Japan's GDP rises more than expected in Q420

Chris Scicluna

US equities and bond yields hit new high; similar trends in Asia today during holiday-impacted trade
While the preliminary findings of the University of Michigan’s February survey pointed to the weakest consumer confidence in six months, Wall Street still ended last week on a positive note as investors instead again focused on the proposed additional fiscal stimulus that should provide some cheer over coming months. At the close both the S&P500 and Nasdaq had advanced 0.5% to new record highs, even as a sell-off in the Treasury market lifted the 10Y yield to 1.21% and the 30Y yield back above 2.00%. A rally in the US dollar proved short-lived, with the greenback ending the session broadly unchanged.

While US markets are closed today for the Presidents’ Day holiday, while markets also remained closed today in mainland China, Hong Kong and Taiwan, markets elsewhere have been eventful. In Japan the TOPIX has begun the week with a 1.0% advance to a new high – with the Nikkei crossing 30,000 for the first time since 1990 – and JGB yields have inched higher. Aside from the positive US backdrop, local sentiment was boosted by news that Japan’s GDP growth had exceeded expectations for a second consecutive quarter, with the upside surprise in Q4 led by an encouraging rebound in business investment. Solid gains were also achieved in almost all other markets that have been open for trade, especially in South Korea where the KOSPI advanced 1.5%. Thai stocks also increased more than 1%, with the country also reporting stronger-than-expected GDP growth in Q4 (1.3%Q/Q).

In the Antipodes, after losing ground on Friday following the snap lockdown announced in the state of Victoria, Australia’s ASX200 rebounded 0.9% today. The market was supported by some better-than-expected local earnings reports and news of just one further case of community coronavirus over the past 24 hours, raising the likelihood that the lockdown will be lifted as scheduled on Thursday. That good news also saw the Aussie 10Y bond yield jump 10bps to a new high of 1.32% as investors reacted more fully to the sell-off in USTs over the past two sessions. In New Zealand, the weekend discovery of three new community coronavirus cases (UK-variant) has seen restrictions placed on activity for at least three days, especially in the Auckland region where all non-essential public venues are required to close. This development led to a decline in Kiwi stocks today but the 10Y bond yield still rose a substantial 7bps due to the large sell-off in USTs.

The UST sell-off has also followed through to Europe this morning. Once again, however, BTPs are outperforming Bunds and OATs, as investors take comfort from the swearing-in of Mario Draghi as Italian PM, as well as the members of his cabinet, on the weekend. With the cabinet incorporating a mix of technocrats (such as the Banca d’Italia’s Daniele Franco as Finance Minister) and notable politicians from the parties with the largest representation in parliament (including Five Star leader Luigi Di Maio, who retains the Foreign Minister position), the new administration should comfortably survive its parliamentary confidence votes this week.

Japanese activity continued to recover in Q4; rebound in business capex leads upside surprise
The focus for investors in Japan today was on the preliminary national accounts for Q4, which pointed to a further recovery in economic activity. According to the Cabinet Office, overall activity increased a further 3.0%Q/Q (12.7%AR) during the quarter – a welcome 0.6ppts above Bloomberg’s consensus estimate – following an initial and unrevised 5.3%Q/Q rebound in Q3. As a result, with output having fallen 1.8%Q/Q in Q419 in the wake of the consumption tax hike, the annual decline in output moderated significantly to 1.2%Y/Y compared with 5.8%Y/Y in Q3. Allowing for the low base effect associated with the consumption tax hike, Japan’s rebound from the economic impact of the first wave of coronavirus lockdowns appears broadly comparable with that seen in the US and South Korea (and likely Australia once Q4 data are published there), but substantially stronger than that seen in the euro area and the UK.

