BoJ Regional Economic Report points to continued pickup

Chris Scicluna

Equity markets mixed in Asia as PBoC MLF operation falls short of expectations
After opening positively, as a rebound in oil lifted energy stocks and as better-than-expected earnings reports from the banking sector lifted financials, the S&P500 fell away yesterday afternoon to close down 0.4%. The decline in stocks coincided with the release of the Fed’s Beige Book, which reported both an acceleration of activity but also prices, with many Districts reporting moderate price increases but some saying prices rose more robustly. However, the losses were driven by tech stocks – with the Nasdaq closing down 1.0% – as cryptocurrency exchange Coinbase debuted with a 14% decline from its opening price, albeit still valuing the company at around $86bn. Treasury yields largely held steady as Fed Chair Powell, speaking to the Economics Club of Washington, reiterated that the Fed will not begin raising interest rates until full employment and 2% inflation are achieved, and inflation is on track to run moderately above 2% – conditions that are unlikely to be achieved before the end of next year if not beyond. In the currency market, the greenback lost ground against the euro and antipodean dollars. However, it has rebounded against Russia’s rouble, with newswires reporting that the US is poised to take action against Russian individuals and institutions accused of hacking or attempting to interfere with the US elections.

Against that background, it has been a mixed day in the Asia-Pacific markets. In China, the CSI300 is currently down 0.7% with investors evidently a little disappointed with the PBoC’s offer of CNY150bn via its Medium-term Lending Facility – at the same 2.95% rate applied since April last year – which was CNY6.1bn less than impending maturities. By contrast, Japan’s TOPIX increased 0.4%, erasing the previous day’s loss. There remained concern about Japan’s fourth wave of pandemic, with the covid-19 case count firmly on track to be back at January’s highs by the end of the month. And LDP Secretary-General Toshihiro Nikai – number 2 in the ruling party – stated that cancellation of the Tokyo Olympics remained a possibility, while Reform Minister Taro Kono noted that the events might yet be held without spectators. But BoJ Governor Kuroda – speaking to branch managers ahead of the release of the latest Regional Economic Report (detail below) – maintained his cautiously positive outlook for the economy, albeit reiterating that if necessary the Bank would take additional monetary easing measures without hesitation. And in a nod to next week’s release of the Bank’s semi-annual Financial System Report, he judged that that the financial system was maintaining stability as a whole too.

Stocks also moved higher in South Korea, where the BoK again left its policy rate unchanged and signalled that any talk of policy tightening was premature despite an improvement in the baseline outlook. However, equity markets weakened in Hong Kong and India, with the latter reporting more than 200k new coronavirus infections in a single day for the first time. In Australia, a lift in energy stocks drove the ASX200 to a 0.7% gain, while Aussie bond yields finished only slightly higher after the release of yet another stronger-than-expected jobs report (more on this below too).

BoJ Regional Economic Report points to continued pickup, but with pandemic weighing on consumer spending
Today the BoJ released the latest edition of its quarterly Regional Economic Report (Sakura Report), which provides a summary of anecdotal information gathered by the Bank’s various branches in a similar manner to the Fed’s Beige Book. The news this quarter was slightly less positive than three months earlier, with two of the nine regions (Hokkaido and Tohoku) revising down their economic assessment and the remaining regions leaving their assessment unchanged. That said, all regions aside from Hokkaido – where the economy was described as being more or less flat – continued to report improving conditions as a trend. Encouragingly, signs of a lift in business investment were cited by five of the nine regions. However, the assessment of consumer spending was slightly less positive with some regions cited a pause or slowing of growth, unsurprisingly referring to the impact of the coronavirus situation on spending on consumer services. As was the case previously, comments on production were positive with all regions reporting at least some degree of pickup. However, all regions continued to describe both labour market conditions and household incomes as being weak.

Final March inflation data from large euro area member states set to confirm rise due to energy prices
In what should be a quiet day for economic news from the euro area, the most notable data today are the final estimates of March inflation from the three largest member states. But like the Spanish figures yesterday these are set to confirm the flash estimates. Indeed, that’s already been the case with the German numbers, which confirmed a rise in the EU-harmonised measure of 0.4ppt to a 2½-year high of 2.0%Y/Y driven principally by higher energy prices. On the national measure, the CPI rate was also confirmed at 1.7%Y/Y, similarly 0.4ppt higher on the month, while the core measure (excluding food and energy) was unchanged on the month at 1.4%Y/Y. The equivalent French and Italian data are due shortly ahead of the final euro area numbers tomorrow. In the UK, meanwhile, the BoE’s latest credit conditions survey is due for release.

