Japanese retail sales rebound further

Chris Scicluna

US Treasury yields rise as investors await Fed guidance/Biden speech and a plethora of corporate earnings reports
With the Conference Board survey for April reporting US consumer confidence at a 14-month high and the “jobs plentiful” diffusion index at a 13-month high – with both well above average levels – selling pressure returned to the Treasury market yesterday. At the close, the 10Y UST yield had increased 6bps to a two-week high of 1.62%, with investors likely also eyeing today’s FOMC meeting and the likelihood that Chair Powell will express a more optimistic view at the post-meeting press conference than last month. The rise in yields put a handbrake on the equity market, with the S&P500 closing virtually unchanged despite gains in the energy, financial and industrial sectors. In currency markets, the greenback was broadly unchanged against most key counterparts. However, the rebound in UST yields and worries about the recent surge in Japanese coronavirus cases weighed on the yen, with ¥/$ threatening 109 for the first time since mid-April.

US equity futures have changed little since Wall Street closed with no net reaction to post-close earnings reports from the likes of Microsoft and Alphabet (although Alphabet stock rallied in the aftermarket). Against that background, and with so much event risk today – notably an FOMC meeting, President Biden’s address to Congress and some significant earnings reports – markets in the Asia-Pacific region have been relatively subdued today. In Japan, the TOPIX gained 0.3%, supported by a weaker yen and news of a pick-up in retail spending in March. In other news, Japan’s parliament ratified the 15-member Regional Comprehensive Economic Partnership (RCEP) free trade agreement, joining China and Singapore as the only countries to complete ratification so far. Bourses were a touch firmer in China, where analysts await direction from the official PMI reports to be released on Friday, and also in Hong Kong. However, South Korea’s KOSPI fell 1%, weighed down by losses in the tech sector.

In Australia, a softer than expected Q1 CPI report underpinned a 0.4% gain in the ASX200. After initially selling off in response to the overnight weakness in the US Treasury market, the 10Y ACGB yield closed little changed at 1.73% with the CPI report failing to validate the market’s more optimistic view of the inflation outlook compared with the subdued picture that the RBA had painted in its last published forecasts back in February.

Japan’s retail sales rebound further in March
Ahead of tomorrow’s Showa Day holiday, the only economic report of note in Japan today concerned retail spending in March. According to METI, retail sales increased 1.2%M/M – double the consensus expectation – building on a 3.1%M/M rebound in February. So thanks to favourable base effects, annual growth lifted to 5.2%Y/Y from -1.5%Y/Y previously (these base effects will be even larger next month, with spending have fallen more than 10%M/M in April last year). Spending on apparel and accessories increased more than 13%M/M and so was up 12.0%Y/Y, while a 4.2%M/M lift in spending on motor vehicles – the tenth consecutive gain – lifted annual growth to 10.5%Y/Y. As always, we await the release of the BoJ’s Consumption Activity Index – next released on 7 May – for a more complete picture of overall consumer spending during the month.

Latest German and French consumer confidence surveys disappoint
While last week’s flash estimate of euro area consumer confidence in April reported further improvement to a fourteen-month high, the firming of sentiment appears to have occurred away from the euro area’s two largest member states. Certainly, this morning’s German and French household survey results disappointed, illustrating the harmful impact on sentiment of the intensification of the pandemic and associated restrictions over the past month. Contrary to expectations of little change, the headline GfK German consumer confidence index – presented as a forecast for May – dropped for the first time in three months and by a non-negligible 2.7pts to –8.8, still well down on pre-pandemic levels, albeit well above February’s low (-15.5) and the deeper trough last May (-23.1). Within the detail, the survey’s index of income expectations weakened but willingness to buy rose for a third month, sustaining its recent rebound from a steep drop in January following the reversal of last year’s VAT cut. With Germany’s vaccination programme now proceeding more smoothly – administering between 500k-700k doses per day so that 23% of the population has received a first shot and 7% has received both shots – and all adults to be offered the vaccine by end-June, we expect a pickup in consumer confidence and willingness to spend next month, when restrictions should be eased too.

