Japanese consumer confidence rebounds to post-pandemic high

Chris Scicluna

Selling pressure follows through to Asia-Pacific bonds, sending equities sharply lower
Despite both the ISM services index and ADP measure of private payrolls printing well south of expectations – albeit likely partly explained by some severe winter weather during the period – selling pressure returned to the US Treasury market yesterday. The sell-off was seen elsewhere too, with Gilt yields up sharply after Chancellor Sunak announced extra near-term support for the UK economy ahead of tax rises in two years’ time. With the 10Y UST yield sitting at just under 1.50% as Wall Street opened, US equities quickly encountered selling pressure too. While Treasury yields dipped slightly into the close – the 10Y nudging down to 1.47% – the S&P500 ended the day down 1.3% and on its session lows. As before, higher bond yields had a greater impact on growth stocks, with the tech-laden Nasdaq closing down 2.7%. The rise in yields gave the greenback a modest boost, including against the yen despite the evident increase in risk aversion.

Against that background, unsurprisingly, bond and equity markets in the Asia-Pacific region have also faced significant selling pressure today. Aussie bond yields gapped on the open and continued to rise, with the now closely-watched November 2024 issue rising 5bps to 0.40%. The RBA bought a further A$2bn of longer-term bonds but the benchmark 10Y bond still closed up 10bps at 1.76%, having peaked at 1.81% during the afternoon. The Kiwi 10Y yield jumped 11bps to 1.83%, ignoring a speech by RBNZ Governor Orr in which he again tried to downplay the importance of the recent change to its monetary policy remit, which requires the Bank to consider the impact of its policy on house prices. As usual, the sell-off was generally smaller elsewhere in the region but included a 2bp rebound in the 10Y JGB yield to 0.136%.

Turning to equity markets, the TOPIX closed down 1.0% but off its session lows, as Japanese consumer confidence posted a larger-than-expected rebound in February. Investors are awaiting confirmation that PM Suga will extend the state of emergency in the Tokyo area, which would bring further short-term pain but might increase the probability that the Tokyo Olympics go ahead as scheduled from late July. In China, where investors are awaiting tomorrow’s opening of the week-long National Peoples’ Congress – which will approve the 5-year work programme drafted by the Standing Committee last November – the previously outperforming CSI300 slumped a further 3.2%, cutting its year-to-date gains to less than 1.5%. Losses of almost 2% were seen in Hong Kong and Taiwan, while South Korea’s KOSPI was also down more than 1%.

Fed Chair Powell will participate in a WSJ-moderated discussion on the economy today. If last week’s investor reaction to Powell’s Congressional testimony is any guide, markets may be calmer today, especially if he echoes this week’s comments from Fed Governor Brainard – she stated that she was paying close attention to market developments and would be concerned by disorderly conditions or persisting tightening of conditions “that could slow progress towards our goal”.

Japanese consumer confidence rebounds to post-pandemic high in February
While the decline in local coronavirus cases is yet to result in a material lift in PM Suga’s approval rating – probably not least due to the recent controversy created by his eldest son’s inappropriate entertainment of numerous government officials – today’s Cabinet Office survey indicated that the improving pandemic situation and outlook has resulted in a notable lift in Japanese consumer sentiment in February. In a pleasant surprise, the headline index increased 4.2pts – more than erasing the decline seen over the previous two months – to eke out a new post-pandemic high of 33.8. Lest one get too excited, the index remains 5.0pts lower than a year earlier and even further below the long-term average for the series (which is a shade above 40). In the detail, the largest improvement this month was in the index measures respondents’ expectations regarding employment – which had fallen most of the past two months. And with respondents pleased with developments in asset prices, they also expressed greater willingness to buy durable goods.

In other news, the BoJ published its regular monthly sectoral breakdown of outstanding bank loans for January. Total loans increased 5.5%Y/Y, with growth continuing to be dominated by a 7.3%Y/Y lift in lending to corporations (lending to small enterprises increase 6.0%Y/Y). By contrast lending to local governments increased 3.9%Y/Y and lending to individuals increased a more moderate 2.4%Y/Y.

