Japan’s Economy Watchers survey rebounds strongly in February

Chris Scicluna

Mixed start to the week in Asia despite Friday’s Wall Street gains, as Chinese shares sink despite stronger-than-expected trade data over the weekend
A volatile Friday session on Wall Street had seen the S&P500 down as much as 1% in morning trade as Treasury yields jumped to session highs, with the 10Y yield briefly rising above 1.61%. This price action followed the much stronger-than-expected 379k lift in February non-farm payrolls and an unexpected nudge down in the unemployment rate to a 10-month low of 6.2%. However, with that still 2.7ppts higher than prior to the pandemic and thus still unlikely to impress the Fed, investor sentiment began to turn in the late morning. And with the 10Y UST yield backtracking to 1.57%, an afternoon rally lifted the S&P500 to an unlikely 1.9% gain on Friday and so delivering a 0.8% advance for the week. The Nasdaq rebounded 1.6% on Friday, but nonetheless still closed the week down 2.1%. While the VIX fell back to just over 24, the greenback retained its previous day’s advance.

Treasury yields re-opened slightly higher today after crude oil added to last week’s OPEC-inspired gains – sending Brent above $70/bbl – due to a reported drone attack on a Saudi oil facility (but reportedly not impacting production). So even with the Senate on Saturday passing President Biden’s $1.9tn fiscal stimulus plan – which will now go back to the House on Tuesday for a confirmatory vote on minor Senate changes – US equity futures have nudged lower today. And it has been a very mixed start to the week in Asia. Of particular note are developments in China, which over the weekend reported export data that far surpassed consensus expectations. Even so, the CSI300 has extended its post-LNY decline, falling almost 3% to be down 12% from the 10 February peak. The Hang Seng was also weaker, falling about 2%. By contrast, bourses rallied in Singapore and Malaysia, while Japan’s TOPIX cut a middle path with a negligible 0.1% loss. Higher materials and energy prices helped Australia’s ASX200 to a gain, especially with the 10Y ACGB yield closing down 6bps. Elsewhere in bond markets, after rallying sharply last week as BoJ Governor Kuroda ruled out of a wider trading band for the 10YJGB, Japanese yields nudged higher today, with a substantial rebound in the Economy Watchers Survey pointing to improved economic conditions over coming months (see below).

Japan’s Economy Watchers survey points to rebound ahead after a soft Q1
The highlight of a reasonably busy day for Japanese economic data was the Cabinet Office Economy Watchers survey for February. Pleasingly, after falling to an 8-month low in January amidst the extension of pandemic-driven restrictions on activity, the headline current conditions DI rebounded a far sharper than expected 10.1pts in February to a 3-month high of 41.3. While this is still almost 12pts below the high reached in October last year, the good news is that respondents expect conditions to improve further over the coming 2-3 months. Indeed, the overall expectations DI increased an even stronger 11.4pts to 51.3 in February – not only the highest level since the beginning of the pandemic, but also the most optimistic reading since August 2018. So while economic activity has very likely taken a backward step in Q1, respondents clearly expect the recovery to resume in Q2.

In the detail, not surprisingly, the largest driver of the improvement in current conditions came from the household sector index, which rebounded 10.9pts to 38.9. The indices measuring sentiment amongst those respondents interacting with the retail, food and services sectors all recorded double-digit increases, but remained well below last October’s highs. The corporate sector index, which had remained somewhat more resilient in recent months, increased 6.8pts to 45.8 – just shy of its November reading. The non-manufacturing index increased 7.9pts to 43.6, whereas the manufacturing index increased 4.8pts to a 4-month high of 48.5. Similar relativities were evident in the sectoral expectations indices, with the greatest further improvement expected in activities driven by households and otherwise occurring in the services sector.

In other Japanese news, the BoJ reported that total bank lending increased 6.2%Y/Y in February, up 0.2ppts from a month earlier (growth in January was revised down 0.1ppt to 6.0%Y/Y). A slight pick-up in growth was observed across each of the major bank types, with lending by the major city banks rising 0.2ppts to 6.7%Y/Y, that by regional banks rising 0.1ppts to 5.1%Y/Y and that at shinkin banks rising 0.2ppts to 8.5%Y/Y. On the other side of the ledger, while bank deposits edged down ¥0.6bn in February, base effects meant that annual growth increased to 10.0%Y/Y – the fastest pace in at least 30 years and indicative of continued precautionary behaviour by households. Meanwhile, given the significant support provided by banks and the government to the corporate sector, bankruptcies fell to a fresh 30-year low of just 446 cases in February and so were down more than 31%Y/Y.

