Japan’s Economy Watchers survey points to slightly weaker conditions in January

Chris Scicluna

Equity markets and bond yields rise together as Yellen reiterates need for a big fiscal package
Despite a disappointing 49k increase in US non-farm payrolls – after 159k of downward revisions to earlier months – an unexpected decline in the unemployment rate to 6.3% and a perhaps-strengthened case for the Biden Administration’s proposed $1.9bn fiscal stimulus package saw the yield on 10Y USTs close at an 11-month high of 1.16% on Friday. Moreover, stocks still managed to advance for a fifth consecutive session, with the S&P500 gaining 0.4% to close the week up 4.7% and at a new high. The prospect of sizeable fiscal stimulus – and its potential inflation impact – also seemed to be on the minds of FM market participants, with the greenback giving back all of its previous day’s gains as inflation breakevens continued to rise to new cyclical highs.

The same themes remained in play in Asia today, especially after weekend interviews given by Treasury Secretary Yellen in which she reiterated her view that aggressive fiscal stimulus was warranted in light of the ‘stalling’ job growth in Friday’s employment report. US equity futures have moved a few tenths higher and so helped to underpin a positive session in most of Asia, even as the yield on 10Y USTs rose further towards 1.20%. Leading the way, the TOPIX closed up 1.8% despite the Cabinet Office’s Economy Watchers survey signaling a further softening of business conditions in January. Local sentiment was likely boosted by reports that the Government may lift the current state of emergency ahead of 7 March in some prefectures, thanks to the imminent arrival of a new law that will allow local leaders to impose fines on businesses that that don’t comply with locally-mandated restrictions – restrictions that could be varied within prefectures depending on coronavirus case numbers. China’s CSI300 also started the week with a solid gain of 1.4%. In the bond market, Aussie 10Y yields jumped 7bps to a new 11-month high of 1.27%, with yields also up slightly in most other markets. Indeed, govvies in Europe have opened lower again too, with BTPs the exception as Mario Draghi continues steadily to build support for his new government (the populist Five Star Movement and League – the two largest parties in parliament – have now both signaled support despite their initial misgivings).

Japanese sentiment softens again in January but may be near bottom; tomorrow’s wages data the highlight of remaining holiday-curtailed diary
As far as data are concerned, the highlight in Japan today was the Cabinet Office Economy Watchers survey for January. As had been expected given the extension of pandemic-driven restrictions on activity during the month, and following a slight downward revision to the December reading, the headline current conditions DI declined a further 3.1pts to an 8-month low of 31.2 – also now down almost 22pts from the high reached in October last year.

In the detail, the household sector index continued to suffer most, falling 3.9pts to 28.0, with the indices measuring sentiment amongst those respondents interacting with the retail and services sectors driving most of the decline (sentiment in the food sector had already fallen heavily last month). The corporate sector index remained somewhat more resilient, falling just 0.9pts to a 6-month low of 39.0. After declining sharply last month, the non-manufacturing index fell just 0.3pts in January to a 7-month low of 35.7, whereas the manufacturing index fell 1.6pts but remained comparatively hardy, albeit at a 5-month low of 43.7. As was the case last month, the good news is that respondents expect conditions not to worsen further over the coming 2-3 months. Indeed, the overall expectations index improved 3.8pts to 39.9 in January, with the food sector hopeful that business conditions will turn much less dire over the period ahead – probably a nod to the decline in coronavirus case numbers recorded over the past month.

In other Japanese news, the BoJ reported that total bank lending increased 6.1%Y/Y in January, down 0.1ppt from a month earlier. After growing in December by the most in six months, lending by the major city banks declined slightly and so annual growth fell back 0.6ppts to 6.5%Y/Y. By contrast, growth in lending by regional banks picked up 0.2ppts to 5.1%Y/Y while growth in lending at shinkin banks was steady at 8.3%Y/Y. On the other side of the ledger, bank deposits increased by a further ¥3.3bn in January, causing annual growth to increase to 9.8%Y/Y – the fastest pace in at least 30 years and indicative of continued precautionary behaviour by households. But not least given the support provided by banks and government to the corporate sector, bankruptcies fell further to a new 30-year low of just 474 cases in January, down a marked 38.7%Y/Y. Finally, balance of payments data revealed an adjusted current account surplus of ¥2.28trn in December, just a fraction narrower than a month earlier, with a slightly smaller trade surplus larger offset by a slightly smaller deficit on secondary income. As usual, the overall current account surplus was largely attributable to a surplus on primary income, which stood at ¥1.87trn in December.

The remainder of this week’s Japanese diary is very light, not least due to Thursday’s National Foundation Day holiday. Most interest will probably centre on tomorrow’s Monthly Labour Survey for December, which will almost certainly report an even steeper decline in average earnings than last month’s 1.8%Y/Y decline, not least due to a slump in winter bonus payments. Tomorrow will also bring the release of the BoJ’s money stock figures for January and the preliminary release of machine tool orders for January. On Wednesday, the BoJ will release the goods PPI for January, wrapping up this week’s local data flow.

China’s inflation data ahead before market closes for week-long LNY holiday begins on Thursday
There were no economic releases in China today. Indeed, with the week-long LNY holiday beginning on Thursday, the only economic reports scheduled this week are Wednesday’s CPI and PPI inflation reports for January. According to Bloomberg’s survey, the market expects annual headline CPI inflation to slip 0.2ppts to 0.0%Y/Y, with last year’s 1.4%M/M lift in prices providing a steep hurdle – especially considering the likelihood that this year’s pre-LNY price rises will be more subdued than usual. However, given strengthening commodity prices, annual PPI inflation is likely to print above zero for the first time since May 2019.

