Japanese IP rebounds strongly in January

Chris Scicluna

Equity markets slump as bond yields skyrocket; mostly hold losses even as UST yields retreat from highs
After yesterday’s sell-off in USTs and US stocks, Asian markets unsurprisingly took fright today, even as UST yields edged lower. Certainly, yesterday’s volatility in USTs was extreme. Early in the day the yield on the 10Y UST continued to grind steadily higher to reach 1.49% just ahead of the release of the result of the latest 7Y auction. But while that auction might have been expected to attract some support given the recent sell-off in markets, instead the issue attracted a record low bid-to-cover and was awarded more than 4bps above where the bond had been trading when bids closed. Not surprisingly, investors took fright, with the 10Y yield briefly spiking to 1.60% and the 5Y spiking to 0.86% (up 24bps from the start of the day). Whilst the moves were soon reversed, markets remained skittish with the 10Y note trading back up above 1.55% for a period before easing to 1.52% as Wall Street closed – still a 14bp advance on the day to levels last seen 12 months earlier. Equity investors were not impressed, with the S&P500 closing down 2.5% and near its session lows, while the Nasdaq lost an even greater 3.5%. Meanwhile, a good dose of risk aversion did wonders for the greenback, which made strong gains against all major counterparts with the exception of the yen.

The Treasury sell-off appears to have halted in Asia but trading has remained volatile with the 10Y UST trading a 1.45% to 1.55% range (it currently sits at 1.48%). Against that background, Asian equity markets recorded heavily losses today. In Japan, where today’s key activity data – discussed further below – were mostly a bit firmer than expected, the TOPIX has closed down 3.2%. In pandemic news, local media reported that the Government would imminently announce the removal of state of emergency conditions in five prefectures (including Osaka and Kyoto) from Monday. In China, where investors are awaiting Sunday’s release of the official PMI reports for February, the CSI300 fell ‘just’ 2.4%. Amongst the other notable losses were a 2.8% decline in the KOSPI, and a decline of more than 3% in the Hang Seng.

Meanwhile, it has been another wild day in the Antipodean bond markets. The 10Y ACGB opened 20bps above yesterday’s closing yield at 1.93%. With UST yields retreating and the RBA buying another A$3bn of ACGBs in an unscheduled further defence of its 3Y yield target, the 10Y bond then unwound all of its losses, only to surrender almost all of the gains in afternoon trade to eventually close at 1.92% – the highest close since April 2019. Similar turmoil was observed in the Kiwi market, even after the RBNZ’s Governor reaffirmed the Bank’s commitment to maintaining its current policy settings until it is confident of achieving a sustained annual inflation rate of 2%. Evidently, investors expect that to occur sooner than the Governor, as the 10Y yield knocked on the door of 2.00% before retreating to 1.89% at the close – up 4bps on the day and also the highest close since April 2019. While a 1bp rise in Japan’s 10Y JGB yield paled by comparison, this still amounts to the highest yield since the BoJ lowered its policy rate to -0.1% back in January 2016. Nevertheless, a little while ago the BoJ confirmed that it has left its March purchase schedule unchanged for all JGB maturities.

Japanese IP rebounds strongly in January, but momentum fading as activity normalises
During a busy day for Japanese data, the key release as far as activity was concerned was the preliminary IP report for January. Starting with the good news, after declining over the previous two months, overall production increased by a seasonally-adjusted 4.2%M/M in January. This outcome was 0.4ppts above the consensus expectation but much in line with what had was suggested by firms’ forecast last month, after allowing for the usual over-optimistic bias. In unadjusted terms, output was still down 5.3%Y/Y in January – at face value a deterioration from the 2.6%Y/Y decline registered in December. However, using the seasonally-adjusted series, a 2.1%Y/Y decline in January represented an improvement on the 4.2%Y/Y decline in December and was the best result since September 2019. As far as the other headline figures are concerned, shipments increased a slightly less emphatic 3.2%M/M in January and so were down an unadjusted 5.1%Y/Y. Inventories fell just 0.2%M/M in January but were still down 10.5%Y/Y. As a result, the inventory ratio fell 6.3%M/M and was down 4.8%Y/Y.

