Japanese IP declines in February

Chris Scicluna

Equity markets slightly weaker as investors await today’s US infrastructure announcement
With the 10Y Treasury yield touching a 14-month high of 1.77% yesterday, Wall Street was under early pressure as investors continued to await today’s news from the White House concerning further fiscal stimulus. However, with Treasury yields eventually slipping from their highs despite a much larger than expected lift in the Conference Board’s measure of consumer sentiment, the S&P500 closed down just 0.3% assisted by a rebound in financial stocks following Monday’s Archegos-driven losses. According to the latest Washington Post report, today President Biden will announce a $2.25trn infrastructure and jobs package, with a further package of measures concerning health and social welfare – taking the overall price tag to $4trn or more – likely to be announced within weeks. Citing the usual ‘people familiar with the matter’, the Washington Post reports that today’s package will include money for transport infrastructure, housing infrastructure, IT infrastructure, green investments and assistance for manufacturing. Of course, much of this will likely be paid for by the reversal of President Trump’s 2017 tax cuts.

UST yields have again traded a little higher in Asia today (the 10Y yield is currently up almost 2bps at 1.72%), contributing to a softer tone across most Asia-Pacific equity markets. In Japan, the TOPIX declined 1.2%, weighed down by further losses in the financial sector after Mitsubishi UFJ warned of losses at its European unit, presumed to be in the wake of the troubles at Archegos Capital Management. A weaker than expected IP report probably didn’t help matters, although firms forecast a big lift in activity in the coming quarter. In China, the CSI300 fell 0.9%, almost fully erasing yesterday’s gains, with a much steeper than expected rebound in the country’s official PMIs perhaps rekindling fears of tighter macro policy settings. Markets in South Korea and Singapore were little changed, while Australia’s ASX200 bucked the trend with a 0.8% gain with industrials, real estate and consumer stocks benefitting from news of a far steeper than expected rebound in dwelling approvals in February, as well as celebrating the rebound in China’s PMI data. In the bond market, JGB yields were little changed, but higher UST yields were reflected in slightly higher yields in Antipodean markets.

Japan’s industrial production declines in February; further fall likely in March but Q2 looking brighter
With Japan’s industrial production having lifted by a seasonally-adjusted 4.3%M/M in January – almost certainly influenced by the timing of the Lunar New Year holiday in China – analysts had anticipated that a degree of payback would follow in February, especially given the added negative impact of the global semiconductor shortage and the mid-month earthquake near the Fukushima prefecture. As it turns out, that payback was somewhat larger than anticipated with overall production declining by 2.1%M/M – an outcome that was 0.8ppts weaker than the consensus expectation and the exact inverse of what optimistic firms’ had forecast last month. As a result, in unadjusted terms – as reported by METI – output was down 2.6%Y/Y in February. However, using the seasonally-adjusted series, a 3.8%Y/Y decline in February represented a deterioration from the 2.0%Y/Y decline in reported in January. As far as the other headline figures are concerned, shipments declined a less significant 1.5%M/M in February and were down an unadjusted 3.5%Y/Y. Inventories fell 1.0%M/M and so were down a steep 9.6%Y/Y, led by 25.9%Y/Y decline in inventories of electronic parts and devices and a 17.2%Y/Y decline in inventories of ICT equipment. As a result, the inventory ratio increased 1.0%M/M but was still down 4.8%Y/Y.

In the detail, production of non-durable consumer goods suffered a steep 9.8%M/M decline in February, leaving output down 6.6%Y/Y. Of particular note was an 11.4%M/M decline in production of autos, which was impacted by both chip shortages and the earthquake. Production of non-durable consumer goods fell a lesser 3.1%M/M but was still down 5.7%Y/Y. Total production of capital goods fell just 1.0%M/M in February, weighed down by a 6.9%M/M decline in output of transportation equipment, but was still up 2.5%Y/Y. Excluding transportation equipment, production of capital goods increased an encouraging 1.4%M/M and 5.5%Y/Y, notwithstanding a pullback in production of business-orientated machinery and ICT equipment following steep increased in January. Finally, production of construction goods declined 1.5%M/M and 7.4%Y/Y, which is not surprising in light of trends in the construction sector.

