Japan’s manufacturing PMI revised higher, but vehicle sales decline

Chris Scicluna

Asian equity markets start the week on strong note following Friday’s UST yield retreat
After ending last week with heavy losses, the start of the new week has been a much happier one for equity and bond investors alike (at least so far). Following Friday’s steep retracement in the US bond market – the 10Y UST closed down 10bps at 1.42% even after news of a stronger-than-expected lift in the Fed’s preferred measure of core inflation – local bond yields have also moved off their highs. This is especially so in Australia, where the 10Y ACGB yield slumped 25bps to 1.65%, albeit still leaving the bond trading 50bps higher than it was when the RBA last reviewed policy a month ago. Of note, the RBA bought a further $A4bn of bonds today, including $A1.1bn of the November 2024 maturity (for which the yield declined 10bps to 0.34% – still well above the RBA’s 0.10% target for the April 2024, reflecting expectations that later this year the RBA will cease to target the 3Y yield, rather than roll it into that bond). The Kiwi 10Y yield declined 17bps to 1.72%, underperforming its Tasman counterpart despite a day of strong Australian data (more on this below) and the re-imposition of a lockdown in the major city of Auckland following the discovery of two new coronavirus cases over the weekend.

While the S&P500 still closed with a 0.5% loss on Friday, developments in US equity futures today indicate that investors expect those losses to be reversed. So despite some disappointing PMI data in China over the weekend (more on this below), after recording very heavy declines on Friday, equity markets in the Asia-Pacific region have found cause to unwind some of those losses today, especially with UST yields continuing to creep to creep lower (the 10Y UST sits close to 1.40% as we write). After falling more than 3% on Friday, Japan’s TOPIX closed with a 2.0% gain, with sentiment likely supported by an upward revision to Japan’s manufacturing PMI to a fresh 26-month high despite some softer vehicle sales figures. In China, the CSI300 rebounded 1.5%, perhaps weighed down by its softer weekend PMI news (confirmed by the Caixin manufacturing PMI today). Markets were closed for local holidays in South Korea and Taiwan. Meanwhile, in FX markets, after making very strong gains on Friday, so far the greenback has held onto most of those gains today.

Japan’s manufacturing PMI up more than first reported in February, but vehicle sales decline
This week’s Japanese data flow began on a positive note today, with the headline manufacturing PMI revised up 0.8pts to 51.4 in February, thus doubling the improvement indicated by the preliminary report and confirming the best month for manufacturing since December 2018. In the detail, there were notable upward revisions across most of the key activity indices, with both the output index and new orders index revised up 1.1pts to 52.4 and 51.2 respectively (the latter now the best reading since October 2018). The new export orders index was revised up just 0.1pts to 51.5, but coming after a 3.2pt lift in the preliminary report this still confirms the best month for this index since March 2018. The employment index was revised up 0.5pts to 49.8, but remains just below where it ended last year. Strong activity was also reflected in the pricing indices which for both inputs and outputs were revised up 0.6pts. As a result, input price index increased 1.7pts during the month to a two-year high of 55.6, while the output price index closed at 51.0 – down just 0.1pts from the 20-month high reached in January.

Separately, after rising 6.8%Y/Y in January, Japanese vehicle sales fell 2.2%Y/Y in February, the first negative reading in four months. Sales of cars fell 2.7%Y/Y and sales of buses slumped more than 40%Y/Y, whereas truck sales increased 2.2%Y/Y. The decline appears to relate to supply-chain disruption associated with the semiconductor shortage, which has hit production this year at Honda, Nissan and Subaru.

Meanwhile, the BoJ’s latest bond market survey suggested relatively modest change to assessments of bond-market functioning over the past quarter, with the respective DI up just 1pt over the three months to early February to -24, signaling that negative perceptions continue to dominate. The median forecast for the 10YJGB yield for end-2021 rose 5bps to 0.10%, however, a level that might now seem a little conservative in light of recent global market moves (the 10Y yield fell only slightly back below 0.15% today).