Meanwhile, according to the latest INSEE survey, French consumer confidence was steady if subdued in April, with the headline indicator unchanged at 94, matching March’s three-month high and still close to the top of the pandemic range, albeit still well down on the pre-pandemic level (105) and the long-run average (100). As in Germany, the French survey index of expectations of consumers’ future financial situation weakened but willingness to spend improved to the highest since December. And similarly, we look for a further pickup next month on accelerated vaccinations and gradual economic reopening.

BRC suggests UK retail prices remained under downward pressure as stores clear stock but hints of higher prices to come
While surveys such as yesterday’s from the CBI point to further solid growth in UK retail sales this month as non-essential stores reopened, this morning’s BRC survey suggested that prices remained under downwards pressure. The decline in food prices in April (-0.6%Y/Y from +0.3%Y/Y in March) was the first since the pandemic, and reflected base effects associated with last year’s panic-buying at the onset of lockdown. In contrast, the pace of decline of non-food items eased 1.7ppts to -1.7%Y/Y. The continued negative print in this component reflected ongoing discounting of many items (e.g. clothing) as retailers sought to clear stock ahead of this month’s new seasonal goods. But some retailers (e.g. of furniture) reportedly did push prices higher, seeking to pass on the costs of recent supply-chain disruption and Brexit, and/or rebuild margins as demand firms. We look for further upwards pressure on retail prices from such sources over coming months as the economy reopens fully.

Fed and Biden address the focus in the US today; more economic data and corporate reports too
A very busy day looms in the US, with investors required to digest the Fed’s latest FOMC meeting, President Biden’s first address to a joint session of Congress, a number of economic reports and almost 50 S&P500 earnings reports.

Starting with the Fed, in the opinion of Daiwa America’s Chief Economist Mike Moran, and reflecting prior comments made Fed Chair Powell, there is no realistic possibility of the Fed changing any of its key policy settings at this meeting. So, the focus will be on the post-meeting statement and the subsequent press conference to see whether the Fed’s medium-term view is evolving in a way that might signal the possibility of the earlier policy tightening when the next set of projections are prepared prior to the FOMC’s June meeting. The Committee is likely to offer an optimistic view on the outlook, one more upbeat than the guarded view provided at the March press conference, and in keeping with the bright outlook in Powell’s subsequent television interview on 60 Minutes. At the same time, Powell is likely to emphasize that the labour market is still far from normal and that any pickup in inflation that accompanies the recovery is likely to be transitory. Powell will stop short of suggesting any near-term change in policy, although the positive outlook will support the view that the Fed will begin to taper its QE programme next year. And some additional analysts might pull the expected date of the first rate hike into 2022. Separately, there is an outside chance that policymakers will take action to try to push up money market interest rates from their current rock-bottom levels, and prevent them drifting into negative territory, e.g. by raising the interest rate paid on excess reserves (IOER) and/or the interest rate on reverse repurchase agreements (RRPs). On balance, however, Mike thinks this is unlikely unless and until the fed funds rate drops as low as 5bps.

As far as the day’s other events are concerned, President Biden’s address to a joint session of Congress is expected to see the formal unveiling of his “American Families Plan”, which according to an earlier Bloomberg report will be partially funded through a lift in the capital gains tax paid by the wealthy. On the data front, today will bring advance merchandise trade and inventory data for March, with both exports and imports expected to lift from their weather-impacted February readings. However, Mike expects the rebound in exports will likely be sharper, leading to a modest narrowing of the trade deficit. Finally, today’s very busy corporate earnings diary includes such tech heavyweights as Apple and Facebook and manufacturers such as Boeing and Ford.

