German trade surplus highest since 2017

Chris Scicluna

After tech stocks were under pressure yesterday in the US, state buying reportedly tried to rescue Chinese stocks from further heavy declines today
With the 10Y UST yield pushing back up towards 1.60%, the rotation out of growth stocks resumed yesterday with the Nasdaq falling 2.4% and so extending its decline over the past month to almost 10%. By contrast, after trading in the black for most of the session, the S&P500 closed with a modest loss of 0.5%. In the FX market, the greenback continued its recent solid run with further gains in Asia lifting $/¥ above 109 for the first time since June last year and €/$ falling into the 1.18s for the first time since November.

Today most of the focus in Asia has remained on Chinese equities. After slumping a further 3.5% yesterday, the CSI300 fell more than 3% in early trade today and so at one point was down more than 17% from where the market had reopened following the LNY holiday. However, the market soon reversed course, with newswires reporting that State-owned funds (often referred to collectively as the “the national team”) had stepped in buy stocks in order to support the market. While Chinese officials were likely comfortable with some market correction given the worries expressed about emerging financial bubbles, clearly the particularly sharp decline in prices over recent days was taking the gloss off proceedings at the showpiece National People’s Congress in Beijing. Sparked by that reported intervention, the CSI300 initially erased all of those losses, but subsequently fell back again to close down 2.15% with investors perhaps concluding that State intervention will be time-limited. The turnaround in mainland China was mirrored in Hong Kong, where the Hang Seng’s has overcome initial losses to rise 0.3% today. And US equity futures have also firmed, assisted by a pullback in Treasury yields (the 10Y UST returning to 1.55%) which has followed through to euro govvies this morning.

Elsewhere in Asia, Japan’s TOPIX opened somewhat firmer today and has since closed with a 1.3% gain. While Q4 GDP growth was revised fractionally lower, all of that revision was attributable to a bigger drag from inventories, whereas growth in final demand was little changed from earlier estimates. And while the MIC’s survey confirmed that the pandemic had reduced consumer spending in January, data from the MHLW pointed to the first annual growth in regular time wages since October (more on Japan’s economic reports below). In the JGB market, yields drifted higher as investors continued to absorb yesterday’s late comments by BoJ Deputy Governor Amamiya, which at face value contradicted Governor Kuroda’s statement last week that the Bank would not permit an expansion of the ±0.2% trading band applying to the 10Y tenor. Meanwhile, with the BoJ Policy Board’s only female member due to step down in late June, the Government announced that it had nominated Junko Nakagawa – the CEO of Nomura Asset Management – to lend her market expertise thereafter.

In the Antipodes, despite an encouraging NAB Business Survey, Aussie bond yields increased only fractionally as investors awaited tomorrow’s important speech by RBA Governor Lowe on “The Recovery, Investment and Monetary Policy”. Kiwi bond yields were also little changed despite news of a further lift in firms’ inflation expectations and the strongest employment intentions in over three years.

Japanese GDP growth revised down modestly in Q4 as inventories prove greater drag
Today the Cabinet Office released the revised national accounts for Q4, which amongst other things incorporated new data on capex and inventories from last week’s MoF survey of corporations. In the scheme of things, the broad description of the economy’s recent performance was little very changed, with real GDP now estimated to have increased 2.8%Q/Q – just 0.2ppts less than first estimated. So with no material revision to earlier quarters, the annual decline in output now stands at 1.4%Y/Y compared with 1.2%Y/Y previously. And with no material change in the GDP deflator either – the annual increase rounding just fractionally higher at 2.3%Y/Y – growth in nominal GDP was also revised down 0.2ppts to 2.3%Q/Q.

Turning to the expenditure detail, private inventories made a negative contribution to growth of 0.6ppts – 0.2ppts more than estimated previously and thus accounting for all of the downward revision to activity. While growth in non-residential investment was revised down to 4.3%Q/Q, this was just 0.2ppts less than estimated previously and a smaller downward revision than analysts had expected given the capex information in the aforementioned MoF survey. The first published breakdown revealed that investment in non-transport machinery – which had previously declined for four consecutive quarters – rebounded a substantial 13.5%Q/Q in Q4, leaving it down just 2.0%Y/Y. After rebounding almost 10%Q/Q in Q3, transport investment recovered a further 12.0%Q/Q in Q4 but was nonetheless still down 6.4%Y/Y. By contrast, investment in intellectual property increased just 1.0%Q/Q and non-residential building activity increased just 0.5%Q/Q. Growth in private consumption was unrevised at 2.2%Q/Q, but growth in government consumption was revised down 0.2ppts to 1.8%Q/Q. Residential investment was revised down 0.1ppts and so is now estimated to have been flat during the quarter, but growth in public investment was revised up 0.2ppts to 1.5%Q/Q. Finally, a fractional downward revision to growth in imports meant that net exports contributed 1.1ppts to growth – just 0.1ppts more than first estimated.