German manufacturing rose again in December but set to slow in New Year
The run of seven consecutive monthly increases in German industrial production came to an end in December, as overall output was unchanged from November. While that meant that IP was still down 0.7%Y/Y and 3.6% below last February’s pre-Covid-19 level, it was also up a marked 6.2%Q/Q over Q4 as a whole having risen 10.5%Q/Q in Q3. Moreover, output of manufacturing and mining did grow again, rising 0.9%M/M, albeit still down 3.8% from the pre-pandemic level.

Within the detail, production of autos rose a further 1.2%M/M to be 3.8% below February’s pre-pandemic level, while output of chemicals (up 3.4%M/M), pharmaceuticals (4.2%M/M) and metals (up 1.9%M/M) also saw continued growth albeit remaining below the pre-pandemic level. Output of consumer goods overall rose for the first time since September, up 2.6%M/M to be about 5% below February’s level. Production of machinery, however, dropped 2.4%M/M to be almost 10% below the pre-pandemic level. Beyond the manufacturing sector, construction output dropped 3.2%M/M but remained above the pre-Covid level and up 4.0%Q/Q. And energy output also dropped, falling 2.9%M/M, but was up 4.5%Q/Q albeit still more than 5% below the pre-pandemic level. Looking ahead, the drop in German factory orders in December tallies with survey evidence that we should expect softer growth in manufacturing in the first quarter, with auto production in particular to be weighed by the hit to domestic demand from the reversal of last summer’s temporary VAT cut as well as supply-chain problems associated with global semiconductor supply.

After the Sentix investor survey for February comes later today, the rest of the week’s euro area data calendar will be dominated by further news from the industrial sector. German goods trade figures for December come tomorrow along with Italy’s production data. And French industrial output numbers come the following day. Final January inflation numbers – whose flash estimates shocked on the upside upon their release – will come from Germany and Portugal (Wednesday), the Netherlands (Thursday) and Spain (Friday).

Friday’s Q4 GDP report to be the highlight in the UK
The most notable UK data this week will all come on Friday, when the first estimates of Q4 GDP are due. With December set to have seen a return to positive growth following November’s dip, we now expect GDP to have grown by about 0.5%Q/Q following the jump of 16.0%Y/Y in Q3. That, however, will still leave GDP down about 8.2%Y/Y. Among the components, private consumption is likely to have dipped but fixed investment, inventories and a surge in exports ahead of the end of the Brexit transition should have provided support. Of course, not least given the tightening of pandemic containment measures as well as the disrupting impact of Brexit on trade with the EU (an unsubstantiated report in the Observer yesterday suggested that freight traffic to the EU through UK ports and the Channel Tunnel was down more than two-thirds from a year ago in January) Q1 is likely to see a non-negligible drop in UK GDP.

A quiet start in the US ahead of January CPI inflation data and Powell speech on Wednesday
As usual, this post-payrolls week is reasonably quiet as far as data is concerned, with inflation data likely to be of greatest interest in light of rising bond yields and breakevens. The first report of any note is tomorrow’s NFIB small business survey for January and JOLTS report for December. On Wednesday, Daiwa America Chief Economist Mike Moran expects that higher energy prices will help drive the headline CPI to a 0.2%M/M advance in January. However, he expects the subpar economy to have weighed on general prices, and so has penciled in a mere 0.1%M/M lift in the core index – an outcome that would lower annual core inflation from 1.6%Y/Y given that the index had increased 0.2%M/M last January. Wednesday will also see the release of final whole trade data for December and Federal Budget data for January, with Mike expecting the latter to reveal a deficit of $150bn compared with just $32bn a year earlier. The weekly jobless claims report is the only notable economic release on Thursday while the preliminary results of the University of Michigan consumer sentiment survey for February will be released on Friday. Regarding the latter, Mike expects no more than a modest improvement in sentiment to be recorded, with ongoing concerns about the pandemic providing an offset to new highs in the stock market. Aside from the data, investors will also keep an eye on developments in passing some version of President Biden’s proposed fiscal package while a speech on Wednesday by Fed Chair Powell to the Economic Club of New York is the highlight of a light Fed diary.

Monthly sentiment reports the key focus in Australia this week
This week’s limited Australian dataflow will provide an update on business and consumer sentiment, starting tomorrow with the NAB Business Survey for January. Last month firms’ assessment of business conditions improved to the most upbeat level since August 2018, with the employment index surging to its best level since September 2018 – well above average readings that would bode well for the economy should they be sustained again this month. Tomorrow will also bring the release of the weekly ANZ-Roy Morgan consumer confidence index, which last week hit its highest level since November 2019. Meanwhile, the monthly Westpac consumer confidence index – which reached a 9-year high in January – is released on Wednesday, and might register a further improvement given developments in the labour market.

A quiet week ahead in New Zealand too, but inflation expectations worth keeping an eye on
Kiwi markets were closed for a national holiday today and there are only a small number of economic reports scheduled over the remainder of this week. Tomorrow, the RBNZ’s Survey of Expectations for Q4 may attract some attention in light of the sharp pick up in pricing pressure suggested by the latest ANZ Business Outlook Survey. In addition, the Government will release the Budget Policy Statement, setting out the fiscal envelope and spending priorities to be addressed in this year’s Budget (likely to be announced sometime in May). The manufacturing PMI for January is released on Friday and will be of interest in light of the sudden and sharp dip below 50 registered in December, while the REINZ housing report for January might make an appearance late in the week.

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