In the detail, whereas production of capital goods had weighed on overall output in December, it was the key driver of the overall rebound in output in January. Total production of capital goods increased 11.4%M/M in January, reducing the annual decline to 5.9%Y/Y (a fall of 3.8%Y/Y excluding transport equipment). Production of business-orientated machinery surged over 15%M/M, while production of ICT equipment increased almost 14%M/M. Production of consumer durable goods increased 2.2%M/M – even with production of autos up just 0.8%M/M – but was nonetheless down 8.9%Y/Y. Production of non-durable consumer goods increased 1.6%M/M but was still down 8.0%Y/Y, while production of construction goods increased 3.2%M/M but was still down 9.3%Y/Y.

As we commented last month, the strong increase in production that was signalled to occur in January was likely influenced by the front-loading of orders ahead of this month’s Lunar New Year holiday in China. This appears to be confirmed by firms’ updated forecasts for production over February and March. While firms forecast production to increase 2.1%M/M in February, as usual this forecast will likely prove too optimistic and so METI estimates a bias-corrected 0.4%M/M decline in output for the month. A much more significant adjustment is forecast in March, with firms’ forecasting output to decline 6.1%M/M. So after increasing 8.8%Q/Q in Q3 and 6.3%Q/Q in Q2, it appears that industrial output will expand by a much weaker 1.0%Q/Q in Q1, likely providing only a partial offset to the reduction in output that seems certain to occur in the service sector as a result of pandemic-driven restrictions on activity. The foreshadowed decline in output would of course also provide a weak base for growth in Q2, but METI continues to assess that “On the whole, production is picking up”. Considering the trends in the other manufacturing indicators – such as recent PMI and Reuters Tankan readings – METI’s assessment still seems fair.

Japanese retail sales fall less than feared in January; housing starts rebound disappoints
In addition to news on industrial activity, today Japan also released data on retail spending and construction activity for January. Total retail sales declined 0.5%M/M – considerably less than the market had feared – and so was down 2.4%Y/Y. As indicated in yesterday’s department store figures, demand for general merchandise and apparel/accessories was severely curtailed by upswing in coronavirus cases, with both recording double-digits declines in spending during the month and so both down more than 17%Y/Y. But while spending on household machines also fell a further 3.1%M/M – continuing to correct lower after an upswing in November – spending on autos increased 5.1%M/M and so was up more than 6%Y/Y. Attention will now turn to the next release of the BoJ Consumption Activity Index on 5 March, which will provide a more comprehensive assessment of consumer spending during the month and one that aligns much more closely to the measure in the national accounts.

In construction news, after declining more than 4%M/M in December to the lowest level since October 2011, housing starts rebounded a disappointing 2.2%M/M in January. As a result, starts were down a greater-than-expected 3.1%Y/Y. In somewhat better news, Japan’s largest construction companies reported that construction orders increased 14.1%Y/Y in January with domestic orders rising more than 21%Y/Y. However, the majority of that growth was due to a more than 66%Y/Y leap in public sector orders. Domestic private sector orders increased a comparatively subdued 4.8%Y/Y, with a 16.8%Y/Y increase in orders from the manufacturing sector contributing about half of that overall growth.

Tokyo CPI points to no upward drift in core prices in February
While the suspension of the Government’s ‘Go-to-Travel’ subsidy programme had led to a pick-up in CPI inflation in January, today’s advance report for the Tokyo area for February pointed to the resumption of normal service with at best fractional growth in prices amongst the key aggregates, and no growth in the aggregates that the BoJ cares most about. The headline CPI index increased a seasonally-adjusted 0.1%M/M in February, which given base effects was sufficient to cause annual inflation to increase 0.2ppts to -0.3%Y/Y (0.1ppt firmer than the consensus estimate in Bloomberg’s survey). After rebounding sharply in January, prices for fresh food declined 1.1%M/M – a smaller decrease than usually seen in February – and so were up 0.1%Y/Y, rather than down 1.9%Y/Y as was the case previously. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – was unchanged during the month, although as with the headline measure annual inflation still increased 0.2ppts to -0.3%Y/Y.