Looking ahead, given the winter surge in coronavirus and associated restrictions on activity, the GDP growth recorded in Q4 is likely to have been erased in the current quarter. However, with coronavirus cases and restrictions easing, yesterday’s Economy Watchers survey suggests that activity should rebound nicely in the coming quarter.

Japan’s labour cash earnings down less severely in January as bonus influence wanes
Turning to slightly more up-to-date news from the household sector, today the MHLW released the preliminary Monthly Labour Survey for January. A 5.1%Y/Y decline in winter bonus payments had played a key role in driving a 3.0%Y/Y decline in labour cash earnings (per employee) in December. While bonuses payments fell an even greater 12.7%Y/Y in January, these payments are typically smaller in January and so have much less impact on overall earnings. As a result, combined with some improvement in contractual earnings, overall labour cash earnings fell a much less severe 0.8%Y/Y in January – only about half as much as the consensus estimate and the least since October. After accounting for inflation, real wages declined 0.1%Y/Y.

Aside from bonuses, overtime earnings remain an ongoing source of weakness in these figures, although the 6.6%Y/Y decline reported in January was 2.0ppts less than last month and the least since March. As has been the case since the pandemic began, this decline largely reflects a reduction in overtime hours worked (while up a further 0.5%M/M in January, overtime hours worked still fell 8.0%Y/Y). By contrast, regular earnings increased 0.3%Y/Y in January – the first increase since October – even as regular hours worked declined 1.9%Y/Y.

Finally, the number of people in regular employment was steady in January, ending a run of seven consecutive monthly increases. Given base effects, this caused annual growth to slow 0.1ppts to 0.5%Y/Y. The preliminary breakdown – which is often revised substantially – suggests that growth in the number of full-time employees edged up to 1.2%Y/Y, whereas the number of part-time employees fell 1.1%Y/Y – much larger than the 0.2%Y/Y decline reported in December.

Japan’s household spending slump bigger than feared in January
In other household news, the MIC released its monthly survey of household spending and incomes for January. According to the survey, real household spending slumped a much greater than expected 7.3%M/M – slightly more than the decline reported during the last upswing in coronavirus cases in July – and so was down 6.1%Y/Y. The measure of core spending, which excludes spending on volatile components such as housing and autos, fell an almost equally severe 6.7%M/M, led by a more than 23%M/M dive in clothing sales and a more than 13%M/M decline in spending on recreation. While the slump in spending indicated in the MIC survey appears alarming, last Friday’s release of the BoJ’s Consumption Activity Index – a much superior indicator of the national accounts measure of private consumption – had pointed to a less-concerning 2.9%M/M pull-back in spending to a level around 2.5% below the average experienced through Q4. Finally, the survey’s measure of workers’ real disposable incomes fell 2.3%Y/Y in January.

Japan’s machine tool orders up firmly in February; base effects lift M3 growth
Turning to the rest of today’s Japanese data, the Machine Tool Builders’ Association, which represents the nation’s largest manufacturers of machines, reported that its members received an impressive 19.1%M/M and 36.7%Y/Y increase in orders in February. As in previous months that growth was mainly by foreign customers, with orders from overseas rising by almost 21%M/M and 66%Y/Y. By contrast, while domestic orders increased 15.4%M/M in February, this failed to erase a sharp decline in January and so these orders remained down 4.8%Y/Y.

Finally, reflecting base effects associated the BoJ’s pandemic response, growth in Japan’s M3 money stock edged up 0.2ppts to a new high of 8.0%Y/Y in February (the monthly increase equates to an annualised rate of just 5.4%). Growth in M2 increased similarly in February to a new high of 9.6%Y/Y.

German exports maintain uptrend, but imports from the UK plunge on Brexit
Yesterday’s German IP data for January were disappointing, with production in autos seemingly weighed by supply-chain issues and construction activity hit by the end of the VAT cut and weather. But this morning’s goods trade data showed that the uptrend in German exports remained intact at the start of the year. In particular, the value of exports rose 1.4%M/M in January to be 2.4% above the Q4 average. While they were still down some 8.0%Y/Y, exports were nevertheless still at the highest since the pre-pandemic level in February last year, albeit down 3.3% from that benchmark. Exports to other EU member states were down 6.0%Y/Y with those to the US down a similar 6.2%Y/Y. In contrast, exports to China were up 3.1%Y/Y. The end to thew Brexit transition saw German exports to the UK fall 29.0%Y/Y.

