More signs of recovery in Japan’s labour market in January

Chris Scicluna

A positive session on Wall Street gives way to weakness in Asia as Chinese regulator expresses concerns about financial bubbles
With the sell-off in the Treasury market halted at least for now – the 10Y UST mostly trading a 1.40-1.45% range after rallying on Friday – Wall Street began the new week with its best gains since June. Some stronger than expected manufacturing data from the ISM – including a decent rebound in the new orders index – more than offset concerns about the softness seen in China’s PMI reports. Together with building anticipation that President Biden’s fiscal package will begin to deliver further stimulus by midmonth, investors saw fit to rally the S&P500 by 2.4% while the Nasdaq posted an even larger gain of 3.0%. Despite the decline in risk aversion, the greenback made further gains against both the euro and yen.

Against that background, a positive day had appeared to be in the offing for equity markets in Asia. While it began that way – for example, the TOPIX opened up 0.7% – the mood soured quickly as newswires reported comments made the Chair of the China Banking and Insurance Regulatory Commission, Guo Shuqing, who was delivering a briefing in Beijing. According to those reports, in contrast to the sanguine stance of most western policymakers, Guo said that he was “very worried” about the disconnect between US and European asset prices and their underlying economies, which he thought would lead to a correction “sooner or later”. Guo also expressed concern about bubbles in China’s property market.

The expression of those views has seen US equity futures lose about ½% since Wall Street closed. In Japan, the TOPIX reversed course to close down 0.4% while JGB yields also moved lower – the 10Y falling 2bps to 0.123 – following media reports suggesting that the BoJ might step in with increased rinban purchases before yields hit the permitted perceived upper YCC limit of 0.2%. Local investors also reflected on the MoF’s latest survey of corporations, which pointed to a large rebound in profits in Q4 but a further unexpected decline in business capex. The latter was at odds with the preliminary national accounts and so suggests that at least a portion of the earlier upside surprise to GDP growth will likely be revised away when updated figures are released next week (more on this survey below). Meanwhile, China’s CSI300 fell 1.5% to erase Monday’s rally, while the Hang Seng is down more than 1%. And Australia’s ASX200 closed down 0.4% as 10Y ACGB yields rebounded 5bps to 1.70% after the RBA retained its dovish policy stance but offered no notable criticism of the past month’s significant rise in bond yields (more on the RBA below too).

More signs of recovery in Japan’s labour market in January
Starting with today’s good news, following on from yesterday’s also encouraging news from the manufacturing sector, today reports from both the MIC and MHLW pointed to another month of greater-than-expected resilience in Japan’s labour market. According to the MIC, even though parts of the economy were subject to restrictions on activity, household employment increased by 110k or 0.2%M/M in January. The annual decline in employment now stands at 470k or 0.7%Y/Y – unsurprisingly driven by losses in the retail/wholesale trade and hospitality sectors – but nonetheless employment is 650k above the pandemic-low reached in April last year. With the labour force also increasing 11k in January, the unemployment rate stood at 2.9% – 0.1ppt below market expectations. The January reading is also 0.1ppts below the December reading, which due to slightly less favourable rounding is now a notch higher than reported previously.

To a degree, resilience was also evident in the data issued by the MHLW, which reported that the effective jobs-to-applicant ratio increased by an unexpected 0.04ppts to 1.10x in January, marking the highest reading since June last year. To be fair, this was partly due to a 2.3%M/M decline in the number of job applicants – perhaps not surprising given developments in coronavirus cases during the month. However, the number of outstanding job offers also increased 3.1%M/M in January, reducing the annual decline to 17.7%Y/Y.

Japanese capex declines in Q4, pointing to downward revision to GDP growth
In less positive Japanese news, today the MoF released the results of its latest quarterly survey of company performance. As usual, most interest centred on the survey’s findings regarding firms’ capex, which will guide revisions to the national accounts that are due to for release next Tuesday. Sadly, the MoF survey suggests that the surprisingly positive business capex estimates in the preliminary national accounts report – which had contributed 0.7ppts to the larger-than-expected 3.0%Q/Q lift in GDP in Q4 – are likely to be revised lower. Indeed, according to the MoF’s survey, total business investment recorded a further 0.3%Q/Q decline in Q4, so that spending was down 4.8%Y/Y. By contrast, respondents to Bloomberg’s survey had expected spending to have increased around 2.5%Q/Q and the preliminary national accounts had estimated a 4.1%Q/Q lift in nominal business investment. Excluding software, spending fell an even greater 1.4%Q/Q and 6.1%Y/Y.