Looking ahead, unfortunately firms forecast that production will decline by a further 1.9%M/M in March, albeit much less than 6.1%M/M contraction forecast last month. In contrast to most months, firms tend to be slightly too pessimistic in formulating their March forecasts and so METI estimates a bias-corrected 1.4%M/M decline in output for the month (with a ±1.7ppt range at the 90% confidence level). So after increasing 8.8%Q/Q in Q3 and 6.3%Q/Q in Q4, it appears that industrial output will expand by 1.5%Q/Q in Q1, likely providing a partial offset to the reduction in output that seems certain to occur in the service sector as a result of pandemic-driven restrictions on activity. The foreshadowed further decline in output in March would of course also provide a weak base for growth in Q2, but today’s survey reports that firms expect a huge 9.3%M/M lift in activity in April – certain to prove too optimistic, but boding well for output nonetheless. As a result, METI assesses that “Production is picking up”, which is slight upgrade from the qualified uptrend that was noted last month. Considering the trends in the other manufacturing indicators – such as recent PMI and Reuters Tankan readings – METI’s assessment seems fair, and is likely to be further supported by the BoJ’s Tankan survey tomorrow. And over the coming three months annual comparisons will improve markedly due to the slump in activity that followed last year’s first wave of coronavirus cases.

Japanese housing starts nudge higher in February; growth in construction orders slows
Today’s other Japanese economic news concerned the construction sector. After declining more than 4%M/M in December to the lowest level since October 2011, housing starts rebounded for a second month in February, albeit by a very modest 0.8%M/M. Starts were down 3.7%Y/Y compared with 3.1%Y/Y previously, but this was nonetheless a slightly firmer outcome than analysts had expected. Meanwhile, Japan’s largest construction companies reported that construction orders increased just 2.5%Y/Y in February, down from 14.1%Y/Y in January. Domestic orders increased just 1.8%Y/Y, with all that growth accounted for by a lift in public sector orders. Domestic private sector orders slipped 0.1%Y/Y, with growth in the non-manufacturing sector offset by a weak month for orders from the manufacturing sector. Over the past three months combined, domestic private sector orders have fallen 4%Y/Y.

China’s official PMIs rebound sharply in March, beating market expectations
Following a notable slowing over the first two months of this year – doubtless linked to a rise in local coronavirus cases and the Lunar New Year holiday – China’s official PMI readings rebounded in March by more than analysts had expected. The closely-watched manufacturing PMI increased 1.3pts to 51.9, thus returning to where it had ended last year. Meanwhile the non-manufacturing PMI leapt 4.9pts to 56.3, which marked the highest reading since November. The headline composite PMI – which combines the output index from the manufacturing PMI and the headline non-manufacturing PMI – increased 3.9pts to also achieve a 4-month high of 55.3, which is also 2pts above the historic average.

Turning to the detail, the outcome in the manufacturing sector was driven especially by medium- and small-sized firms, where the respective indices increased 2.0pts and 2.1pts to return to expansionary levels. The key activity sub-components all recorded material improvement, including the output index which increased 2.0pts to 53.9. The new orders index increased 2.1pts to a 3-month high of 53.6 and the new export orders index increased 2.4pts to a 3-month high of 51.2. Interestingly, while the employment index increased 2.0pts to an 11-month high of 50.1, the business activity expectations index slipped 0.7pts to 58.5 (albeit still comfortably above the historic average). In the services sector there were even more convincing signs that firms expect activity to lift, with the new orders index increasing a sharp 7.0pts to a 13-year high of 55.9 and the new export orders index increasing 4.6pts to a 19-month high of 50.3. After reaching a more than 8-year high last month, the business activity expectations index nudged down 0.3pts to 63.7.

Perhaps not surprisingly, the PMI pricing indicators also firmed this month. In the manufacturing sector the output prices index increased 1.3pts to a new high of 59.8 while the input price index increased 2.7pts to a more than 4-year high of 69.4. In the non-manufacturing sector, the output prices index increased 2.1pts to a 3-month high of 52.2 and the input prices index increased 1.5pts to a more than 3-year high of 56.2.

Euro area flash inflation bound to post steep rise while French figures were just a touch softer than expected
The flash March inflation estimates from France just released came in only a touch softer than anticipated, with the EU-harmonised measure jumping 0.6ppt to 1.4%Y/Y, the highest since February 2020 but 0.1ppt below the BBG consensus, and the national measure rising 0.5ppt to 1.1%Y/Y, similarly 0.1ppt below consensus. As in Germany and Spain yesterday, inevitably the main source of inflation was energy prices, which leapt 4.8%Y/Y following the drop of 1.6%Y/Y the prior month. However, the pace of decline of manufactured items eased 0.2ppt to -0.2%Y/Y. And services inflation rose 0.3ppt to 1.1%Y/Y. We forecast the flash euro area figures, due later this morning, to show increases of 0.5ppt in the headline inflation rate to 1.4%Y/Y and 0.2ppt in the core rate to 1.3%Y/Y. While the risks to that forecast of headline inflation are skewed to the upside, those to the core rate are probably skewed to the downside.

