Japan’s department store sales down almost 30%Y/Y

Chris Scicluna

Asian equity markets rebound as Powell repeats dovish testimony; Treasuries steady but huge bond selloff continues in Australia and New Zealand
Treasury yields remained under upward pressure yesterday, with the 10Y UST temporarily making new highs above 1.43%. However, with Fed Chair Powell repeating his previous day’s soothing words – this time before the House Financial Services Committee – yields soon retreated, taking the 10Y note back to 1.38% at the close. Equity investors appeared to appreciate the further reassurance as the S&P500 quickly erased modest early losses to eventually close with a 1.1% gain and so not far from the mid-month record high.

Turning to the Asia-Pacific region, the Antipodean bond markets have been the key focus today with this year’s selloff gathering even greater pace. In Australia, initial weakness on the open was soon reinforced by some better than expected capex data (more on this below). As a result, the yield on the RBA’s targeted 3Y bond (April ’24) crept up to 0.14% while the yield on the November ’24 bond increase to 0.36% – suggestive that many investors do not expect the Bank’s current 3Y bond target to be rolled later this year. Meanwhile, the 10Y bond rate jumped by a further 12bps to 1.73%, bringing the YTD selloff to more than 70bps. Notably, yields moved higher despite the RBA buying a record-equalling A$5bn of bonds today, including a record A$3bn to support its 3Y bond target.

The RBA’s task wasn’t helped by developments across the Tasman Sea where the Kiwi 10Y bond yield exploded 18bps higher to 1.85% (now up almost 90bps this year). This move – which probably contributed to the early weakness in Australian bonds – followed an announcement from the Minister of Finance that from 1 March the RBNZ’s monetary policy remit would be amended to require the Bank to take account of how its policy settings are impacting the overheating housing market (more on this below). Understandably, investors viewed this change as restricting the RBNZ’s ability to continue with ultra-easy monetary policy. That said, with market now pricing a one-in-three chance of a rate hike by the end of this year – something that seems very unlikely, especially with the Kiwi dollar leaping to new 3-year highs – the move in the Kiwi market looks increasingly overdone.

Elsewhere in Asia, after weakening sharply yesterday, the major regional bourses have rebounded somewhat today. In China, after declining by 6% over the previous three sessions, the CSI300 advanced 0.6% today, while the KOSPI was the start performer, rallying 3.5% to erase most of this week’s prior losses. Equity markets also moved higher in Japan, with a 1.2% rebound in the TOPIX erasing a good portion of the previous day’s losses, while JGB yields also continued to rise – the 10Y moving close to 0.14% and the 30Y rising above 0.75% for the first time since end-2018. The ASX200 was a relative underperformer weighed down by both higher bond yields and a rally in the Aussie dollar to a fresh 3-year high, while the same factors drove the Kiwi equity market down more than 1%.

Japan’s department store sales slump in January as restrictions weigh
The only macroeconomic data released in Japan today concerned nationwide department store sales in January. Not surprisingly, the advent of new restrictions across almost half of the country meant that sales were extremely weak, declining 29.7%Y/Y – more than twice as bad as the 13.7%Y/Y decline reported in December. Spending on clothing fell almost 40%Y/Y and spending on accessories fell almost 32%Y/Y. While demand for household goods was more resilient, spending was still down 15%Y/Y.

Consumer sentiment improves modestly in Germany but drops a touch in France
This morning’s consumer sentiment survey results from Germany and France suggested little change this month in confidence, which remains in the doldrums. According to the GfK survey, German consumer sentiment is expected to edge up in March, with the headline indicator – always couched as a forecast for the coming month – up a modest 2.6pts to -12.9, still far below the range prevailing from July last year to January. Within the detail, all key indices marked an improvement in February, with expectations about personal incomes and the economy as a whole up to the best since the autumn. While also up from January, willingness to spend remained low by historical standards.

In France, the INSEE consumer confidence indicator edged down 1pt to 91, thus well below the long-run average (100) and indeed matching the second-lowest reading of the pandemic. There was no change in the assessment of whether this was a good time to spend. But households’ assessment of their standard of living deteriorated while concerns about unemployment rose to the highest since 2009.

More euro area survey indicators and bank lending data to come today
The European Commission’s comprehensive economic sentiment indices for February are due later this morning. The continued divergence between the services and manufacturing sectors is bound to be highlighted again, with the headline confidence indicator for the former expected to remain unchanged at -17.8 in February, the lowest since July last year. In contrast, the industrial sentiment index is expected to rise 0.9pt to -5.0, which would mark the strongest reading since May 2019. Euro area bank lending data for January are also due for release this morning.

