BoJ consumption activity index points to sharp decline in real spending in January

Chris Scicluna

Selling pressure continues in bond markets as Powell’s words fail to satisfy nervous investors; BoJ’s Kuroda helps calm Asian markets, however
At face value, the headlines from Fed Chair Powell’s WSJ Q&A yesterday appeared dovish and very similar to the comments made by Governor Brainard earlier in the week. In particular, Powell noted that the rise in bond yields “was notable and caught my attention” and added “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.” And as in previous testimony to Congress, he emphasised that the Fed would be patient in withdrawing stimulus given that “We’re still a long way from our goals”.

Whereas such words were sufficient briefly to soothe investors’ worries last week, however, this was not the case yesterday. With investors possibly looking for a clear hint that, at least for now, bond yields had reached the peak of the Fed’s tolerance, yields immediately begun moving higher. So, after oscillating around breakeven earlier in the session, the S&P500 eventually closed down 1.3% – it had been down 2.5% at one point – with the 10Y UST yield rising 6bps to 1.54%. As on Wednesday, growth stocks were harder hit, and so the Nasdaq closed down a somewhat larger 2.1%.

Since the close, UST yields have lifted a further 2bps to almost 1.56% and so US equity futures have edged lower. Meanwhile, renewed risk aversion – which saw the VIX close above 28 – gave the greenback a lift against its major counterparts. While that risk aversion would ordinarily have benefitted the yen too, the growing interest rate gap between Japan and elsewhere seemingly prevented the yen from attracting its usual bid ($/¥ testing 108 for the first time since early July).

Against that background, unsurprisingly, on the open, bond and equity markets in the Asia-Pacific region also faced significant additional selling pressure today. At the 10Y tenor, bond yields increased by around 10bps or more in Malaysia, the Philippines and Indonesia. In that context, Antipodean markets outperformed, with Aussie bond yields rising just 6bps and Kiwi yields rising 8bps. By contrast, in Japan the 10Y JGB yield fell 5bps to under 0.09% – with the 30Y bond rallying more than 10bps to 0.61% – following comments made by BoJ Governor Kuroda’s comments in Japan’s parliament. Specifically, in contrast to what many commentators had thought to be a possible outcome of the Bank’s policy review, Kuroda said that it was neither necessary nor appropriate to widen the current ±0.20% range through which the 10Y JGB is allowed to trade. But as a guide to what little new may be announced later this month, Kuroda said that increased flexibility in ETF purchases was appropriate.

Turning to equity markets, similar to the previous day, the TOPIX appeared to be on track for a 1% loss today. However, following Kuroda’s comments – and with Chinese stocks rallying too – the TOPIX erased those gains to close with an unlikely 0.6% gain. The only Japanese economic data was the BoJ Consumption Activity Index, which unsurprisingly suggested that rising coronavirus cases and associated restrictions on activity had caused consumer spending to fall sharply in January (more on this below). In China, the CSI300 was down as much as 2% in early trade – taking it into 10% correction territory – but pared those losses to close little changed. Premier Li Keqiang conservatively forecast GDP growth of over 6% and no sharp changes in macroeconomic policy settings when he delivered the Government’s Work Report on the first day of the National People’s Congress (more on this below too).

Japanese consumer spending falls sharply in January, presaging decline in Q1
Today brought the release of the BoJ Consumption Activity Index for January, providing the first reliable indication of how private consumption – as defined in the national accounts – had begun the year. Sadly, but understandably in light of the restrictions imposed on activity in around half of the country, the BoJ’s data pointed to a sizeable decline in spending during the month. Led by a 4.0%M/M decline in expenditure on services, overall real spending fell 2.9%M/M, marking the worst month since April (albeit nowhere near as bad as the near 15%M/M slump seen then). While this followed an upward revision to December – which now reports an increase in spending of 0.3%M/M – deeper revisions meant that the previously-reported 2.7%Q/Q lift in Q4 remained intact. Aside from cutting back on spending on services – where spending is now down almost 15%Y/Y – consumers also reduced spending on non-durable goods, by 2.8%Q/Q. The winner from the pandemic continues to be the durable goods sector, with the stay-at-home economy boosting such spending by 1.3%M/M and over 13%Y/Y.

Looking ahead to prospects for the full quarter, given today’s result, real spending in January is sitting 2.5% below the average level through Q4. And with restrictions on activity likely to have taken an even greater toll in February, and now continuing for the majority of March in the Tokyo area, a further pull-back in consumer spending seems more likely than not. So today’s figures certainly appear consistent with the estimates made by our colleagues in Tokyo, who expect that private consumption will contract 3.5%Q/Q in Q1.