Elsewhere in the CPI, higher prices for fuel drove an overall 0.7%M/M lift in energy prices – the first increase since June last year – causing the annual decline to moderate to 9.8%Y/Y. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – was unchanged during the month with annual inflation also steady at a trifling 0.2%Y/Y, in line with market expectations. The narrower measure of core prices used overseas – which excludes all food and energy – was also unchanged in the month, leaving annual inflation steady at 0.3%Y/Y. Goods prices fell 0.8%Y/Y in February, although industrial product prices increased 0.3%Y/Y despite lower fuel prices. Sadly, services prices declined 0.1%M/M in February – not helped by a decline in hotel charges – and so were up just 0.1%Y/Y.

French inflation falls less than expected in February due to higher energy prices
The first February inflation figures from the euro area, released this morning in France, surprised on the upside. Having jumped 0.8ppt in January to a 10-month high of 0.8%Y/Y, the flash estimate of inflation on the EU-harmonised HICP measure slipped back only to 0.7%Y/Y. A steeper drop had been expected, not least due to the two-week extension to the winter sales, which indeed led to a drop in inflation of manufactured goods of 1.3ppts to -0.5%Y/Y on the national measure. Services inflation also eased back, down 0.1ppt to 0.7%Y/Y. But energy inflation leapt more than 4ppts to -1.7%Y/Y. And, with oil and other commodity prices continuing to rise with significant base effects set to kick in, French inflation is set to move significantly higher over the near term.

The equivalent flash February Spanish measure due later this morning is expected to edge higher by 0.1ppt to 0.5%Y/Y. And the UK inflation outlook will be discussed later this morning by the currently bullish Chief Economist Haldane.

USTs remain the focus today, but also plenty of US economic data ahead
While investors will likely be preoccupied with monitoring and analysing developments in the Treasury market, the US economic diary is once again a busy one today. Most interest will likely centre on the personal income and spending report for January. Daiwa America Chief Economist Mike Moran expects that personal income will have increased a hefty 8.0%M/M in January, largely due to the arrival of stimulus payments, while last week’s bumper retail sales report leads him to expect a solid 1.3%M/M increase in personal spending during the month. While Mike expects the core PCE deflator to have increased 0.2%M/M, this will do no more than leave the annual inflation rate steady at 1.5%Y/Y – a rate that is hardly likely to cause the Fed to abandon its current policy stance. Today will also bring the advance merchandise trade report for January, which Mike expects will point to a $2.2bn narrowing of the deficit to $81.0bn. The Chicago PMI for February, advance wholesale and retail inventory readings for January and final results of the University of Michigan consumer sentiment survey for February are also due for release today.

Australian private sector credit growth subdued in January as personal and business lending remains soft
The only economic report in Australia today was the RBA’s release of the money and credit aggregates for January. After lifting 0.3%M/M in December – the most since the pandemic began – private sector credit grew a lower-than-expected 0.2%M/M in January, causing annual growth to edge back down to 1.7%Y/Y. Housing-related credit grew 0.4%M/M, led by a robust 0.5%M/M increase in loans to owner-occupiers (lending to investors increased just 0.1%M/M for a sixth consecutive month). Other forms of consumer credit remained exceptionally weak, however, with personal loans declining a further 0.9%M/M in January and so down 12.4%Y/Y. Meanwhile, after rising last month for the first time since April, business lending declined 0.1%M/M in January, causing annual growth to slow to 0.5%Y/Y – the least since October 2011. The weakness in business lending doubtless reflects low demand for investment-related funding, notwithstanding the slight rebound in capex reported yesterday for Q4.

Kiwi consumer confidence cools slightly in February; merchandise trade deficit widens in January
An eventful week in New Zealand concluded with an update on consumer sentiment and the merchandise trade report for January. Despite parts of the country facing a period of temporary pandemic-related restrictions over the past month, the ANZ consumer confidence index fell just 0.6%M/M from the previous post-pandemic high. However, at 113.1 the index remains 9pts below where it stood a year earlier and about 6pts below the historical average.

Meanwhile, Statistics New Zealand reported a trade deficit of NZ$0.6bn in January, which was NZ$0.2bn wider than in the same month last year and the largest deficit in 14 months once seasonal factors are taken into account. Exports fell 10.4%Y/Y, weighed down by weakness in dairy and meat products. Imports fell 5.0%Y/Y, with the decline more than explained by weakness in imports of petroleum. Imports of plant and machinery increased 5.2%Y/Y while imports of consumption goods increased 5.9%Y/Y – solid growth rates considering the downward influence on prices coming from an appreciating Kiwi dollar.

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