Meanwhile, in contrast to the continued growth in exports, German goods imports fell 4.7%M/M to be down 9.8%Y/Y, 3.4% below the Q4 average and 5.2% below the pre-pandemic level. Here Brexit was the main culprit, with imports from the UK down an extraordinary 56.2%Y/Y. However, imports from the US were down a steep 22.8%Y/Y while those from other EU countries were down 5.9%Y/Y. In contrast, imports from China were up 1.1%Y/Y. Adjusted for prices, while export volumes rose for the ninth successive month and by 0.7%M/M, imports dropped 6.4%M/M to the lowest level since July. And Germany’s trade surplus on a seasonally-adjusted basis rose €5.8bn to €22.2bn, the highest since November 2017.

Looking ahead, this morning will bring the release of final euro area Q4 GDP figures. Despite some revisions in various member states, these are expected to confirm the preliminary estimates (-0.7%Q/Q and -5.1%Y/Y). The expenditure breakdown of euro area Q4 GDP, to be published for the first time, is likely to show that household consumption declined significantly due to the intensified pandemic and associated containment restrictions. But net trade and inventories, and perhaps also certain components of fixed investment, likely provided some offset.

NFIB small business survey the only economic report in the US today
The coming day is a quiet one for US economic data with the only release of note being the NFIB small business optimism survey for February. After declining over the previous two months as coronavirus case numbers skyrocketed, the more recent decline in numbers is likely to have lifted sentiment somewhat.

Australian business conditions rebound in February
After beginning the year on a slightly softer note, the NAB Business Survey pointed to a notable lift in business conditions and general confidence in February. The closely-watched business conditions index erased all of last month’s decline – which is now 2pts smaller than first estimated – with a 6pt lift to 15 (indeed, at one decimal place, the index surpassed December as the best reading since August 2018). This reading – which is 10pts above the historic average – was driven by an improvement in trading, profitability and employment, with firms also indicating an increased stock of forward orders and improving export conditions. Not surprisingly, therefore, the headline confidence index increased 4pts to 16 – a level not seen since the economy emerged from the GFC in 2010. Meanwhile, the pricing indicators offered some encouragement for the RBA with firms reporting a 1.0% increase in labour costs in the three months to February, marking the largest increase since August 2019. However, final product prices increased just 0.2%Q/Q, suggesting for now little upward pressure on the CPI.

In other Aussie news, ahead of tomorrow’s monthly Westpac survey, the ANZ-Roy Morgan index of consumer sentiment lifted 1.5%M/M to 111.9 – just fractionally below late January’s post-pandemic high. The largest contributions to the lift in sentiment were made by indices capturing perceptions of the economic outlook, with the year-index index rising 3.6% to the highest level since July 2019.

Kiwi business confidence softens in March but employment intentions and inflation expectations climb, business indicators mixed for Q4
Most interest in New Zealand today centred on the preliminary results of the ANZ’s Business Outlook Survey for February, which not surprisingly indicated a negative impact from the relatively brief pandemic-driven restrictions imposed on two occasions over the past month. The headline general confidence index fell 7pts to 0, while the activity outlook index – which has the best correlation with GDP growth – fell a relatively modest 4pts to 17 (other than in December, still firmer than at any time last year). Most encouragingly, investment intentions eased only fractionally and employment intentions firmed to the highest level since August 2017, suggesting that firms continue to view the medium-term outlook favourably. Meanwhile, after surging last month, the number of firms reporting an intention to raise their prices remained at a historically elevated level and firms’ year-ahead forecast for inflation firmed a further 0.21ppts to 1.95% – now just a fraction below the midpoint of the RBNZ’s inflation target and at the highest level since April 2019.

In other news, ahead of next week’s national accounts report, Statistics New Zealand reported that after rebounding more than 175Q/Q in Q3, the volume of manufacturing sales increased at a more sedate pace of 0.5%Q/Q in Q4 (0.4%Q/Q excluding the meat and dairy sector) and so delivering annual growth of 1.9%Y/Y despite the pandemic. However, sales in the wholesale trade sector – which had also rebounded more than 17%Q/Q in Q3 – fell 1.7%Q/Q in Q4, led by reduced spending on food, alcohol and tobacco.

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