Euro area retail and labour market data due after Merkel confirms gradual reopening plan
Yesterday evening saw Chancellor Merkel present her plan for a gradual reopening of Germany’s economy – following this week’s reopening of hairdressers, Monday will see bookshops, florists and garden centres reopen, with further easing possible on a local basis every fortnight thereafter. Most restrictions, e.g. the closure of hospitality and most non-essential retail, will remain in place to 28 March.

Looking ahead, today will bring the release of the latest euro area retail sales data, which are expected to report a fall of 1.6%M/M and 1.5%Y/Y in January as pandemic restrictions continued to weigh on household spending, particularly in Germany and France. Meanwhile, the euro area’s labour market figures, also to be published today, are expected to report than the unemployment rate was unchanged at 8.3% in January, still representing a relatively modest increase from the pre-pandemic rate of 7.2% in February last year thanks to support from the various government short-term working/furlough schemes. Survey-wise, the latest euro area construction PMIs are expected to point to a continued contraction in activity in three of the four larger euro area economies, with the Italian PMI forecast to reveal that activity moved broadly sideways last month. The UK construction PMIs are also due today.

Chair Powell to speak again today; productivity revisions and factory orders also due
A WSJ-moderated discussion on the economy by Chair Powell will doubtless be a focus of attention in the US today, although one wonders what more he might choose to say today that he withheld from last week’s hours of Congressional testimony. On the data front, following last week’s revised GDP report, the second estimates of labour productivity and unit labour costs for Q4 will be released, 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 our Daiwa America Chief Economist to expect the latter to have increase a sturdy 2.5%M/M. As always, the weekly jobless claims figures will also be worth a look.

Aussie retail sales confirmed to have increased modestly in January, while international trade surplus rises to a record high
This week’s Australian data flow drew to a close today with the ABS releasing the final figures for retail sales and international trade for January. Starting with the former, the completed survey reported a 0.5%M/M lift in retail spending in January – just 0.1ppt less than indicated by the preliminary data. A 1.6%M/M lift in spending on food amounted to the first increase since July, whereas spending on clothing fell a further 3.6%M/M as levels continued to normalise following a post-lockdown shopping spree. Spending on household goods was virtually unchanged during the month but with annual growth of 19.6%Y/Y remains at well-above normal levels.

While the modest lift in overall retail spending in January had followed a 4.1%M/M decline in November, this itself had followed a 7.1%M/M surge in spending in November as stores reopened in Melbourne. As a result, retail spending was up a strong 10.6%Y/Y in January. However, spending in January was no more than that seen on average through Q4, and so growth in the current quarter is unlikely to match the 2.5%Q/Q growth seen last quarter. Still, as yesterday’s national accounts highlighted, there remains plenty of room for further recovery in spending on services and so overall household spending is still likely to contribute to a solid lift in overall activity during the quarter.

Turning to the international trade report, Australia’s goods and services trade surplus widened by $A3.0bn to a record A$10.1bn in January (the surplus in December was revised up A$0.3bn to A$7.1bn). This outcome was more than A$2.6bn above the market consensus, with many analysts inexplicably continuing not to factor the accurate steer provided by the preliminary merchandise trade figures released earlier last week. Overall exports increased 6.2%M/M, lifting annual growth to 2.9%Y/Y – the first time that annual growth has been positive since March last year. This is a remarkable result considering that with the border closed to most foreign nationals, exports of services fell a further 2.9%M/M and were down 39%Y/Y. Fortunately, exports of goods increased 7.6%M/M, with about three-quarters of that growth driven by shipments of metal ores and minerals. With prices for these goods having increased very sharply, shipments are now up more than 51%Y/Y (A$5.4bn) over the last year, more than offsetting the slump in tourism revenue.

Meanwhile, imports declined 2.3%M/M in January and so were down 12.6%Y/Y. Imports of consumption goods declined 2.8%M/M, in large part explained by reduced exports of textiles, clothing and footwear, but were up a substantial 8.7%Y/Y. Imports of capital goods were little changed in the month but up an even more solid 12.1%Y/Y, while imports of intermediate goods fell 2.4%M/M – notwithstanding a 19%M/M lift in imports of fuels and lubricants – and so were down 9.8%Y/Y. Finally, with few Australians travelling overseas, imports of services were little changed during the month and so still down almost 54%Y/Y.

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