In the detail, as expected, net exports continued to unwind the sharp subtraction from growth recorded in the first half of last year, contributing a further 1.0ppt to GDP growth in Q4 – just 0.1ppt above the consensus estimate. Overall exports increased 11.1%Q/Q but nonetheless remained down 6.2%Y/Y. Almost all of that annual decline reflects weakness in exports of services, which remained down 27%Y/Y despite recording a 3.6%Q/Q increase in Q4. Of course, that result owed in large part to the ongoing slump in spending by overseas visitors, which in direct terms remained down almost 89%Y/Y. By contrast, exports of goods increased 12.8%Q/Q and so were down just 0.6%Y/Y in Q4.

Private consumption also provided a positive contribution to growth in Q4, increasing 2.2%Q/Q – 0.2ppts above the consensus estimate – following an unrevised 5.1%Q/Q rebound in Q3. The largest contributor was a further 3.0%Q/Q rebound in spending on services, which nonetheless remained down 5.7%Y/Y. Spending on durable goods jumped 9.2%Q/Q and was up 10%Y/Y – the annual outcome owing mostly to low base effect associated with the slump in spending a year earlier following the consumption tax hike. It is worth noting that real compensation of employees increased a meagre 0.3%Q/Q in Q4 and so remained down 2.1%Y/Y – not significantly different to the 2.4%Y/Y decline in real consumer spending. At face value, this suggests that the household savings rate continued to normalize in Q4 from the very high levels reached in Q220.

The largest upside surprise in today’s preliminary report, which accounted for about half of that outperformance in GDP growth, concerned business investment. After declining in both of the preceding quarters, business investment is said to have rebounded 4.5%Q/Q in Q4 – almost twice the consensus estimate. Moreover, given that a decline of the same magnitude was recorded in the wake of the consumption tax hike, the annual decline in business investment moderated sharply to 2.8%Y/Y from 10.8%Y/Y in Q3 (spending for the calendar year was still down 6%Y/Y, however). While this is an encouraging outcome, and one clearly consistent with the marked pickup in machine orders at the beginning of the quarter, as usual we note that these figures are subject to the potential for significant revision once the Cabinet Office includes more accurate information from the MoF’s corporate survey (to be released 1 March).

As far as the other key expenditures are concerned, after slumping 5.7%Q/Q in Q3, residential investment eked out a 0.1%Q/Q increase in Q4 but was still down almost 9%Y/Y. Fiscal stimulus continued to be evident with government consumption spending increasing a further 2.0%Q/Q, lifting annual growth to 4.8%Y/Y – a rate not exceeded in figures dating back to 1995. Moreover, government investment increased 1.3%Q/Q – a sixth-consecutive increase – lifting annual growth to 4.7%Y/Y. Combined, direct government spending contributed 0.5ppts to quarterly growth in Q4 and 1.2ppts to annual growth. Private inventories are estimated to have subtracted 0.4ppts from growth in Q4, but this figure could be revised following the receipt of information from the aforementioned MoF corporate survey.

Finally, unsurprisingly, the deflators continued to point to a very weak inflation pulse. The private consumption deflator decreased 0.4%Q/Q in Q4 and so was down 0.6%Y/Y. Moreover, with deflators declining across all other expenditures too, the overall domestic demand deflator also fell 0.4%Q/Q and 0.6%Y/Y. The overall nominal GDP deflator fell 0.5%Q/Q but was still up 0.2%Y/Y – a result that was a little weaker than market expectations. As a result, nominal GDP increased 2.5%Q/Q in Q4 but was still an annualized ¥5trn lower than a year earlier and ¥12trn lower than the peak seen just ahead of the consumption tax hike.

In other Japanese news, METI released its final IP report for December, which pointed to a smaller decline in output than first estimated. Total production is now estimated to have declined 1.0%M/M – 0.6ppts less than estimated previously – reducing the annual decline to 2.6%Y/Y and lifting the increase in production during Q4 by 0.2ppts to 6.3%Q/Q. The originally-reported decline in shipments was revised down by a similar 0.5ppts to 1.1%M/M, reducing the annual contraction to 2.9%Y/Y. Therefore, inventories grew an unrevised 1.1%M/M in December and thus were still down 8.4%Y/Y. The new content in today’s release concerned capacity use, which in aggregate increased 0.8%M/M in December but was little changed from a year earlier (production capacity declined 0.9%Y/Y).

