BoJ Tankan points to improvement in business conditions

Chris Scicluna

Markets unmoved after release of well-signalled Biden infrastructure plan, but Asian equity markets mostly firmer today. Euro govvies a touch firmer after extension of French and Italian lockdowns confirmed
After underperforming through the quarter, technology stocks rallied on final day to lift the Nasdaq to a 1.5% gain on Wednesday. However, after opening firmer and reaching a new intraday high, the S&P500 faded into the close to end up the day up just 0.4% (but up 5.8% for the quarter). The broader index was weighed down by weakness in both energy stocks and financials, with oil declining in advance of today’s OPEC+ meeting and financials still feeling the fallout from the turmoil at Archegos Capital Management. Both 10Y and 30Y UST yields nudged higher but the greenback was generally little changed.

After the close, President Biden delivered his scheduled speech in Pittsburgh in which he unveiled his long-awaited infrastructure plan. As indicated by earlier reports, the proposed “American Jobs Plan” carries a $2.25trn price tag – albeit spread over eight years – and includes $620bn for transportation, $650bn for the likes of cleaner water and high-speed broadband, $580bn to assist manufacturing and $400bn for care of the elderly and disabled. As also signalled, the plan will be paid for over fifteen years largely by raising the corporate income tax rate by 7ppts to 28% – thus rolling back half of the Trump tax cut – and a proposed minimum 21% tax rate on US corporations foreign earnings.

With Biden’s plan having been well signalled – and with a further “American Family Plan” still to be unveiled later this month – US equity futures, Treasuries and the greenback were largely unmoved by Biden’s speech. But given the gains overnight, bourses in the Asia-Pacific region have generally firmed today. With utility stocks struggling, the TOPIX underperformed, closing up just 0.2% despite a BoJ Tankan survey that was mostly a little firmer than analysts had expected and an encouraging upward revision the Japan’s manufacturing PMI to a 27-month high. JGB yields increased, with the 10Y yield moving up to 0.10%. While the more upbeat Tankan may have contributed at the margin, investors were largely responding to yesterday’s late release of the BoJ’s planned bond purchases for April, which had indicated a reduced frequency of purchases compared with March. By contrast, despite a disappointing Caixin manufacturing survey, mainland China’s CSI300 increased 0.9%, while solid gains were also seen in Hong Kong and Taiwan. In Australia, the ASX200 increased 0.6% amidst the release of generally robust local data, but ACGB yields were little changed.

In the euro area, sovereign bonds are a touch firmer so far but equity futures are little affected by yesterday evening’s announcements of extended pandemic containment measures in France and Italy. German retail sales figures disappointed this morning but the final manufacturing PMIs due shortly should be upbeat and point to ongoing recovery in the sector.

BoJ Tankan points to improved conditions in Q1, cautious optimism as firms look ahead to FY21
Turning to today’s economic reports, the key focus in Japan was the BoJ’s latest Tankan survey. In summary, consistent with other business survey indicators, respondents to the Tankan indicated a further improvement in business conditions over the past quarter. Indeed, the extent of improvement over the past quarter – especially in the manufacturing sector – was more pronounced than the market had expected. At this stage, firms appeared unconvinced that conditions will improve further over the coming quarter. However, looking ahead to FY21 as a whole, they anticipate a modest rebound in their sales, profits and capex. With firms continuing to operating with a degree of spare capacity and excessive inventories, inflation pressures and inflation expectations remained very weak too but not quite as soft as in the previous quarter.

Turning to the detail, a net 8% of the respondents reported unfavourable business conditions in Q1, down 7ppts from Q4 and the best reading since Q120. The closely-watched diffusion index (DI) for large manufacturers improved by a larger-than-expected 15ppts to 5, thus moving back above the long-term average (which is close to 0) and to the highest level since Q319. The improvement was reasonably broad-based across industries, with only the shipbuilding, food and beverage and textiles industries reporting a slight worsening of conditions. Conditions were viewed most favourably in the petroleum, electrical machinery and non-ferrous metals industries. Looking ahead, a net 4% of large manufacturers expect favourable business conditions to prevail in Q2, indicating that conditions are expected to remain broadly stable. It is worth noting that this forecast is based on an assumed exchange rate of ¥105.38/$ in FY21, so these firms would likely be more confident if the yen were to remain around its current weaker level. As is usually the case, small- and medium-sized firms were more downbeat in their assessment about both the past quarter and prospects for the coming quarter, but the improvement seen over the past quarter was similar to that for large firms. For example, the DI for small manufacturing firms increased 14ppts to -13 (the long-term average is -12), while a similar net 12% of firms expect that business conditions will remain unfavourable in Q2.