MoF corporate survey and labour market data ahead in Japan tomorrow; sentiment and consumer spending data due later in the week
There are still a number of top-tier economic reports ahead in Japan over the remainder of the week. Tomorrow’s diary begins with the release of household employment figures for January, which will likely be impacted to some degree by the restrictions imposed across around half of the country early in the month. Also tomorrow, the MoF will release the results of its quarterly survey of corporations. In addition to providing broad insight into corporate activity and profitability during the quarter, capex and inventory data from this report will be used to inform the revisions to Q4 GDP growth that will be released a week later. Investors will be hoping that the MoF data confirms the uplift in capex that was indicated in the preliminary national accounts last month. On Wednesday, the final services and composite PMI readings for February will be released, while the following day will bring the release of the Cabinet Office’s consumer confidence index for February. On Friday, the week concludes with the release of the BoJ’s Consumption Activity Index for January, which will provide a reasonable approximation of how the GDP-based measure of consumer spending has been impacted by restrictions on activity and shoppers’ reluctance to expose themselves to possible coronavirus infection.

China’s PMIs disappoint again with softer momentum evident in both manufacturing and services
Yesterday China released its official PMI readings for February, which sadly for a second consecutive month came in well short of market expectations. Of particular note, the closely-watched manufacturing PMI fell a further 0.7pts to 50.6. So after reaching a more than three-year high in November, this index has declined for three consecutive months and is now back to where it stood in May last year. Meanwhile the service sector PMI fell 1.0pts to 51.4, thus also declining for a third consecutive month and now at its lowest level in 12-months. The headline composite PMI – which combines the output index from the manufacturing PMI and the headline services PMI – fell an even greater 1.2pts to a 12-month low of 51.6. Of course, the Chinese PMI data is always difficult to read at this time of the year due to the variable impact of the LNY holidays, while restrictions on activity – some mandated by authorities and some likely undertaken voluntarily – might reasonably have impacted activity more this year than is typically the case. Indeed, as noted below, in the detail of the survey – especially in the services sector – there are some indications that firms expect momentum to lift over coming months.

Turning to the detail, the outcome in the manufacturing sector was driven by weaker conditions at both medium- and small-sized firms – where the respective indices now sit below 50 – as the index for large firms nudged up 0.1pts to 52.2. The key activity sub-components all recorded material declines, especially the output index which fell 1.6pts to a 12-month low of 51.9. The new orders index fell 0.8pts to an 8-month low of 51.5 and the new export orders index fell 1.4pts to a 7-month low of 48.8. While the employment index fell just 0.3pts to 48.1 in February, this still marked a 12-month low. More optimistically, the business activity expectations index increased 1.3pts to 59.2. While this did not fully erase last month’s decline, this index is now a comfortable 3pts above the historic average. In the services sector there were more convincing signs that firms expect activity to lift, with the business activity expectations index jumping 8.9pts to 64.0 – the best reading since December 2012. The new orders index edged up 0.2pts to 48.9 and the employment index increased 0.6pts to 48.4. However, the new export orders index fell 2.3pts to a 7-month low of 45.7. Meanwhile, the PMI pricing indicators were mixed this month. In the manufacturing sector the output prices index rebounded 1.3pts to 58.5 in February – not far short of December’s 3-year high – while the input price index slipped 0.4pts to a still elevated reading of 66.7. In the services sector the output prices index fell 1.3pts to a 4-month low of 50.1, but the input prices index edged up 0.2pts to a more than 3-year high of 54.7.

Moving on, today China’s Caixin manufacturing PMI – capturing activity in the private SME sector – confirmed the softer picture in the weekend’s official PMI data. The Caixin headline index fell a further 0.6pts to a 9-month low of 50.9 – now more-or-less back to the historic average – with the output index down 0.6pts to a 10-month low of 51.9 and the new orders down 1.2pts to a 9-month low of 51.0. Looking out over the remainder of the week, the only report of note is Wednesday’s Caixin services PMI report for January, which will presumably echo the further decline seen n the official series.