UK GDP growth revised up in Q4, but record pace of contraction in 2020 little changed
This morning’s updated UK national accounts revealed that GDP growth in Q4 was a touch firmer than previously thought, with an upwards revision of 0.3ppt to 1.3%Q/Q leaving the year-on-year rate 0.5ppt firmer at -7.3%Y/Y. Amendments to the estimates for previous quarters suggest that GDP was even weaker than previously thought in Q2, down 19.5%Q/Q, 0.5ppt more than in the prior estimate. But growth in Q3 was 0.8ppt stronger than previously thought at 16.9%Q/Q. And, over 2020 as a whole, UK GDP is now estimated to have contracted by 9.8%Y/Y, just 0.1ppt less than previously thought and the steepest on the series dating back to 1949. Among the other detail published this morning, the UK’s household saving ratio increased 1.8ppts in Q4 to 16.1%, with the level of gross savings up almost 110%Y/Y representing a potential source of demand to come. But in the balance of payments, a weaker trade balance saw the UK’s current account deficit widen 2.2ppts in Q4 to 4.8% of GDP (4.2% of GDP excluding precious metals), the most since Q119. And the hit from Brexit will probably see that widen sharply further in Q121 and to 7% of GDP or above this year.

President Biden’s infrastructure announcement likely to be the main event in the US today
The main focus in the US today will be on President Biden’s announcement of his infrastructure and jobs package, providing further stimulus to the economy. On the data front, most interest today will probably centre on the ADP employment report to see whether anything can be gleaned ahead of Friday’s official employment report. Similarly, today’s Chicago PMI might offer some insight into tomorrow’s ISM manufacturing survey. The pending home sales report for February will round out the day’s data flow.

Australian dwelling approvals rebound sharply, but private sector credit growth slows
Today’s Aussie building approvals report for February suggests that the previous month’s 19.4%M/M slump in dwelling approvals was likely driven by nothing more than a greater-than-usual number of Australians taking time off to enjoy the summer weather. Indeed, the number of dwelling approvals rebounded 21.6%M/M in February to a level just below that seen at the end of last year and up 20.1%Y/Y – a far larger rebound than the modest 3%M/M lift that the market had expected. Approvals for apartments – typically the largest source of volatility – rebounded more than 45%M/M after previously declining to the lowest level seen since the GFC. Private house approvals increased 15.1%M/M to set a new record high and were up a whopping 58%Y/Y. In value terms, approvals for residential buildings increased 21.6%Y/Y. However, the value of approvals for non-residential buildings fell 7.9%Y/Y, continuing the weak trend that has emerged since the onset of the pandemic. So, the value of total approvals for all buildings increased a less emphatic 8.9%Y/Y, reminding that the near-term outlook for the construction sector is not quite as rosy as suggested by the performance of the housing market.

In other news, the RBA released the money and credit aggregates for February. Private sector credit grew a lower-than-expected 0.2%M/M, causing annual growth to edge down to 1.6%Y/Y – the slowest pace since the GFC. Housing-related credit grew 0.4%M/M for a third consecutive month, led by a robust 0.6%M/M increase in loans to owner-occupiers (lending to investors increased just 0.1%M/M for a seventh consecutive month). Other forms of consumer credit remained exceptionally weak, however, with personal loans declining a further 0.5%M/M in February and so down 12.6%Y/Y. Meanwhile, business lending was essentially unchanged in February and so down 0.2%Y/Y – the first contraction since October 2011 and doubtless reflecting still low demand for investment-related funding.

Kiwi business sentiment confirmed to have weakened slightly in March
The final results of the ANZ’s Business Outlook Survey for March confirmed that a negative impact from the relatively brief pandemic-driven restrictions imposed on two occasions over the past month. The headline general confidence index fell 11pts to -4.1, while the activity outlook index – which has the best correlation with GDP growth – fell a relatively modest 4pts to 16.6. While investment intentions also eased fractionally, employment intentions firmed to the highest level since August 2017, suggesting that firms continue to view the medium-term outlook favourably. Meanwhile, 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 to 1.97% – now just a fraction below the midpoint of the RBNZ’s inflation target and at the highest level since April 2019.

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