Elsewhere in the survey, firms’ sales recovered by a further 2.5%Q/Q in Q4, with the manufacturing sector slightly outperforming with growth of 3.0%Q/Q. Even so, sales were down still down 4.5%Y/Y. The increase in sales revenue and firms’ cost-cutting led to a further 15.5%Q/Q rebound in ordinary profits in Q4, which as a consequence are now down just 0.4%Y/Y. Manufacturing profits increased more than 30%Q/Q to be up almost 22%Y/Y, whereas the still under-pressure non-manufacturing sector saw profits lift just 7.5%Q/Q and so remain down 11.5%Y/Y. Meanwhile, with economic uncertainty declining, if only slightly, growth in firms’ short-term borrowings slowed to 9.7%Y/Y from 11.8%Y/Y previously. But with firms’ caution still evident in a sharp 15.3%Y/Y lift in their cash and deposit holdings, their overall liquidity ratio declined just 0.4pts to 18.7% and thus remains just 1.4pts below the record high seen back in Q2.

Completing the day’s Japanese data flow, the BoJ reported that the monetary base expanded at an annualised pace of 14% in February – much greater than in the same month last year, and so lifting annual growth to 19.6%Y/Y.

RBA leaves all policy settings unchanged, retains dovish forward guidance but offers no opinion on global bond sell-off
As was widely expected, it was “business as usual” at the RBA today with the Board electing to keep all of its policy settings unchanged. So the Bank’s cash and 3-year bond rate targets once again remained at 0.1%, the parameters of the Term Funding Facility were unchanged and the Bank’s government bond purchase programme remained capped at last month’s expanded A$200bn (to date the Bank has purchased A$74bn). Crucially, the Bank’s forward guidance was also unchanged. Specifically, given the baseline outlook for inflation and the labour market – which the Bank indicated was also unchanged from that set out in last month’s Statement on Monetary Policy – it remains the case that the Board thinks that the conditions required to prompt a rate hike are unlikely to be met until 2024 at the earliest. As before, the Board stated that it will not increase the cash rate until actual inflation is sustainably with the 2-3% target range, and noted that this will likely require a return to a tight labour market and materially higher wage growth – neither of which are expected to happen quickly.

Speaking to recent movements in bond rates, the Bank attributed the global sell-off to positive news on vaccines and the prospect of significant fiscal stimulus in the US, which had helped to lift inflation expectations to rates closer to central banks’ target. Notably, the Bank did not pass judgement on whether the move up in yields was warranted by the economic outlook. However, with regard to the domestic market, the Bank stated that it remains committed to the 3Y bond yield target and will continue to purchase bonds to support the target as necessary. Yesterday’s additional purchases under the QE programme were described as being brought forward “to assist with the smooth functioning of the market” and the Board again signalled a willingness to further extend that programme if required.

Australian bond yields sold off to the day’s highs following the release of the RBA’s post-meeting statement, suggesting that investors were looking for the RBA to do more than simply observe the recent rise in bond yields and the strength of the Australian dollar. The next RBA event of note is a speech on 10 March by RBA Governor Lowe to the AFR Business Summit.

Aussie data continue to point to solid lift in GDP in Q4; but dwelling construction approvals correct sharply lower in January
Turning to the Aussie data flow, the countdown to tomorrow’s national accounts continued today with the ABS releasing data on external trade and government spending. The former revealed a A$3.8bn widening of the seasonally-adjusted current account surplus to A$14.5bn in Q4, with the goods and services surplus widening an even greater A$4.4bn to A$18.1bn. The volume data indicated that merchandise exports increased 4.3%Q/Q – the first increase in five quarters – while exports of services eked out a 1.2%Q/Q gain but sadly remained down more than 42%Y/Y. Meanwhile, imports of goods increased 5.3%Q/Q, led by a sharp recovery in imports of consumer and capital goods. Imports of services increased 2.7%Q/Q but were down 56%Y/Y, with Australians’ spending on travel down almost 99%Y/Y. In the absence of significant revisions, the ABS notes that net exports have made a 0.1ppt negative contribution to GDP growth in Q4 – a slightly smaller subtraction than analysts had expected and much smaller than the 2.0ppt negative contribution seen in Q3.