Flash inflation the principal euro area data focus this week; Germany set to review its lockdown
The most notable data from the euro area due this week are the remaining flash February inflation figures, with German and Italian data to be published today and the euro area numbers to come the following day. Friday brought the flash French and Spanish figures, which fell back to different degrees. But after jumping a whopping 2.3ppts in January, the German EU-harmonised measure of inflation is expected to remain unchanged at 1.6%Y/Y in February (the highest since February 2020), while Italy’s HICP rate is expected to remain close to January’s eighteen-month high of 0.7%Y/Y. So, while inflation in France and Spain declined, we expect headline euro area inflation to remain unchanged at 0.9%Y/Y. Given upwards pressure from energy prices, we expect the core rate to fall 0.2ppt to 1.2%Y/Y.

The first part of the week also brings data on February’s new car registrations in France, Italy and Spain (today) and Germany (Wednesday) and January’s German retail sales (tomorrow). On Thursday, euro area retail sales data are expected to report a fall of 1.6%M/M and 1.5%Y/Y in January as pandemic restrictions continued to hamper household spending. Meanwhile, tomorrow’s unemployment figures for February from Germany and Spain will be followed on Thursday by euro area unemployment data for January – the euro area unemployment rate is expected to remain unchanged at 8.3% in January, still thus representing a relatively modest increase from the pre-pandemic rate of 7.2% in February last year. German factory orders for January and French trade data for the same month will be published on Friday.

Survey-wise, we will also get the final manufacturing PMIs for February today and the final services and composite indices on Wednesday, followed by the construction PMIs on Thursday. The flash euro area PMIs suggested minimal improvement in overall economic activity in the middle of Q1 albeit with a big contrast in fortunes between the ailing services sector and resurgent manufacturers. In particular, the euro area services activity PMI for the sector dropped 0.7pt to 44.7, but the euro area manufacturing output PMI more than reversed January’s dip, rising almost 3pts to a four-month high of 57.5.

Beyond the data, Germany’s heads of national regional governments will meet on Wednesday to review the country’s lockdown rules, which are being relaxed very gradually today with the reopening of hairdressers. And in terms of ECB-speak, Christine Lagarde will speak to German SMEs this afternoon, while VP de Guindos, French Governor Villeroy de Galhau and Irish Governor Makhlouf will all speak at even on macroprudential issues this afternoon.

Government’s Budget announcement the key focus in the UK this week
In what will be a low-key week for economic data from the UK, the Budget statement on Wednesday will be most closely watched given the likely significant bearing on the near-term economic outlook of new fiscal policy measures to be announced. In particular, the Government looks set to extend certain key business support programmes, including the Job Retention Scheme and loan guarantees, to better match the plans for gradual easing of lockdown restrictions through to late June. Given recent increases in oil prices, the Chancellor will probably also decide to postpone an increase in fuel duty. And decisions to extend the current hospitality VAT cut beyond end-March, and possibly reinstate the Eat Out to Help Out hospitality subsidies in the summer, would also impact the near-term inflation outlook. A decision to extend the stamp duty holiday, from end-March and probably to end-June, would maintain near-term support for the housing market. At the macro level, the Chancellor seems likely to postpone a decision to start to tighten fiscal policy but might well flag plans to raise revenues in due course. In terms of fiscal arithmetic, given stronger revenues, the OBR will be able to revise down its forecast of borrowing in FY20/21 of £339.9bn. But while it will also likely revise up its GDP forecast for the coming fiscal year, it will likely also revise up its forecast of borrowing in FY21/22 too (from £164bn).

Data-wise, BoE bank lending data for January will be published today, with the final manufacturing, services and construction PMIs for January due today, Wednesday and Thursday respectively. The flash PMIs pointed to a stabilisation of economic activity after a very soft start to the first quarter. The improvement was registered in services, suggesting a better ability of firms in the sector to cope with pandemic containment measures. In particular, having dropped almost 10pts in January to an eight-month low of 39.5, the services activity PMI rebounded to 49.7. However, the manufacturing output PMI edged down to 50.5, the lowest since last May, to suggest that the strong conditions seen in the euro area are not being shared with the UK.

