Wall St weaker on mooted Biden capital gains tax lift; Asian markets
Wall Street had been modestly in the black mid-session on Thursday with news of a disappointing decline in existing home sales countered by a further unexpected fall in initial jobless claims, a larger than expected lift in the Conference Board’s leading indicator and a firmer Kansas Fed manufacturing survey. However, that all changed following the release of a Bloomberg report claiming that President Biden intends to almost double the capital gains tax rate paid by those earning more than $1m p.a., which would help to fund Biden’s upcoming “American Families Plan”. So given the possibility that some investors might chose to cash in their gains, at the close the S&P500 was down 0.9%, erasing the previous day’s advance. Meanwhile, Bitcoin added to its recent declines to hit a 4-week low, falling below $50k in Asian trading. After rising above 1.58% earlier in the session, the 10Y UST yield closed at 1.54% while renewed risk aversion gave the greenback a lift.
Given the US-centric nature of the news that weighed on Wall Street, Asian equity markets have generally held their ground or better today. The notable exception was in Japan, where the TOPIX has closed down 0.4%, with news of a further lift in the manufacturing PMI countered by confirmation that Japan’s government will shortly formally declare a new state of emergency in Tokyo, Osaka, Kyoto and Hyogo. According to reports, the new restrictions will apply from Sunday until 11 May, with bars and restaurants, large malls and department stores and sport stadiums being asked to close their doors to customers. It is also hoped that commuter numbers will decline by 70% due to staff being asked to work from home. By contrast, solid gains of more than ½% have been seen in the major indices in mainland China and Hong Kong, while markets were up modestly in South Korea. In Australia, the stock market nudged lower, notwithstanding April PMI readings that were the highest recorded since the survey began in 2016. However, with the 10Y UST yield drifting higher to 1.56% in Asian trading, the 10Y ACGB yield increased 3bps to 1.72%.
Japan’s flash composite PMI output index nudges higher in April as manufacturing conditions improve further, especially for exporters
After improving markedly last month, especially in the wake of significant upward revisions to the preliminary findings, this month flash Japanese PMIs pointed to only a small improvement in April. The composite PMI output index increased 0.3pts to 50.2 – the highest reading since September 2019 – with all of the improvement generated by responses in the manufacturing sector.
In the detail, the headline manufacturing increased 0.6pts to 53.3, marking the highest reading since April 2018. The output index increased 1.3pts to 54.2 and the new orders index increased 0.9pts to 54.3. Of particular note, the new export orders index jumped 3.5pts to a more than three-year high of 54.3, which doubtless reflects demand from the well-performing US and Chinese economies. After lifting to a more than 2-year high last month, the input prices index was little changed at 59.9 while the output prices index declined a somewhat surprising 1.0pts to 50.8, albeit remaining about 2pts above the long-term average.
Turning to the services sector, the headline services PMI – the business activity index – remained at the 14-month high of 48.3 reached in March, but given recent virus developments is surely at risk of downward revision when the final report is released. The more forward-looking new orders index nudged up 0.1pts to a fresh 9-month high of 48.4. Unsurprisingly, the business expectations index slumped 4.6pts to a 3-month low of 53.8 while the employment index declined 0.9pts to 51.0. As in the manufacturing sector, there was little change pressures on input prices during April. However, the output prices index increased 1.8pts to a 15-month high of 50.9.
Japan’s nationwide department store sales rise 21.9%Y/Y in March, flattered by base effects
In other activity-related news, Japan’s national department store sales grew 21.8%Y/Y in March – the first time that positive annual growth has been recorded since the consumption tax was raised in October 2019. Of course, sales had declined 33.4%Y/Y a year earlier as the early stages of the pandemic lockdown began the wreak havoc. So, other than last year, the level of spending in March was still the least for a March month since 2011. In the detail, spending on accessories grew 41.5%Y/Y, but only after a 38.0%Y/Y decline a year earlier. Spending on household goods fell 23.1%Y/Y, having declined 28.2%Y/Y a year earlier.
Japan’s CPI provides no surprises in March; core inflation inches higher
Turning to the latest inflation news, as usual Japan’s national CPI report largely mirrored the indications from last month’s release of advance data for the Tokyo area. The headline CPI index increased a seasonally-adjusted 0.2%M/M, which given base effects was sufficient to cause annual inflation to increase 0.2ppts to -0.2%Y/Y (in line with the consensus estimate in Bloomberg’s survey). Prices for fresh food declined 2.0%M/M and so were down 1.5%Y/Y. However, declines of this magnitude are not unusual at this time of the year, and so the BoJ’s forecast measure of core inflation – which excludes fresh food – also increased 0.2%M/M in March, while annual inflation on this measure increased 0.3ppts to an 8-month high of -0.1%Y/Y.
Elsewhere in the CPI, higher prices for fuel drove an overall 2.0%M/M lift in energy prices in March, causing the annual decline in energy prices to moderate 2.9pts to 4.3%Y/Y – a theme that will continue over coming months as last year’s declines in fuel and electricity prices drop out of the calculation. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased a smaller 0.1%M/M, albeit still sufficient to cause annual inflation to lift 0.1ppts to an 8-month high of 0.3%Y/Y (in line with market expectations). The narrower measure of core prices used overseas – which excludes all food and energy – also increased 0.1%M/M, lifting annual inflation on that measure by 0.1pts to 0.4%Y/Y.