In still other news, the Cabinet Office released its preliminary business indicators for February. The coincident indicator increased 3.5pts to a 12-month high of 91.7, which was more-or-less in line with market expectations. More positively, assisted by favourable upward revisions to recent historical data, a 1.4pt lift in the leading index to 99.1 marked the best reading since September 2018. Finally, balance of payments data revealed an adjusted current account surplus of ¥1.50trn in January, down from ¥2.08trn last month and around ¥0.7trn narrower than the consensus estimate. While each of the major component balances played some role in that narrowing, the largest contribution came from the often-volatile surplus on primary income, which declined around ¥0.3trn to ¥1.49trn in January – the least since September 2016.

GDP revisions ahead in Japan tomorrow, along with wages data for January; MoF Business Outlook Survey of note later in the week
Looking forward, there are a number of important economic reports still ahead this week in Japan. Tomorrow, in light of the disappointing capex numbers in last week’s MoF corporate survey, the second release of the national accounts for Q4 is likely to result in a modest downward revision to the preliminary estimate that the economy expanded 3.0%AR (our colleagues in Tokyo expect GDP growth to be revised down 0.1ppt). Of more contemporary interest, following Friday’s soft reading from the BoJ’s Consumption Activity Index, the MIC’s household survey for January should confirm a week start to the year for consumer spending. Meanwhile, the MHLW’s Monthly Labour Survey for January should continue to report a decline in average labour earnings due to reduced bonus payments and overtime hours, albeit the former should have less downward impact than last month and so the decline in earnings should be less severe than the 3.0%Y/Y slump reported last month. The BoJ’s money stock data for February will also be released tomorrow, as will the JMTBA’s preliminary machine tool orders for February.

On Thursday, the rally in commodity prices – especially oil – should generate a third consecutive solid lift in the BoJ’s goods PPI for February. So given base effects – which will play an even greater role in coming months – the annual decline in prices should more than halve from the 1.6%Y/Y reported for January. The week concludes on Friday with the release of the MoF/Cabinet Office Business Outlook Survey for Q1, which will provide some further clues on business sentiment and expectations ahead of next month’s more widely-followed BoJ Tankan survey. While the non-manufacturing sector will likely report less favourable conditions in Q1, the forward-looking parts of the survey should indicate that firms are more optimistic about how conditions will evolve later this year.

China’s exports surprise substantially to upside; inflation and credit data to come later this week
Over the weekend China released its first international trade data of the year, covering the combined months of January and February. Considering the pandemic-induced lockdowns in China at the beginning of last year, the annual growth suggested in this report was always destined to be unduly flattering. However, against that background, trade flows – especially as regards exports – have proven much stronger than analysts had forecast. Despite some softening of the manufacturing PMI so far this year, export values increased a whopping 60.6%Y/YTD – about half as strong again as analysts had expected. Compared to the same period of 2019 – to abstract from the impact of the pandemic – exports were up 32.7%Y/Y. Meanwhile, imports grew 22.2%Y/YTD or just over 17% compared with the first two months of 2019. As a result, China’s trade surplus for the first two months of the year was $103.3bn, compared with a small deficit in the first two months of last year and almost $62bn larger than the same period in 2019. China’s bilateral trade surplus with the US stood at $51.3bn for first two months of the year, or about twice as large as the same period last year but implying an average monthly running rate that was a little smaller than seen through the second half of last year. Indeed, China’s imports from the US increased over 66%Y/YTD, maintaining the stronger trend that emerged late last year. By contrast, China’s imports from Japan grew 26%Y/YTD while imports from Australia grew just 8.7%Y/YTD.

The remainder of China’s key activity indicators (IP, retail sales, capex etc.) for the combined period will be released next Monday. In the meantime, over the coming week we will receive the February inflation indicators on Wednesday and perhaps the money and credit aggregates towards the end of the week. As far as inflation is concerned, as in Japan a combination of rising commodity prices and base effects should lift the PPI inflation rate significantly. However, as of yet there has been little sign of increased inflation at the consumer level. And so with this year’s LNY celebrations also somewhat curtailed, the consensus forecast of a steady 0.3%Y/Y decline in the CPI seems reasonable. Meanwhile, following the usual January rush, credit growth will inevitably have dropped away sharply in February.