Moving to non-manufacturers, the DI for large firms improved a larger-than-expected 4ppts to -1 – a positive result considering the sector’s exposure to the disruptions caused by the winter wave of coronavirus cases. Not surprisingly, conditions remained especially dire in the hospitality sector, with the relevant DI declining 15ppts to an awful -81. Firms providing services to individuals also grew more downbeat, with the relevant DI falling 8ppts to -51. However, a number of industries describe business conditions as favourable on balance, with this quarters biggest improvers being real estate, services for business and goods leasing. Looking ahead, a net 1% of large non-manufacturing firms expect conditions to remain unfavourable over Q2, indicating that in aggregate these firms expect no improvement over this period. This result reflects a notable weakening of expected conditions in the retailing, construction and information services industries, which largely offsets the expected improvement in several other industries (especially services for individuals and the hospitality sector). As in the manufacturing sector, small- and medium-sized firms were more negative about both Q1 and the outlook for Q2. For example, the DI for small non-manufacturing firms increased just 1ppts to -11 (the long-term average is -9), while a net 16% of firms expect that business conditions will remain unfavourable in Q2.

Elsewhere in the survey, firms’ assessment of the economic damage caused by the pandemic in FY20 has decreased slightly, while firms are understandably more positive about the outlook for FY21. Firms now forecast that aggregate sales will decline 8.1%Y/Y in FY20 – 0.5ppts less than in the prior survey – with broadly similar responses across the manufacturing and non-manufacturing sectors. And led by a forecast of 3.0%Y/Y growth in the manufacturing sector, the first forecast of sales in FY21 is for growth of 2.4%Y/Y. In aggregate current profits are now expected to have fallen 30.3%Y/Y in FY20 – an improvement of 5ppts from the prior survey. In FY21 profits are forecast to rebound 8.6%Y/Y, led by a 12.2%Y/Y increase for non-manufacturing firms (whose profits are estimated to have fallen by more than a third in FY20). As a result, the overall profit margin for all firms is forecast to decline to 3.97% in FY20 – 0.27ppts higher than in the last survey but still down from 5.23% in FY19. The profit margin is forecast to improve to 4.21% in FY21 – about 0.20ppts above the average over the past couple of decades – led by a sharp improvement in the manufacturing sector, where the margin is forecast to rise 0.56ppts to 5.50%.

The improved outlook for sales and profits has translated into a more positive outlook for capital spending in FY21, albeit coming off a weaker base. Given the disruption to activity in Q1, total capex (including land investment) is now forecast to have declined 5.5%Y/Y in FY20 – a forecast that is 1.6ppts weaker than in the prior survey. However, looking ahead, firms forecast a 0.5%Y/Y increase in capex in FY21, led by a 3.0%Y/Y lift in the manufacturing sector. While this is hardly a strong result, the first forecast of a new fiscal year is typically conservative, with later estimates usually improving during periods of economic recovery. Indeed, according to Bloomberg’s survey, analysts had expected large firms to forecast a further reduction in capital spending in FY21, rather than the 3.0%Y/Y increase indicated in today’s survey.

As far as employment is concerned, on balance manufacturers indicated that they were broadly content with staffing levels in Q1, but that a modest shortage would emerge over the coming quarter. Non-manufacturing firms continue to report labour shortages, but these shortages are much less widespread than prior to the pandemic and are forecast to remain steady over the coming quarter. A net 18% of firms described the lending stance of financial institutions as “accommodative” – unchanged from the last survey and still favourable by historical standards (of course, supported by government and BoJ subsidies)

Reflecting the underlying improvement in the economy, a smaller net proportion of both manufacturing and non-manufacturing firms reported excess supply conditions and excessive inventories in Q1. Therefore, unsurprisingly, the Tankan provided slightly better news for the BoJ’s long-term goal of lifting inflation towards its 2% target, albeit suggesting that present conditions remain nowhere near sufficient to achieve that goal. Of particular note was a sharp increase in the number of both manufacturing and non-manufacturing firms citing higher input prices. However, on net a small number of firms continued to report that they had cut output prices in Q1 and in the manufacturing sector they indicated they would do so again in Q2. In aggregate, firms forecast a 0.2% increase in their output prices over the next 12 months and only a cumulative 1.5% increase over the entire 5-year forecast horizon (albeit up 0.3ppts and 0.2ppts respectively since the prior survey). Regarding general consumer prices, firms expect only a 0.4% increase over the next 12 months, with inflation expected to be running at just 1.0% in five years’ time – in both cases revised up just 0.1ppt from the previous response.

