Equity markets mixed as bond market repricing continues to weigh
This week’s further sell-off in the USTs continued to weigh on Wall Street on Thursday. The S&P500 had been down as much as 1.2% in morning trade as the 10Y yield moved back above 1.31%. However, the market eventually closed with a modest loss of 0.4% as USTs belatedly reacted to some disappointing housing starts and jobless claims data, sending the 10Y yield back down to 1.28%. In the FX market, the US dollar lost ground, especially against the euro and sterling, with cable reaching its highest level since April 2018.
US equity futures are little changed from the close, however, leaving Asian markets to struggle for direction. After being down most than 1% in early trade, China’s CSI300 clawed its way back to be up 0.2%, while South Korea’s KOSPI unwound early losses to close up 0.7%. However, in Japan even the best manufacturing PMI result since December 2018 was insufficient to prevent a 0.7% decline in the TOPIX, as the services PMI weakened a touch further in February (more on this below). In Australia, the ASX200 fell 1.3% as the January retail sales report disappointed, the February PMIs weakened and crude oil fell almost 3% despite the impact of poor weather on US production.
Bond yields generally increased in the region reflecting the move up in UST yields from the intraday lows seen at the end of yesterday’s Asian session, especially with the 10Y yield moving back above 1.30% in today’s Asian trade. Indeed, even Japan’s JGB market was weaker with the 10Y yield touching 0.10% for the first time since November 2018 as Japanese inflation took a predictable step up reflecting the halting of the government’s hospitality subsidies.
More good news in Japan’s manufacturing PMI in February; services struggling, but not unexpectedly
As had seemed likely, today’s Japanese flash PMIs for February were once again a mixed bag, but on balance pointed to a degree of resilience in the economy despite the difficulties created by the pandemic. On a very positive note, the headline manufacturing increased 0.8pts to 50.6, marking the highest reading since December 2018. This follows news midweek of very solid export growth in January – just over 3%M/M in real terms according to the BoJ’s measures – and the first positive reading on the Reuters Tankan manufacturing DI since July 2019. In the detail, the output index increased an especially welcome 2.1pts to 51.3 and the new orders index increased an encouraging 0.9pts to 51.0 (also the highest reading since December 2018). Most interestingly, the new export orders index jumped 3.2pts to 51.4, marking the highest reading since March 2018. The employment index increased 0.6pt to 49.3, but remains below where it ended last year. Despite the clear improvement in activity, the pricing indicators were mixed. While the input price index increased 1.1pts to 55.0 – the highest reading in almost two years – the output price index fell 0.7pts to 50.4.
Not surprisingly, with this month’s survey more fully capturing the impact of local restrictions on some activity that were in place in as many as 11 prefectures, the news from the service sector was softer than last month, but not materially so. The headline services PMI – the business activity index – fell just 0.3pts to a 6-month low of 45.8. Similarly, the new orders index fell 0.5pts to a 9-month low of 44.3. However, perhaps indicating that firms can see light at the end of the tunnel, the business expectations index increased 1.2pts to a 3-month high of 54.7 and the employment index increased 0.9pts to a 1-year high of 50.8. Pricing pressures appear to have eased over the past month, however, with the input prices index falling 0.7pts to a 3-month low of 49.9 and the output prices index falling 0.4pts to a 6-month low of 48.4.
Combining results from both sectors, the composite PMI output index picked up 0.5pts to 47.6 in February – still 0.6pts below the average through Q4 – while the composite PMI new orders index edged down 0.1pts to a 5-month low of 46.5. On balance, a contraction of GDP still appears to be in the offing during the current quarter (at present, our colleagues in Tokyo estimate a contraction of around 1½%Q/Q, although a particularly strong January IP report at the end of next week would help to lean further against weakness in service sector activity).
Japanese CPI inflation picks up as travel subsidy impact unwinds
Turning to inflation, as signalled last month with the release of the advance CPI for the Tokyo area, the national CPI for January was dominated by the suspension of the Government’s ‘Go-to-Travel’ subsidy programme, which had since August made the inflation picture look even weaker than it would otherwise have been. Indeed, this suspension resulted in a more 40%M/M rebound in measured hotel charges in January to the highest level since February 2020. Given this rebound, hotel charges were down just 2.1%Y/Y in January, compared with the 33.5%Y/Y decline reported in December. This alone contributed 0.4ppts to an increase in annual headline inflation during January and slightly more to the core inflation measures given that the relative weighting of hotel charges increases as items are removed from the headline CPI.
The headline CPI index reported a seasonally-adjusted 0.6%M/M increase in average prices so that annual inflation increased 0.6ppts to a 3-month high of -0.6%Y/Y – just 0.1ppts firmer than the median estimate in Bloomberg’s survey of analysts. In addition to the rebound in hotel charges, a 6.2%M/M rebound in prices for fresh food reduced the annual decline to just 0.3%Y/Y from 4.6%Y/Y previously, thus accounting for the remaining 0.2ppt increase in annual headline inflation during the month. The BoJ’s forecast measure of core inflation (which excludes fresh food) increased a seasonally-adjusted 0.5%M/M, raising annual inflation by 0.4ppts to a 4-month high of -0.6%Y/Y – a result that was in line with market expectations.