German IP drops further than expected in January weighed by autos and construction
German industrial production in January fell a sharper-than-expected 2.5%M/M to be down 3.9%Y/Y and 4.2% below the pre-pandemic level in February 2020. Excluding energy and construction, production fell a relatively modest 0.5%M/M, with further growth in intermediate items (up 3.0%M/M) offset by declines in output of capital goods (-0.8%M/M) and consumer goods (-3.0%M/M). Production of machinery jumped almost 10%M/M to above the pre-pandemic level but supply-chain issues weighed on the auto sector, where output fell 12.1%M/M to the lowest since August. Energy output rose 0.6%M/M. But having leapt more than 5%M/M in December to a series high, construction dropped 12.2%M/M to a two-year low likely weighed by the reversal of the temporary VAT cut. Surveys and new orders data point to a rebound in manufacturing in February and March, although the outlook for construction appears to remain subdued. Elsewhere in the euro area, January industrial production figures from Spain are due later today followed by the Italian, French and euro area numbers tomorrow, Wednesday and Friday respectively.

ECB PEPP purchase data due this afternoon ahead of Thursday monetary policy announcement
Ahead of the Governing Council meeting, which concludes on Thursday and will provide an opportunity to send a clear message about the bond sell-off, the ECB’s latest weekly PEPP bond purchase data, due this afternoon, will be closely watched. After the drop in both net and gross purchases to multi-week lows in the week to the 26 February, the pace of purchases settled through to last Friday is likely to have accelerated notably. But they are likely to remain well down on the average pace of more than €25bn per week through the first three months of the programme – indeed they will probably maintain the average pace since the start of 2021 at roughly half that rate. So, there will remain plenty of headroom within the current PEPP envelope to accelerate purchases over coming weeks and months if necessary. (Indeed, at the current pace of buying, the envelope would not be exhausted until July next year, more than three months after the current deadline for the programme).

ECB forecasts unlikely to suggest cause for the Governing Council to panic
But we doubt that the ECB will be panicking. Despite recent evidence of a tightening of credit standards on bank loans, overall financial conditions remain highly accommodative by historical standards, while the GDP-weighted yield curve remains well below its level before the pandemic struck. The Governing Council will welcome the recent upwards shift in financial market inflation expectations as well as the modest weakening of the euro against the US dollar. And the ECB’s updated economic projections, also due on Thursday, will also suggest that it doesn’t see the need suddenly to change course with policy. Euro area GDP fell less than the Bank expected in Q4. And while a contraction is now highly likely in Q1 (unlike the growth of 0.6%Q/Q forecast by the ECB), the GDP outlook ahead might be revised up thanks to the more favourable outlook for external demand. Indeed, we expect only a modest downwards revision to the forecast for GDP growth this year (currently 3.9%Y/Y) but a modest upwards revision to the forecast for 2022 (4.2%Y/Y). Moreover, the ECB’s current forecast for inflation this year (1.1%Y/Y) is now clearly far too low while the forecasts for the following two years (1.1%Y/Y and 1.4%Y/Y) appear to merit little revision.

Lagarde to signal ECB willingness to accelerate PEPP purchases, albeit within the current envelope
So, we don’t expect a great deal from the ECB on Thursday. In her press conference, Lagarde will certainly signal that the ECB is mindful of the risks that excessive increases in yields might cause an undesirable and unwarranted tightening of financial conditions, which could ultimately undermine its ability to achieve its inflation target. She will likely state that the ECB will monitor financial market developments closely and emphasise a readiness to adjust all policy tools in future if necessary. She will also likely signal the ECB’s willingness to accelerate purchases under the PEPP programme, albeit within the current envelope, if required to maintain accommodative financial conditions. In this context, however, it is notable that the PEPP legislation states that the “The Governing Council delegates to the Executive Board the power to set the appropriate pace and composition of PEPP monthly purchases within the total overall envelope”. Therefore, the Executive Board will retain the discretion to respond to market events as they see fit after Thursday’s meeting. So, at this current juncture, the views of some members of the Governing Council (i.e. the members of the Executive Board) might be more important than the others (the national bank Presidents).

