeably until February. With a major labour market shake-out on its way, wage growth is likely to remain extremely weak. And that would normally ensure that core inflation would remain very subdued – and headline inflation sub-target – too. However, in the event that the UK Government fails to reach a free trade agreement with the EU by year-end, higher taxes on a range of imported items – particularly food and autos – as well as a sharp depreciation of sterling, would push both core and headline inflation significantly higher and well above 2.0%Y/Y throughout next year, despite the big hit to GDP that would also ensue.

Euro area trade figures to show a significant rebound in goods exports
A quieter day for economic releases today will bring just euro area trade figures for July. In line with national data from Germany and France, these are expected to show a further notable rise in the value of exports that month, which once again outpaced growth in imports, implying that net trade is on track to provide a notable positive contribution to GDP growth in Q3.

US Fed announcement in focus
The conclusion of the aforementioned FOMC meeting this evening will bring no substantive change in its current policy settings. The meeting should certainly not be uneventful, however, being the first since Chair Powell confirmed the Fed’s new approach to inflation targeting at last month’s online Jackson Hole symposium – an approach that will see the Fed target average inflation outcomes of 2%, rather than a point target of 2%.

Certainly, the accompanying press statement – and Powell’s post-meeting news conference – could take on a slightly more dovish tone, reflecting the policy implications of the Fed’s new policy target i.e. at the very least, policy can be expected to remain accommodative for longer than would have been the case under the Fed’s previous target. But at the same time, Daiwa America’s Mike Moran looks for the Fed to alter the rationale of and give new guidance on the QE programme, billing it as another form of accommodation (rather than a means of promoting smooth market-functioning) and providing information on the likely duration of the program. He anticipates that the Fed will continue purchasing securities at the current rate through the end of the year and begin tapering next year. Meanwhile, the FOMC also might offer more explicit forward guidance on its interest rate stance. But it might offer little additional clarity on its average inflation targeting strategy beyond what was offered at Jackson Hole, leaving vague how far above target, and for how long, inflation might be allowed to run in future.

In terms of data releases, the focus will be on August retail sales figures, which are expected to report more modest growth than over recent months, not least reflecting the expiration of enhanced unemployment benefits. Business inventories data for July will also be published.

New Zealand projects higher fiscal deficits due to weaker global outlook
Today the New Zealand Treasury released an economic and fiscal update, as required by law ahead of the impending General Election on 17 October. The good news is that the economy is now expected to have contracted 3.1%Y/Y in FY20, compared with the 4.6%Y/Y decline reported in the May Budget. As a result, the core Crown deficit is estimated to have been ‘just’ 7.7% of GDP, down from the 9.6% of GDP deficit estimated previously. However, off that improved base, the Treasury has downgraded the forecast pace of economic recovery in subsequent years, citing a weaker global outlook and the likelihood of extended border restrictions. As a result, the Treasury’s forecasts for the fiscal deficit are now larger than at budget time.

In particular, a core Crown deficit of 10.5% of GDP is now forecast for FY21, boosted by Covid-related spending, declining gradually to 3.4% of GDP in FY24. Net core Crown debt is forecast to double from an estimated 27.6% of GDP in FY20 to 55.6% of GDP by FY24. Of course this still represents a low level by international standards. And with the RBNZ looking to buy up to NZ$100bn of mostly sovereign bonds by June 2022, the increased borrowing requirement will be readily absorbed. The first test of the Treasury’s revised assessment will come tomorrow with the belated release of the national accounts for Q2.

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