Data on merchandise trade, machine orders, sentiment and inflation still ahead in Japan this week
With the Q4 GDP report now out of the way, there remains a number of important economic reports ahead this week that will cast light on whether this year’s pandemic-induced restrictions on activity will cause the economy to take a backward step in the current quarter. Following tomorrow’s Tertiary Industry Activity Index for December – which is likely to confirm that activity in the services sector was already slipping at the end of last quarter – the focus on Wednesday will be on the merchandise trade report for January. Bloomberg’s survey indicates that analysts expect the adjusted trade surplus to have changed little from December, with annual growth in exports and imports expected to have improved at a similar pace. Also on Wednesday, there will be significant interest in the machine orders report for December, especially with core orders having shown surprising resilience last month following a sharp improvement in October. This release will also include firms’ forecast for how orders are likely to evolve in the current quarter.

The Reuters Tankan for February is also released on Wednesday, while January department store sales and overseas visitor figures may also make an appearance around the middle of the week. On Friday, most attention will probably centre on the preliminary PMI readings for February. The services index will likely continue to be weighed down by restrictions on activity, but in light of recent softer PMI readings in China it will be interesting to see whether the manufacturing index continues to display the resilience seen last month. Finally, as with the advance report from the Tokyo area, the national CPI for January will be dominated by the suspension of the Go-To-Travel campaign, which alone should lift headline inflation by 0.5ppts to -0.7%Y/Y and move the BoJ’s preferred core measure (CPI ex fresh food and energy) out of deflation.

Inflation and retail spending data to be the focus in the UK this week
The UK data highlights of the coming week will be the latest inflation figures on Wednesday and official retail sales figures on Friday. The intensification of the pandemic and tightening of containment measures at the start of the year might be expected to add some downwards pressure to inflation. However, a significant share of prices in the basket will need to be imputed. A reweighting of the components in the inflation basket might also have an impact, as could recent sterling strengthening. But the extra costs faced by businesses due to Brexit are likely to provide an upwards impulse, particularly to prices of imported items and goods containing a large share of imported components. On balance, we expect inflation to continue to move broadly sideways in Q1 and the consensus for January is for CPI to fall 0.1ppt to 0.5%Y/Y. The significant upside surprises across the euro area, however, suggest that this week’s

Friday’s retail sales data will reveal how the sector is fairing in England’s third lockdown. The past week’s retail survey data has brought somewhat contrasting impressions of the extent of the hit to consumer spending at the start of the year, with expenditure on the high street and fuel reportedly lower last month as people stayed home. In contrast, spending on food and durable goods for the home (including IT equipment to support home-schooling) via online retailing was reported to have risen last month. Excluding fuel, retail sales are forecast to fall 1% on the month in January, albeit leaving them 4.7% higher compared to their pre-pandemic level. Friday’s consumer confidence survey from the GfK will offer some insight into spending intentions going forward. And the preliminary manufacturing and services sector PMIs for February, also to be published that day, will, as in the euro area, likely be little changed from January. In addition, BoE Deputy Governor Ramsden will be speaking on Wednesday about the BoE’s QE policy. The comments might be of interest in light of the MPC’s decision this month to review its current tightening strategy, whereby the BoE would not reduce its asset holdings until Bank Rate had risen to 1.5%.

Key sentiment indicators and the ECB’s meeting account lie ahead in the euro area this week
The most notable new euro area data of the week will come on Friday in the shape of February’s flash PMIs. These are likely to show very little change from January’s indices, which pointed to expansion in manufacturing (with the respective euro area PMI at 54.8) but contraction in services (the respective euro area PMI at45.4) and overall GDP (euro area composite PMI at 47.8). Other February survey indicators due include the German ZEW investor sentiment survey on Tuesday, and the European Commission’s preliminary consumer confidence survey on Thursday. But more noteworthy might be the publication of the account of the ECB’s January policy meeting, when Lagarde’s insistence that the ECB need not buy the full PEPP envelope and was also not targeting yields prompted a sell-off of bonds.