Japan’s manufacturing PMI revised up to 29-month high in March; vehicle sales rise 2.4%Y/Y in March
In other Japanese news, continuing the positive vibe from manufacturing sector, the headline manufacturing PMI was revised up 0.7pts to 52.7 in March, thus almost doubling the improvement indicated by the preliminary report and delivering the best month for manufacturing since October 2018. In the detail, the output index was revised up 1.3pts to 53.3 – the highest reading since December 2018 – and new orders index was revised up 0.9pts to 53.1 respectively (the latter now the best reading since April 2018). By contrast, the new export orders index was revised down 0.1pts to 50.8, thus ending the month down 0.7pts since February. The input price index was revised down 0.2pts but still ended the month a remarkable 4.2pts firmer at 59.9, while the output price index closed at 51.9 – up 0.9pt from February to the highest level since April 2019.

Separately, after declining 2.2%Y/Y in February – not least due to the supply-chain disruption associated with the global semiconductor shortage – Japanese vehicle sales increased 2.4%Y/Y in March. Sales of cars increased 2.3%Y/Y and sales of trucks increased 4.8%Y/Y. However, reflecting the ongoing impact of the pandemic, sales of buses remained down more than 29%Y/Y.

China’s Caixin manufacturing PMI posts surprising decline in March
Following yesterday’s much-improved official PMI readings, driven in particular by improved conditions at smaller firms, analysts were understandably expecting today China’s Caixin manufacturing PMI – capturing activity in the private SME sector – to also paint an improved picture. However, surprisingly, the Caixin headline index fell a further 0.3pts to an 11-month low of 50.6 – now slightly below the historic average – with the output index and new orders index nudging down 0.1pts to 51.8 and 50.9 respectively. Better news was seen in the new export orders index, which rebounded 3.9pts to a 3-month high of 51.4, while the input and output price indices also strengthened as suggested by their official PMI counterparts. Meanwhile, an increase in order backlogs hinted at supply chain bottlenecks as being a partial factor explaining the softer-than-expected PMI reading.

German retail sales data disappoint with modest gain in February after Macron and Draghi extend lockdown measures
As had been anticipated earlier in the day, yesterday evening brought announcements of extensions of pandemic containment measures in France and Italy, which will further retard recovery in the services sector. In particular, Emmanuel Macron announced the extension of measures, that had already been applied to regions accounting for more than one third of the population, including Paris, to all of mainland France. The restrictions, which will close non-essential retail and services, and limit travel between regions, will apply from 3 April for four weeks. In a significant U-turn, Macron also announced the closure of schools for three weeks until 26 April. And Mario Draghi also extended the similar current restrictions in Italy to 30 April.

This morning’s euro area dataflow got underway with the latest German retail sales figures, which were a touch disappointing. Following a steep drop of 6.0%M/M in January, German retail sales (ex cars) rose just 1.2%M/M in February to be down 5.4%Y/Y and leave the average level in the first two months of Q1 down more than 10% from the Q4 average. Looking ahead, the final March manufacturing PMIs are expected to align with flash estimates and confirm that the euro area manufacturing output PMI rose 5pts to a series high of 63.0, with similarly strong growth reported in new orders from home and abroad. Likewise, the final UK manufacturing PMIs are expected to reaffirm the impression that economic recovery is starting to stir. While not as elevated as in the euro area, the flash UK manufacturing output PMI rose more than 5pts to a three-month high of 55.6. And the new orders index for the sector was similarly the strongest since December’s surge in activity ahead of the end of the Brexit transition.