China’s NPC kicks off with the government setting a growth target of “over 6%” for 2021
The focus in China today was on the beginning of the National People’s Congress (NPC), at which Premier Li Keqiang delivered the Government’s Work Report for 2021. Of particular note, the Government set a conservative GDP growth target of “over 6%” for this year (some commentators had expected that the Government would refrain from setting a target at all). Actual GDP growth was 6% in 2019, before the pandemic caused growth to fall to 2.3% last year, and so the Government might reasonably hope for growth well above 6% this year (indeed, Bloomberg’s survey suggests that analysts on average expect growth to surpass 8%). That the target has been set so conservatively might allow the Government to “devote full energy to promoting reform, innovation, and high-quality development” as it aims to do, as opposed to feeling compelled to deliver a higher rate of growth at any cost.

Meanwhile, the Government is targeting the creation of 11 million new jobs and a surveyed unemployment rate of “around 5.5%” (last at 5.2%). As previously, the target for CPI inflation is “about 3%” (last at just -0.3%Y/Y). To achieve that outlook, the Government is proposing that monetary policy remain “prudent” and fiscal policy “proactive” with no sharp changes in macroeconomic policy direction. According to the Government, the macro-leverage ratio will be kept “basically stable” and the general government deficit is planned to narrow just slightly to 3.2% of GDP this year, from 3.6% of GDP last year. Issuance of special local government bonds will be fractionally lower than last year. The Government’s green targets include a “continued reduction” in the discharge of pollutants and a more definitive 3% decline in energy consumption per unit of GDP.

The NPC will continue over coming days with attention turning to the approval of the 14th Five-Year Plan (for 2021-2025) that was drafted back in November, which focuses on further modernising China’s economy and promoting green development. Over the weekend, China will also release its first international trade data for this year, covering the January/February period. Needless to say, given the impact of the pandemic on China at the very beginning of last year, annual comparisons of exports and imports will be flattering, complicating any assessment of this data.

German factory orders firmer than expected at the start of the year, but turnover data points to drop in IP
While the drop in December was a little larger than previously thought at 2.2%M/M, German new factory orders started 2021 with a stronger-than-expected gain of 1.4%M/M to be up 2.5%Y/Y and 3.7% above the pre-pandemic level in February last year. While that was insufficient to return to November’s three-year high, it was still 0.8% above the Q4 average. And the headline figure was suppressed somewhat by a drop in bulk major orders – excluding such items, orders rose 2.8%M/M to the highest since December 2018.

The intensified spread of Covid-19 and associated restrictions weighed on demand at home, with domestic orders falling 2.6%M/M in January. But foreign orders rose 4.2%M/M, with new orders from the euro area up 3.9%M/M and new orders from elsewhere up 4.4%M/M. In addition, growth in demand was strongest for producers of capital goods, who saw orders rise 3.3%M/M. In contrast, manufacturers of intermediate items saw only modest growth (up just 0.2%M/M) while producers of consumer goods saw their orders fall a steep 5.8%M/M. Other data released this morning revealed that real turnover in manufacturing fell 1.1%M/M in January suggesting that data due on Monday will confirm a drop in industrial production of more than 1%M/M too.

Non-farm payrolls take centre stage in the US today
US markets may well remain volatile, as today investors will have to contend with the release of the official employment report for February. Daiwa America Chief Economist Mike Moran expects a 100k increase in non-farm payrolls – up from just 49k last month – but the potential for a rebound in labour force participation leads him to expect a 0.1ppt lift in the unemployment rate to 6.4%. Today will also see the release of the full trade balance for January – which should report a slightly wider deficit than last month given the $0.6bn widening already reported in the goods sector – together with consumer credit data for December.

Kiwi construction activity declines in Q4, adding to likelihood of GDP pullback
This week’s Kiwi data flow drew to a close today with Statistics New Zealand releasing estimates of construction work for Q4. Sadly, the data revealed an unexpected 1.5%Q/Q decline in the volume of work undertaken, with a 0.7%Q/Q lift in residential building activity more than offset by a 4.9%Q/Q decline in commercial construction (albeit difficulties encountered in collecting this data mean that it retains provisional status). Combined with other partial indicators released to date, today’s report adds to the likelihood that GDP took a slight backward step in Q4 after a much stronger-than-expected 14%Q/Q rebound in Q3.

In other Kiwi news, aside from a tsunami alert following a magnitude 8 earthquake offshore, the main focus was on the Government’s review of pandemic alert levels. With no further community cases having been discovered over the past five days, the Auckland region will step down to level 2 on Sunday – allowing public activities to resume with gathering limits and social distancing – while the rest of the country will return to level 1 and thus face no restrictions on activity.

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