The week will kick off today with euro area industrial production data for December. Among the largest member states, production (excluding construction) rose in Germany and Spain and slid only slightly in Italy. Nevertheless, due to a drop of roughly one quarter in Ireland (where production had jumped more than 50% in November), and a larger-than-expected drop in French manufacturing output, the euro area figure will fall roughly ½%M/M in December to be down about 1.3% from February’s pre-pandemic level. But that will still likely leave production up about 4%Q/Q in Q4, confirming that the manufacturing sector provided helpful support to offset some of the impact of renewed weakness in services.

US closed today, but plenty of data ahead this week with the retail sales report of particular note
Following today’s Presidents’ Day holiday, this week’s US data flow gets underway tomorrow with the release of the New York Fed’s manufacturing survey for February. By far the busiest day this week is Wednesday, which will bring the release of the retail sales, IP and PPI reports for January, together with data on business inventories for December and the NAHB housing index for February. Of those, most interest will centre on the retail sales report, especially in light of the consecutive declines reported of the previous three months. Daiwa America Chief Economist Mike Moran expects that the latest round of rebate checks will help to drive a 1.0%M/M lift in ex auto sales, while headline spending will also be boosted by a lift in auto sales. Mike expects only a modest 0.3%M/M lift in IP, which should benefit from the longer workweek indicated in the latest payrolls report.

In contrast to last week’s very soft CPI report, higher energy prices should drive a solid lift in the headline PPI, but annual inflation for both the headline and core measures should remain very subdued at around 1%Y/Y. On Thursday, Mike expects around a 4%M/M dip in housing starts in January, consistent with the softening observed in other housing market indicators that have come off last year’s highs. The Philadelphia Fed’s manufacturing survey for February and import price data for January will also be released on Thursday. On Friday, the week will conclude with the release of the little-followed preliminary Markit PMI readings for February and news on existing home sales February. As far as Fed events are concerned, there are a few speeches scattered through the week and the minutes from the January FOMC meeting will be released on Wednesday.

Labour market and retail spending data the focus in Australia this week
There were no economic reports of note in Australia today. Tomorrow will bring the release of the minutes from this month’s RBA Board meeting, but these are unlikely to add anything new to the Bank’s already considerable post-meeting communication. The first important economic report this week is Thursday’s Labour Force report for January. With labour market indicators remaining positive, Bloomberg’s survey points to a further 30k lift in employment and a 0.1ppt decline in the unemployment rate to 6.5% – a welcome development, if confirmed, but one that would still leave the unemployment rate about 2ppts above the rate that is likely to be required to drive a notable uplift in inflation. On Friday, most interest will centre on the preliminary retail sales report for January, which should point to a solid start to the New Year given recent developments in confidence and the labour market. The preliminary Markit PMI readings for February will also be released on Friday, but as usual will likely attract little market attention.

Kiwi services PMI remains below 50 in January; housing and PPI data ahead this week
In contrast to last week’s vigorous rebound in the manufacturing PMI, the BNZ-Business NZ services PMI fell a disappointing 1.2pts to 47.9 in January, thus remaining below 50 for a third consecutive month. In the detail, the activity/sales index fell 4.6pts to 46.4 while the employment index fell 5.9pts to 46.9. Ordinarily, some solace might be taken from a 2.8pt lift in the new orders index to a 3-month high of 53.7. However, whether this translates into a higher overall PMI reading next month will depend on whether new pandemic-induced restrictions on activity – which took effect from midnight Sunday and which will last for at least three days – are later extended in duration and/or breadth.

The remainder of this week’s Kiwi diary is unlikely to attract much market attention. The REINZ housing report for January will likely remain very robust as buyers rushed to beat the re-imposition of LVR restrictions. The PPI indices for Q4 will be released on Friday.

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