More strong data likely ahead in the US today thanks to stimulus payments, pandemic reopening and weather-related rebound
Today’s US economy diary is a relatively busy one with the release of a number of reports casting light on recent developments in economic activity. Most attention will probably centre on the retail sales report for March, which should report a leap in spending after February’s weather-driven dip and following the receipt of household stimulus payments under President Biden’s American Rescue Plan. Indeed, Daiwa America Chief Economist Mike Moran expects that headline spending likely increased 4.5%M/M, with ex-auto spending rising an almost equally strong 4.0%M/M. Also today we will receive the New York and Philadelphia Fed manufacturing surveys for April, the IP report for March, the NAHB housing index for April and business inventory data for February. As far as IP is concerned, following a weather-induced slump in February, a record ISM index reading and strong employment data lead Mike to estimate a 2.0%M/M rebound in output. Aside from the economic data, today will also bring further earnings reports from the banking sector with the likes of Citigroup and Bank of America presenting their results today, while a speech by San Francisco Fed President Daly on financial stability and monetary policy will also hold some interest.

Australian unemployment rate falls to 5.6% in March as job growth again easily beats expectations
The domestic focus in Australia today was on the labour market, which holds the key to how the RBA’s monetary policy stance will unfold. With job advertising rising almost 40%Y/Y to the highest level since 2008, analysts were understandably looking for another strong Labour Force report in March. And for a second consecutive month, those upbeat expectations were readily exceeded with employment growing a further 0.5%M/M or 70.7k – double the consensus expectation – and so now up 0.6%Y/Y. This brings to level of employment to a record high, while the employment-to-population ratio is now back at its pre-pandemic level.

In the detail, after growing by an average of more than 70k over the previous five months, full-time employment declined almost 21k in March and so was essentially unchanged from a year earlier. However, part-time employment increased almost 92k and 1.9%Y/Y (the full-time/part-time split can be somewhat volatile from month to month). Amongst the larger states, stronger-than-average employment growth was reported in Queensland and Western Australia, whereas growth was somewhat slower in Victoria and non-existent in South Australia. Meanwhile, aggregate hours worked increased a further 2.2%M/M to be up 1.2%Y/Y – the first time that annual growth has been positive since March last year. Given a weak January – when a greater-than-usual number of Australian’s appeared to take holidays – the number of hours worked increased just 0.4%Q/Q in Q1, however. Even with the labour force participation rate rising 0.2ppts to a new record high of 66.3%, the very strong lift in employment resulted in a further 0.2ppt decline in the unemployment rate to a 12-month low of 5.6%. By contrast, in its February Statement on Monetary Policy, the RBA had forecast that such an unemployment rate would not be reached until around the middle of next year. Meanwhile the underemployment rate – which captures those who are working less hours than they would like or in jobs for which they are overqualified – fell 0.6ppts to 7.9%, marking the lowest reading since June 2014.

Needless to say, the continuation of positive surprises from the labour market should please the RBA’s Board, which has made clear that it views lowering the unemployment rate as an important national priority. In the near-term, with the Government’s JobKeeper wage subsidy having expired on 28 March, we imagine that the RBA will be wary that the coming few months might see a period of much less robust labour market data as some jobs that are unviable without the subsidy payments disappear. As a result, we doubt that today’s report will lead to a change in the Bank’s very dovish rhetoric at next month’s Board meeting. But if anything like the recent pace of improvement is sustained, the unemployment rate could easily move into the low 4s during the course of next year, which would surely lead to a reassessment of the Bank’s stance that policy tightening is unlikely until 2024 at the earliest. In the near-term, the key pressure point will be the Board’s decision on roll its 0.1% target for the April 2024 bond to the November 2024 bond (this is unlikely to occur, in our view). Next week’s release of the minutes from this month’s meeting might case some light on whether the Board’s view is shifting.

Kiwi house sales remain very strong in March
Despite the re-imposition of LVR restrictions on mortgage lending and the announcement of government measures to stem investor demand, the REINZ housing report suggests that the Kiwi housing market remained buoyant in March. Total home sales increased 31.2%Y/Y, up from 14.6%Y/Y in February. And while growth was boosted by base effects associated with the start of last year’s national lockdown, the level of sales was nonetheless the most in a March month since 2007. Meanwhile, the median sales price increased 24.3%Y/Y, up from 22.8%Y/Y in February. However, with the government likely to announce more measures to boost housing supply in next month’s Budget, we would be very surprised if house price inflation did not begin to slow materially over coming months.

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