Bailey set to talk this morning, January GDP and trade data due Friday
With the recent sell-off in the Gilt market since the February MPC meeting particularly marked, comments from BoE Governor Bailey at a Resolution Foundation event this morning should be closely watched. Meanwhile, the data highlight of the coming week in the UK will be the initial estimate of GDP in January (on Friday), which will offer the first official glimpse of how severely the economy has been hit by the third lockdown and end to the Brexit transition. We expect a drop of 4.5%M/M and 2.2%Y/Y as the restrictions on activity weighed on private spending. (Indeed, we already know that retail sales fell a very steep 8.8%M/M that month). Once again, services activity will be hardest hit while industrial production is expected to have fallen more modestly (perhaps less than 0.5%M/M, albeit likely leaving it down more than 3.5%Y/Y). And the new barriers to trade with the EU that came into place at the start of the year will have weighed on exports of both goods and services. Indeed, as the French and Italian data have so far suggested, the UK trade deficit is likely to widen in January as the fall in exports outpaced that of imports.

Inflation data to take centre stage in the US this week
With President Biden’s fiscal stimulus soon to be signed into law (the House will give its final approval tomorrow) and the Fed now in its pre-FOMC blackout period, the focus will probably turn back to the economic data this week. And with the one eye on the bond market, the most important news this week will likely be the February inflation readings. Following today’s release of final wholesale trade data for January and tomorrow’s release of the NFIB small business optimism index for February, Wednesday’s CPI report for February will certainly be in the spotlight on a day which also brings at 10Y UST auction. Daiwa America Chief Economist Mike Moran expects the headline index to increase a sturdy 0.4%M/M – which should lift annual inflation by 0.3ppts to 1.7%Y/Y – thanks in part to a ninth consecutive increase in energy prices. With the economic recovery proceeding, Mike expects the core index to advance 0.2%M/M – an improvement on last month’s flat reading – but this will likely do no more than leave annual inflation steady at a still lowly 1.4%Y/Y. Also on Wednesday, Mike expects Federal Budget data for February to reveal a deficit of $280bn – about $45bn higher than a year earlier due to pandemic-related spending.

Thursday will bring the release of the JOLTS measure of job vacancies for January and the weekly jobless claims report. On Friday, Mike expects higher energy prices to drive the headline PPI to a further 0.4%M/M gain which, given base effects, will likely boost annual inflation to 2.7%Y/Y – a level not seen since 2018. However, after an outsized 1.2%M/M jump last month, he expects the core measure to be flat this month, which will nonetheless lift inflation by a at least a couple of tenths from last month’s reading of 2.0%Y/Y. The week’s data flow will conclude later that morning with the release of the preliminary results of the University of Michigan’s consumer survey for March, which should benefit from declining coronavirus cases and the anticipation of fiscal stimulus.

Confidence surveys and speech by RBA Governor Lowe the focus in Australia this week
Following a quiet start to the week, the Australian economic diary begins tomorrow with the release of the NAB Business Survey for February. Last month’s survey pointed to a marked cooling of momentum that may have been partly due to a greater-than-usual rush to take summer holidays, thus marking this month’s survey of greater-than-usual interest. Tomorrow will also bring the weekly ANZ-Roy Morgan consumer confidence survey, followed by the monthly Westpac consumer confidence survey for March on Wednesday. However, the focus midweek is likely to be on a speech scheduled to be delivered by RBA Governor Lowe to the Australian Financial Review Business Summit, titled “The Recovery, Investment and Monetary Policy”. Needless to say, investors will be interested to hear any comments on recent developments in financial markets – the last post-meeting statement offered no opinion – and any update on how the Governor expects policy to evolve, including the likelihood of the Bank’s retaining a target for the 3Y bond rate (which after July would require targeting of the November 2024 bond, which currently yield 40bps above the cash rate).

GDP partials, consumer spending and business survey data ahead in New Zealand this week
The Kiwi economic diary was also empty today but there are a number of important economic indicators ahead over the remainder of the week. Tomorrow, the countdown to next week’s belated Q4 GDP report will continue with the release of quarterly business financial data, including from the manufacturing and wholesale trade sectors. Of greater interest will be the preliminary results of the ANZ Business Outlook Survey from March, which will likely take a hit from the re-imposition of trading restrictions – especially in Auckland – while the survey was in the field. Similarly, Wednesday’s Electronics Card Transactions report seems likely to point to at least a modest decline in consumer spending during February. The week will conclude with the manufacturing PMI for February – likely also a least a little softer after rebounding to a 6-month high in January – and the as-yet unscheduled release of home sales data for February. 

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