US GDP revisions should be positive; durable goods orders data also of note
A reasonably busy for US data includes the second release of the national accounts for Q4 and a number of more contemporary economic indicators. As far as GDP is concerned, Daiwa America Chief Economist Mike Moran expects that growth will be revised up 0.4ppts to 4.4%AR, thanks to upward revisions to various investment expenditures and inventories. The durable goods orders report for January, also released today, will cast light on how investment activity began the current quarter. After increasing for eight consecutive months, Mike thinks that the recovery in orders may have paused for breath in January. The pending home sales report for January and Kansas Fed manufacturing survey for February are also released today, but will hold lesser interest.

Aussie machine capex rebounds in Q4; forecasts for 2020/21 also shift higher
Following yesterday’s slightly disappointing construction data, today’s Q4 CAPEX survey had more positive things to say about plant and machinery investment during the quarter. The volume of overall capex spending increased 3.0%Q/Q – the consensus estimate had called for growth of just 1.0%Q/Q – thanks to a 5.7%Q/Q rebound in investment in plant and machinery. With capex having declined in each of the previous five quarters, capex was still down 7.5%Y/Y, with spending on buildings and structures down 9.4%Y/Y and spending on plant and machinery down 5.2%Y/Y.

Turning to the section of the survey measuring firms’ expectations, for the financial year 2020/21 (i.e. the year ending 30 June 2021), the 5th estimate of firms’ total nominal spending was 6.3% above the last estimate made three months – more positive than the typical revision at this stage of the year – but still 7.1% below the comparable estimate made for 2019/20 (the 4th estimate had been more than 9% below its comparable estimate). Forecast spending on plant and equipment was revised up a strong 9.7% from the still weak forecast made three months ago, and so is now just 2.7% below the comparable forecast made for 2019/20 (compared with 6.5% three months ago). However, forecast spending on buildings and structures was revised up just 1.3% and so remained over 10% below the comparable forecast for 2019/20.

Within the mining sector, forecast spending was little changed from 3 months earlier and still more than 4% lower than the comparable estimate for 2019/20. In the non-mining sector forecast spending increased around 7% over the past three months but remains more than 8% lower than the comparable estimate in 2019/20. Finally, the tentative first estimate for total capex spending in financial year 2021/22 was 3.4% lower than the first estimate for 2020/21 – not a bad result considering that the prior estimate was made before the pandemic struck.

RBNZ directed to take account of housing when setting monetary policy
The focus in New Zealand today was once again on the RBNZ. Tensions had been building between the Government and the RBNZ in recent months, with the Bank’s low interest rate settings leading to rampant house price inflation – an embarrassment to a left-of-centre government that had promised to deliver greater home price affordability under its watch. With the RBNZ having laid most of the blame for that inflation at the feet of others – and to be fair, supply-side factors are also at play – today the Minister of Finance announced that from 1 March the RBNZ’s monetary policy remit will be amended. The new remit notes that the Government’s policy is to support more sustainable house prices, and requires the Bank to take account of how monetary policy settings are impacting the housing market. It is worth noting that in published advice to the Minister, the RBNZ had argued against amending the monetary policy remit. Instead, the Bank had preferred the consideration of house prices be added to the Bank’s financial policy remit.

At the very least, the amendment to the monetary policy remit rules out the already slim possibility of the RBNZ easing monetary policy further over coming months, at least in the absence of a marked reversal of current economic and housing market trajectory. Over time, it also implies somewhat less latitude for the RBNZ to maintain current expansionary settings as the economy recovers. Given the Minister’s direction, the Bank will doubtless continue to seek to use macro-prudential tools to directory slow the housing market and thus minimise the implications for its monetary policy settings. In the near-term, the staged re-imposition of LVR restrictions – already scheduled to formally begin on 1 March – should take some heat out of the housing market, at least for a while.

In other news, the final results of the ANZ Business Outlook survey for February were slightly weaker than the preliminary findings published at the beginning of the month, likely reflecting the brief coronavirus scare that led to the temporary re-imposition of restrictions on activity. The key activity outlook index was revised down 1.0pts to 21.3, leaving it fractionally weaker than the prior reading in December. The pricing indicators were also revised down slightly, but remained up sharply from December.

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