Meanwhile, the government sector remained a direct source of growth in Q4. According to the ABS real general government consumption spending rose a further 0.8%Q/Q in Q4, which will make a positive contribution of 0.2ppts to GDP growth. In addition, total real public investment spending increased 3.5%Q/Q, which will contribute a further 0.1ppts to GDP growth. All up, given the indicators released over the past two days, a further rebound in GDP of around 2½%Q/Q seems likely to revealed in tomorrow’s national accounts, which would be broadly in line with the estimates made by the RBA in last month’s Statement on Monetary Policy.

In other news, the run of very strong Australian housing data finally ended today. With other figures having shown a greater-than-usual number of Australians taking time off to enjoy the summer weather, the number of dwelling approvals was reported to have slumped 19.4%M/M in January – a much deeper correction than the market had expected. However, given the considerable strength seen in the latter part of last year, annual growth remained very sturdy at 19.0%Y/Y. Approvals for apartments – typically the largest source of volatility – plunged almost 40%M/M to the lowest level seen since the GFC and were down 22.7%Y/Y.

By contrast, after surging more than 17%M/M in December to a new record high, private house approvals fell a less severe 12.2%M/M and were still up a whopping 38%Y/Y. In value terms, approvals for residential buildings increased 11.4%Y/Y, implying a slight compositional shift towards cheaper homes. In addition, it is worth noting that the value of approvals for non-residential buildings was down 31.4%Y/Y, continuing the weak trend that has emerged since the onset of the pandemic. So, the value of total approvals for all buildings was down 8.8%Y/Y, once again reminding that the near-term outlook for the construction sector is less rosy than suggested by the performance of the housing market. Finally, the ANZ-Roy Morgan consumer confidence index edged up 1.0%M/M to 110.3 last week, leaving it a little below the post-pandemic high seen in late January.

German retail sales miss expectations with further drop in January; flash euro area inflation and more dovish ECB-speak to come
Having dropped sharply in December in response to the closure of non-essential retail from the middle of that month, German retail sales were expected to be broadly stable in January. However, the restrictions on activity took a greater toll than expected. While the decline in December was revised to be 0.5ppt smaller than previously thought at 9.1%M/M, retail sales volumes fell a further 4.5%M/M in January to be down a hefty 8.7%Y/Y. With data last week having revealed that French spending on goods also fell close to 4½%M/M at the start of the year, the euro area retail sales figures due to be released on Thursday are likely to report a significant decline in January, underscoring the likelihood of a notable contraction in private consumption (and GDP) this quarter.

The focus in the euro area this morning will be the flash estimate of euro area CPI for February. Yesterday’s results from Germany and Italy respectively saw inflation unchanged at 1.6%Y/Y and up 0.3ppt to 1.0%Y/Y. But Friday’s figures reported declines in the French and Spanish HICP rates. So, overall, the figures from the member states tally with our forecast of headline euro area inflation to remain unchanged at 0.9%Y/Y. But given upwards pressure from energy inflation, we expect the core rate to fall 0.2ppt to 1.2%Y/Y. Beyond the data, ECB Executive Board member Fabio Panetta will likely maintain the dovish guidance from Frankfurt today when he will speak publicly about “Monetary policy and the way out of the pandemic”.

February auto sales the only economic release in the US today
Following yesterday’s encouraging news from the US factory and construction sectors, the only economic release in the US today concerns auto sales during the month of February. Daiwa America Chief Economist Mike Moran has pencilled in sales of 16.4M SAAR, which would represent only a modest slowdown from the post-pandemic high reached in January. Aside from these data, the other diary entries of note are speeches on the economy by Fed Governor Brainard and San Francisco Fed President Daly. Meanwhile investors will want to continue to monitor the passage through the Senate of President Biden’s stimulus package.

Kiwi import volume rebound outpaces rise in exports in Q4, further raising prospect of a modest drop in GDP
Ahead of the release of the full national accounts later this month, today Statistics New Zealand released its breakdown of Q4 goods trade values into its constituent volume and price components. The report pointed to a 3.3%Q/Q increase in export volumes, with solid growth seen in both food and non-food manufactures. As a result, annual growth increased to an encouraging 4.3%Y/Y. However, this growth was outpaced by a 6.5%Q/Q lift in import volumes, driven by a sharp rebound in imports of transport equipment from previously depressed levels. Given conceptual and measurement differences, these figures don’t always translate well into the national accounts, but at face value they do suggest that net exports will be a modest drag on GDP growth in Q4. Following the previously reported pullback in retail spending, this further raises the prospect of a modest decline in overall activity following the 14%Q/Q rebound experienced in Q3 (which had restored pre-pandemic levels of activity despite the country being closed to most international visitors). 

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