Boosted by higher energy prices, goods prices increased 0.1%M/M in March but were down 0.6%Y/Y. Industrial product prices increased 0.3%M/M and 0.5%Y/Y (0.9%Y/Y excluding the impact of energy prices, which as noted remain lower than a year ago). Services prices increased just 0.1%M/M in March, weighed down by a 0.9%M/M decline in mobile call charges (with much steeper declines to come). Even so, annual inflation in the services sector lifted 0.1ppts to a 0.2%Y/Y – still 0.7ppts below the cyclical peak reached in January 2019 and of course nowhere near what will likely be required for the BoJ to meet its inflation target. The BoJ will present its update inflation forecasts in next week’s Outlook Report, which will doubtless depict inflation remaining well below target even with the forecast horizon extended to FY23.
UK retail sales surge ahead of expectations but consumer confidence remains subdued
UK retail sales rebounded far ahead of expectations in March despite the continued closure of non-essential stores. Total sales jumped 5.4%M/M – the most since June – to be up 7.2%Y/Y and 1.6% above the pre-pandemic level in February 2020. Sales were still, however, below the levels prevailing through the second half of last year. And the weakness earlier in the quarter meant that sales were still down a hefty 5.8%Q/Q in Q1.
Non-food stores saw strongest growth in March, thanks not least to a long-awaited pickup in sales of clothes (up 17.5%M/M) as households prepared for the end of lockdown. Sales of such items still have a lot of lost ground to make up, however, being still down more than 40% from the pre-pandemic level. Meanwhile, food sales rose another 2.5%M/M to a new series high, likely due to the continued closure of much of the hospitality sector over the Easter period. And with the easing of travel restrictions later on in the month, auto fuel retailers saw sales growth of 11.1%M/M.
With the continued easing of restrictions this month, including the reopening of non-essential stores, we look for further solid growth in sales in April, back to the range seen through the second half of last year. However, this morning’s GfK survey results pointed to only a modest improvement in consumer confidence this month. The headline index rose just 1pt to -15, still some 6pts below the level last March, with a slight worsening reported in the indicator assessing the climate for making major purchases. So, many consumers might choose to be cautious, and the rebound in spending might not be quite as vigorous as hoped.
Flash PMIs for the euro area likely to be mixed, but the UK survey will be strong
Looking ahead, the flash April PMIs for the euro area, its two largest member states and the UK are due shortly. Despite the pickup in the pandemic, last month’s surveys registered significant improvements. For example, the euro area composite PMI returned to expansionary territory for the first time since October, rising a hefty 4.4pts to an eight-month high of 53.2. With ongoing restrictions to activity, the April euro area PMIs are expected to come in close to the March readings. However, as suggested by yesterday’s French INSEE survey, further increases in the euro area manufacturing output indices will probably be tempered by softening in services due to the renewed tightening of pandemic containment measures. Meanwhile, with the UK economy reopening gradually, the flash PMIs seem bound to report an acceleration in activity this month, with the composite PMI likely to rise at least 2pts from March’s six-month high of 56.5 thanks to improvements in both services and – as suggested by yesterday’s CBI survey – manufacturing.
New home sales and flash PMI data to close the week in the US
Yesterday brought disappointing news of a decline in existing home sales during March, which may have been influenced by the impact of poor weather on house hunting during February as well as low inventories. However, today Daiwa America’s Chief Economist Mike Moran expects the US to report a substantial 13.5%M/M rebound in new home sales, as unlike existing home sales, this data is based on contract signings, rather than contract closings. Meanwhile, the flash manufacturing and services PMIs for April will likely at least maintain the historically elevated readings seen back in March. The corporate reporting calendar is relatively light with just five S&P500 companies reporting today.
Australia’s composite PMI output and inflation indexes lift to record high in April
Australia’s flash Markit PMIs – which, like in the US, tend to play second fiddle to more established surveys – pointed to a further solid lift in growth momentum in April. Indeed, in keeping with the buoyancy seen in the NAB business survey, the composite PMI output index increased 3.3pts to 58.8 – the highest reading since this indicator was first constructed in 2016.
The headline manufacturing PMI increased 2.8pts to a record 59.6, with the output index jumping 4.0pts to 59.8. The new orders index increased an especially stunning 5.1pts to a record 60.4, while the new export orders index increased 3.0pts to a more than 2-year high of 53.4. Given these figures, unsurprisingly the employment index increased 2.1pts to a more than 3-year high of 55.4. The activity indicators in the services PMI were almost equally strong, with the headline business activity index rising 3.1pts to a record 58.6. The new orders increased 3.1pts to a record 59.2 and the employment index increased 3.0pts to a record 55.4. On the pricing front, the news was also favourable for the RBA, with the composite output prices index increasing 1.6pts to a record 55.0. That said, underlying CPI inflation has been below the target band since the before the inception of this index and so the RBA will remain focused on actual inflation outcomes, rather than on indicators and forecasts.