Elsewhere in the CPI, energy prices increased 0.2%M/M – the first increase since August – but were nonetheless down 8.6%Y/Y. The BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased a seasonally-adjusted 0.6%M/M and so annual inflation for this measure increased 0.5ppts to 0.1%Y/Y – the first positive reading since July last year. The narrower measure of core prices used overseas – which excludes all food and energy – increased 0.7%M/M, raising annual inflation by 0.7ppts to 0.2%Y/Y. These readings are consistent with the BoJ’s assessment that the underlying inflation pulse is weakly positive (but not by much). Thanks to higher food prices, goods prices increased just 0.3%M/M in January but remained down 1.2%Y/Y, not least due to an 8.4%Y/Y decline in prices for petroleum prices. Prices for non-energy industrial goods increased 0.7%Y/Y, which was unchanged from December. Services prices increased 0.7%M/M – driven by the rebound in hotel charges – and so were unchanged from a year earlier. The lack of inflation in the services sector – even prior to the pandemic – remains the largest obstacle to the BoJ even coming close to meeting its inflation target.
UK retail sales plunge in January; euro area and UK February flash PMIs due shortly
Tighter pandemic containment measures took a much larger toll than expected on UK retail sales last month, with the volume of total sales down a whopping 8.2%M/M compared to the Bloomberg consensus of a drop of 3.0%M/M. That left sales down 5.9%Y/Y and 5.5% below the pre-pandemic level in February 2020. And it represented the second sharpest monthly drop on the series, albeit one that was far smaller than the plunge of 18.0%M/M last April during the first wave of Covid-19. Within the detail, all main sub-sectors registered a drop in sales, with the exception of and food stores (+1.4%M/M) and non-store retailers (+3.7%M/M, with the proportion spent online up to a record 35.2%). Sales in clothes stores fell by more than one third to the lowest level since May, about 55% of the level before the pandemic last February. But while sales at household goods stores fell by about one fifth they were down only about one tenth from the pre-Covid 19 level.
February’s flash PMIs for the euro area and UK are due shortly. These are likely to show very little change from January’s indices, which pointed to expansion in manufacturing (with the respective euro area output PMI at 54. 6 and UK output PMI at 50.8) but contraction in services (the respective euro area PMI at 45.4 and UK PMI at 39.5) and overall GDP (euro area composite PMI at 47.8 and UK composite PMI at 41.2).
More housing data and flash PMIs ahead in the US today
This week’s US economic diary conclude with the release of the little-followed preliminary Markit PMI readings for February and news on existing home sales February. As far as the latter is concerned, Daiwa America Chief Economist Mike Moran expects home sales to have declined by around 5%M/M, thus catching up with the softening seen in pending home sales over recent months.
Aussie retail sales report only modest rebound in January, while PMIs soften in February
As far as data are concerned, the focus in Australia today was on the preliminary retail sales report for January. The ABS reported that total retail spending increased 0.6%M/M – a smaller rebound than the market had anticipated following a 4.1%M/M decline in December. Even with that modest improvement, sales were up a substantial 10.7%Y/Y. However, the level of spending in January was just 0.1%M/M above the average level through Q4.
While that constitutes a soft start to the current quarter, the ABS noted that temporary restrictions in the state of Queensland had weighed on the nationwide result in January (sales fell 1.5%M/M in Queensland, but increased in every other state and territory). Therefore, a stronger result might reasonably be expected when the data for February are released, especially on the back of yesterday’s news of another solid gain in employment during January – now less than 70k below pre-pandemic levels – and a consequent further decline in the jobless rate.
In other Aussie news, the flash Markit PMIs – which, like in the US, tend to play second fiddle to more established surveys, pointed to a softening of growth momentum in February. The composite PMI output index declined 1.5pts to a 4-month low of 54.4 in January – still above the average recorded since this indicator began in 2016, even excluding the impact of the extreme lows recorded during the pandemic. This owed both to developments in the manufacturing and services sector, with the manufacturing PMI falling 0.6pts to 56.6 (although the output index fell 1.5pts to 55.9) and the services PMI falling 1.5pts to 54.1. Importantly, within the services PMI the employment index increased a substantial 2.5pts to 54.4 – by a whisker, the highest reading since the survey began – pointing to a degree of underlying optimism about the future. Despite the softening in the output index, the composite output prices index edged up 0.2pts to 53.5 in February, marking the highest reading since December 2017 – not much reassurance for the RBA considering that underlying CPI inflation has been below the target band since early 2016.
Kiwi producer prices remained subdued in Q4
Today Statistics New Zealand released its suite of quarterly business price indicators, which continued to point to very subdued inflation in Q4. The PPI input prices index was unchanged in the quarter but still down 0.6%Y/Y, whereas the output prices index increased 0.4%Q/Q but was unchanged from a year earlier. By comparison, labour costs increased 1.6%Y/Y, capital goods prices increased 1.9%Y/Y and the CPI increased 1.4%Y/Y.