ISM reports and non-farm payrolls the focus in the US this week; Powell to speak too
There are plenty of important economic data ahead this week in the US, adding to the potential for a continuation of last week’s significant volatility in markets. The dataflow kicks off today with the release of the ISM manufacturing report for February, the final Markit manufacturing PMI reading for February and the construction spending report for January. As far as the ISM is concerned, Daiwa America Chief Economist Mike Moran notes that indicators tied to the sector have continued to perform well, but with last month’s reading boosted by supply chain disruptions he expects a modest 0.7pt decline to a still elevated 58.0. Following tomorrow’s release of auto sales data for February, Wednesday brings the release of the ISM services report for February, the final Markit services PMI reading for February and the ADP employment report for February. As with its manufacturing counterpart, Mike expects the ISM to drop 0.7pts to 58.0 in February, which would leave it at robust levels and within the narrow range recorded since the middle of last year.

Following last week’s revised GDP report, the second estimates of labour productivity and unit labour costs for Q4 will be released on Thursday together with the full factory orders report for January. Revisions to the former should be minor while the already-released strong advance in orders for durable goods leads Mike to expect the latter to have increase a sturdy 2.5%M/M. On Friday, most attention will be centered on the official employment report for February. Mike 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%. Friday 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. As far as Fed events are concerned, the latest Beige Book is released on Wednesday and a WSJ-moderated discussion on the economy by Chair Powell is the highlight of this week’s speaking engagements – the last ahead of the next FOMC meeting on 18 March. Needless to say, the arrival of President Biden’s $1.9trn American Rescue Plan into the Senate – albeit without proposals to increase the minimum wage – is also bound to generate plenty of headlines over the coming week or more.

Aussie data point to further rebound in GDP in Q4; housing market on fire
A very busy week in Australia kicked off today with the release of further partial indicators of the economy’s performance in Q4, together with indicators of more recent trends in activity and inflation. Starting with the former, ABS released its quarterly Business Indicators report, which amongst other things pointed to a further rebound in activity in the manufacturing and wholesale sectors. The volume of manufacturing sales increased a further 2.2%Q/Q in Q4, thus reducing the annual decline to just 0.8%Y/Y. And thanks to a 4.4%Q/Q lift in Q4, sales in the wholesale sector are now up a pleasing 3.0%Y/Y. The report also pointed to no material change in firms’ inventories in Q4. Nominal company operating profits fell 6.6%Q/Q in Q4, influenced by the winding back of government subsidies, but were still up 15.1%Y/Y. Meanwhile, nominal wages and salaries continued to recover rising a further 1.4%Q/Q to be up 0.7%Y/Y.

In other news, the run of very strong housing-related data continued with the ABS reporting a further 10.5%M/M surge in housing loan approvals in January – more than triple market expectations – to a new record high. The value of approvals for loans by owner-occupiers increased 10.9%M/M, causing annual growth to rise to a mammoth 52.3%Y/Y. Approvals to purchase existing homes increased nearly 40%Y/Y while, thanks to the support provided by the Government’s Homebuilder grant, approvals for new construction loans have increased a whopping 140%Y/Y. Interestingly, investors also seem to be returning in droves, as approvals for such loans increased a sturdy 9.4%M/M and 22.7%Y/Y in January. Not surprisingly, this activity is beginning to generate significant upward pressure on house prices. Indeed, the CoreLogic house price index increased 2.0%M/M in February – the steepest increase since November 2019 – with prices up 2.5%M/M in Sydney and 2.1%M/M in Melbourne. As a result, the pandemic-induced slowdown in home price inflation now appears to be well and truly over, with annual growth rising 0.9ppts to 2.6%Y/Y in February. Both the RBA and APRA will be watching these developments closely, with a continuation of recent trends sure to hasten the reintroduction of macro-prudential constraints on lending (APRA relaxed its benchmark capital targets in March last year to facilitate ongoing lending in the economy during the pandemic).