ISM manufacturing survey to take centre stage today; construction and auto sales data also of note
The focus in the US today will likely fall mainly on the manufacturing sector with the release of the ISM’s manufacturing survey for March and the final results of Markit’s less widely followed counterpart. As far as the ISM survey is concerned, Daiwa America Chief Economist Mike Moran expects another firm reading, albeit perhaps slightly softer than the above-trend reading of 60.8 achieved last month (that said, yesterday’s very strong Chicago PMI reading could point to a further upside surprise today). Today will also bring construction spending data for February, which like other February data will likely be impacted by particularly adverse weather during the month. By contrast, auto sales data are likely to point to a rebound in March, with Mike expecting sales of around 16.4m annualised – just short of where they stood in January. The weekly jobless claims report rounds out the day’s diary, which leads into to what should be a very solid payrolls report on Friday with Mike expecting a 600k increase in jobs and a 0.2ppts decline in the unemployment rate to 6.0%.

A busy day in Australia delivers mostly robust data
Today was a busy day for data in Australia with the release of a number of reports that will inform the RBA Board’s discussions when members review monetary policy settings next week. First up, the ABS released final retail sales data for February, which pointed to a 0.8%M/M decline in spending – less than the 1.1%M/M decline indicated by last month’s preliminary data. So while growth in spending in January was also revised higher to show a modest lift of 0.3%M/M, average spending over the first two months of the quarter is tracking 0.4% below that seen in Q4 – a development that probably partly reflects the diversion of spending back to non-retail services. Indeed, even with the decline in February – which was driven by a 3.1%M/M decline in food retailing – total retail spending was still up a sizeable 9.1%Y/Y.

In housing news, the Corelogic house price index increased by a record 2.8%M/M in March, with prices in Sydney surging 3.7%M/M and gains of 2.4%M/M seen in both Brisbane and Melbourne. As a result, annual house price inflation increased 1.8ppts to 4.8%Y/Y, with double-digit annual growth recorded in Darwin, Canberra and Hobart. Meanwhile, the ABS reported that the value of new housing loan approvals nudged down 0.4%M/M in February, but was nonetheless up a whopping 48.8%Y/Y. Approvals for investor loans increased 4.5%M/M and 31.6%Y/Y, while approvals for owner-occupier loans declined 1.8%M/M but rose 55.2%Y/Y.

In external sector news, the ABS reported that Australia’s goods and services trade surplus narrowed by $A2.1bn to A$7.5bn in February (the surplus in January was revised down A$0.5bn to A$9.6bn, but remains the highest on record). This outcome was more than A$2.3bn below the market consensus, with many analysts again ignoring the accurate guide provided by the preliminary merchandise trade figures released last week. Overall exports declined 1.3%M/M, but thanks to positive base effects annual growth nonetheless increased to 9.1%Y/Y. With the border closed to most foreign nationals, exports of services fell a further 2.7%M/M and were down over 33%Y/Y. However, while down 1.1%M/M in February, exports of goods increased 20.5%Y/Y, with exports of metal ores increasing almost 68%Y/Y. Meanwhile, imports increased 5.2%M/M in February, reducing the annual decline to a 13-month low of -3.6%Y/Y. Imports of intermediate goods jumped 12.9%M/M – not least due to a 30%M/M lift in imports of fuels and lubricants – while imports of consumption goods increased 2.8%M/M and imports of capital goods fell 0.7%M/M. Finally, with few Australians travelling overseas, imports of services remained down 48%Y/Y in February.

In manufacturing news, the Markit manufacturing PMI concluded March at a very robust 56.8 – just 0.2ppts below the flash reading and down 0.1ppts from February. The more volatile AiG performance of manufacturing index increased 1.1pts to an even more robust 59.9, marking the highest reading since March 2018.

Finally, continuing the strong run of labour market data, the ABS reported that the number of job vacancies increased 13.7% over the three months to February to a new record high that was also 26.8% higher than a year earlier.

Kiwi house price inflation hits 16-year high in March, but consumer confidence softens slightly; Kiwi fiscal situation again much better than forecast
Despite the re-imposition of LVR restrictions, according to Corelogic Kiwi house prices increased by a further 2.2%M/M in March, raising annual house price inflation to a 15-year high of 16.1%Y/Y. However, with LVR restrictions on investors set to tighten further in May, and with the Government having recently announced other measures to deter investor activity, it would be surprising if house price inflation did not ease somewhat over coming months. In other Kiwi news, the ANZ Consumer Confidence Index fell 2.0%M/M to a 4-month low of 110.8 in March, likely impacted by the temporary periods of pandemic-related restrictions during the month. Meanwhile, with the economy outperforming earlier forecasts, the Treasury reported a government operating deficit of NZ$4.5bn for the eight months to February – a full NZ$3.7bn less than forecast in the half-year update.

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