Australian CPI inflation increases less than expected in Q1; core measures subdued
The focus in Australia today was the release of the CPI report for Q1, which provided at least some support for the RBA’s forecast that inflation will be slow to rise. The headline index increased a relatively solid 0.6%Q/Q, which was sufficient to lift annual inflation by 0.2ppts to a 12-month high of 1.1%Y/Y. However, this outcome was 0.3ppts below market expectations. Moreover, half of the quarterly increase owed solely to an 8.7%Q/Q rebound in the price of automotive fuel. Also of note was a soft 0.4%Q/Q increase in the education group, with beginning-of-year increases in primary and secondary school fees much smaller than seen usually and tertiary fees declining due to the impact of government policy changes. As a result, the CPI increased in even more subdued 0.5%Q/Q in Q1 once seasonal factors are taken into account. Positive contributions were made by a health sector, with a 5.7%Q/Q lift in the price of pharmaceutical products contributing to a 2.0%Q/Q lift in that group. Reflecting the impact of fuel, tradeables prices increased a solid 1.1%Q/Q and yet was up just 0.7%Y/Y. Non-tradeable prices increased just 0.4%Q/Q, lowering annual inflation for these items by 0.2ppts to 1.3%Y/Y. The ABS noted that federal and state grants continued to depress measured home construction prices in Q1, which would otherwise have increased due to the impact of strong demand on material and labours costs.

The underlying softness of today’s result was reflected in the core measures favoured by the RBA, which recorded smaller increases than the headline index. Most importantly, the trimmed mean increased just 0.3%Q/Q – 0.2ppts less than market expectations – so lowering annual inflation by 0.1ppt to a new low of just 1.1%Y/Y. The weighted median increased 0.4%Q/Q, leaving annual inflation on this basis at just 1.3%Y/Y. So on these measures, underlying inflation continues to track well below the RBA’s 2-3% inflation target (indeed, the average of these annual movements has been beneath the target range since Q116 and beneath the target midpoint since Q414).

Looking ahead, the outcome for Q2 will see last year’s 1.9%Q/Q slump in the headline CPI and record low 0.0%Q/Q movement in the trimmed mean drop out of the annual calculation. In its February Statement on Monetary Policy, the RBA had forecast annual headline and trimmed mean inflation to increase in 3%Y/Y and 1¼Y/Y respectively, and these near-term forecasts are unlikely to be lowered despite today’s report printing softer than market expectations (indeed, the headline CPI has already increase 3% over the past three quarters and a further 0.3%Q/Q lift in the trimmed mean is all that is required to meet the RBA’s forecast). So with the economy – and particularly the labour market – rebounding more quickly than the RBA had expected, next week’s updated Statement on Monetary Policy should still project slightly higher inflation over the latter part of the Bank’s forecast period, but not so much to change the Bank’s view that so policy settings will likely need to remain very accommodative for the foreseeable future.

Australia reports another large goods surplus in March as iron ore exports hit record high
In today’s other Aussie news, the ABS released preliminary merchandise trade figures for March. Exports increased a sharp 15%M/M in unadjusted terms during the month, albeit leaving annual growth at just 2%Y/Y given a very high base a year earlier. Largely due to the influence of higher prices, exports of iron ore increased to a record high and accounted for huge 39% of total exports during the month. However, over the past year this growth was largely offset by a reduction in exports of non-monetary gold (-47%Y/Y), coal (-28%Y/Y) and gas (-30%Y/Y). Imports also increased a preliminary 15%M/M in March and so were also up 15%Y/Y. Compared with February, growth was led by increased imports of non-monetary gold, petroleum, road vehicles and electrical machinery, while a 23%Y/Y lift in imports of consumption goods accounted for close to half of the annual growth in total imports.

These preliminary figures – which the ABS will discontinue from June – indicate an unadjusted merchandise trade surplus of A$8.5bn in March – A$1.0bn larger than last month but almost A$3.0bn smaller than in the same month a year earlier. Allowing for seasonality and likely developments in services trade, this suggests that the full trade report will indicate a seasonally-adjusted trade surplus of around A$6.5bn – just a little below the average surplus recorded over the past year.

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