Turning to the day’s other indicators, the news from the labour market also remained very encouraging, with the ANZ jobs ads index rising a further 7.2%M/M in February. As a result, advertising is now up 13.4%Y/Y and at the highest level since October 2018. Similar buoyancy was seen in the Markit manufacturing PMI, which was revised up 0.3pts to a final reading of 56.9 in February, so leaving it just below the previous month’s 4-year high. However, in a reminder that it will likely take some time for significant generalised inflation pressures to build, the MI monthly inflation gauge increased just 0.1%M/M in February, albeit sufficient to lift annual inflation by 0.1ppts to 1.6%Y/Y. While the trimmed mean also increased 0.1%M/M, the annual increase was even lower at just 0.3%Y/Y.

RBA very likely to remain dovish tomorrow; Q4 GDP and more January activity indicators also ahead this week
Turning to the week ahead, the focus tomorrow will be the RBA’s monthly Board meeting. Unsurprisingly, surveys indicate that analysts expect the Bank to keep its overnight rate and 3Y bond yield targets steady at 0.1%, while there would also appear to be little chance of the Bank altering the parameters of its Term Funding Facility or QE programmes (recall that the duration of the latter was extended at last month’s meeting). As far as the accompanying press statement is concerned, we expect the Bank to remain constructive on the outlook for economic activity – while still concerned about the potential for global pandemic-related setbacks – and still very dovish on the medium-term outlook for inflation. Importantly, we expect the Board to repeat that it will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range and that this is likely to require significant gains in employment and a return to a tight labour market – conditions that the Board has previously said are unlikely to be met until at least 2024. Perhaps most interest this month will centre on the Bank’s assessment of the impact of the tightening of monetary conditions seen over the past month – in particular, the appreciation of the Aussie dollar. Any comments on developments in long-term interest rates and in the local housing market will also be read with interest.

Aside from the RBA’s announcement, tomorrow will also bring the release of the Balance of Payments and Government Finance Statistics reports for Q4 – which will cast further light on GDP growth during the quarter – and the Building Approvals report for January. As far as the latter is concerned, with private house approvals having already surged to a record high in recent months, the scope for further growth would seem to be reasonably limited.

On Wednesday, attention will turn to the National Accounts for Q4. Ahead of the release of tomorrow’s final partial indicators, led by a further rebound in consumption, GDP appears to have increased by around 2-2½%Q/Q during the quarter, reducing the annual decline in output to about 2%Y/Y. The final services and composite PMI readings for February will also be released on Wednesday. This week’s Aussie data flow concludes on Thursday, when we will receive the retail sales and international trade reports for January. Preliminary data published by the ABS pointed to a 0.6%M/M lift in consumer spending, and revisions to these preliminary estimates are typically minor. Meanwhile, preliminary data on merchandise trade suggests that the surplus on goods and services is likely to have widened substantially in January, likely to a new record high.

Auckland back in lockdown for 7 days
The main news in New Zealand since Friday has been the re-imposition yesterday of level 3 lockdown restrictions in Auckland (home to more than a third of the population) following the discovery of two new coronavirus cases in the community, which have been linked to the cluster than had caused the short lockdown last month. This means that all public places in the Auckland region will be closed for at least 7 days, with the likes of stores, cafes and restaurants only allowed to operate on a non-contact or delivery basis. Outside of Auckland, at least for now, the rest of the country has moved to a level 2 alert, which allows activity to continue but with limits on gathering sizes and the requirement for social distancing in public venues. Data-wise, there were no economic reports in New Zealand today and the diary over the remainder of the week is unlikely to attract much investor attention. But further information feeding into estimates of Q4 GDP will come from the release of the Overseas Trades Indexes and Construction Work Done reports tomorrow and Friday respectively.

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