Japan’s Economy Watchers Survey points to sharply weaker conditions

Chris Scicluna

Huge upside CPI surprise places upward pressure on bond yields, sending equities lower
The jitters seen in financial markets earlier this week were more than validated by the US CPI report for April, with the headline index rising 0.8%M/M and the core index up an even greater 0.9%M/M. Indeed, the latter outcome was triple market expectations, the largest monthly increase since 1981 and sufficient to drive annual inflation to a 26-year high of 3.1%Y/Y. Many of the price increases appear to reflect temporary imbalances of supply and demand as well as progress to normalisation in the price levels of many items that had been previously depressed by the pandemic. Indeed, prices for used cars and airfares rose about 10%M/M while hotel charges increased almost 9%M/M. But the magnitude of the upside surprise inevitably raised questions about whether underlying conditions for pricing were firmer than the Fed and investors had assessed. And with headline inflation now running at 4.2%Y/Y – the most since 2008 – some impact on inflation expectations and thus future inflation might be judged a non-negligible risk too.

Investors reacted to the CPI report by driving Treasury yields higher, with the 10Y note closing up 7bps at 1.69% and the 30Y bond up 7bps at 2.41% – significant increases, but surely much smaller than would have occurred had investors interpreted the upside surprise as the beginnings of a more sinister trend. Given a higher discount rate, Wall Street finished in the red for the third consecutive day, with the S&P500 closing down 2.1% and the tech-heavy Nasdaq down 2.6%. By contrast, the unexpected large lift in inflation proved a boon for the greenback, with the widening in yield-spreads sending ¥/$ back through 109. Meanwhile, commodity prices maintained their strong uptrend. In cryptocurrency news, Tesla announced that it had suspended the use of Bitcoin as a means of settling payment for its vehicles, citing concerns about the energy use associated with Bitcoin mining. So after declining more than 4% yesterday, Bitcoin has fallen around 8%, at times trade below $50k today.

Turning to the Asia-Pacific markets, understandably the major equity markets have faced further downward pressure today, albeit moderated by a slight rebound in US equity futures (S&P minis are currently up 0.2%). In Japan, the TOPIX closed down 1.5%, taking its decline over the past three days to almost 5%, with today’s Economy Watcher’s survey for April pointing to a much weaker assessment of economic conditions than indicated by recent PMI data. Speaking to a parliamentary committee whilst delivering the BoJ’s Semi-annual Report on Currency and Monetary Control, Governor Kuroda reiterated that the Bank would adjust policy if needed – and noted that the BoJ was ready to cut rates and/or buy ETFs ‘boldly’ if and when necessary – while keeping an eye on any negative side effects from its ultra-easy policy settings. Among other things he acknowledged that the ongoing pandemic posed downside risks to the economic outlook while the price pressures seen in the US were likely to be temporary and similar developments in Japan were unlikely to be a concern.

Elsewhere, after bucking the trend yesterday, China’s CSI300 closed down 1.0% with late-yesterday’s weaker than expected April credit data probably contributing to its demise (more on this below). In Taiwan, after falling more than 8% over the previous two sessions, the TAIEX fell a comparatively modest 1.2% after the Financial Supervisory Commission said that it would adopt measures to address any “irrational” declines in stock prices, notwithstanding the fact that the index remains up 7%YTD. Stocks fell similarly in Hong Kong and South Korea. In Australia, the ASX200 fell 0.8%, while the 10Y AGCB yield increased just 3bps to 1.80% despite the steeper lift in UST yields.

Japan’s Economy Watchers survey weakens sharply in April
As far as data are concerned, the focus in Japan today was release of the Cabinet Office Economy Watchers survey for April. After moderating slightly last month from what had been a more than two-year high, this month the re-imposition of pandemic-driven restrictions on activity caused the headline current conditions DI to slump a much greater-than-expected 9.9pts to a three-month low of 39.1, albeit for now still well above where it had stood during the previous wave of coronavirus cases in January. Moreover, respondents expect little improvement in conditions over the coming 2-3 months, with the overall expectations DI declining 8.1pts to 41.7. So while recent Markit PMI data pointed to a strong start to the quarter, today’s report warns of a likely backward step when the flash May PMIs are released next week.

In the detail, not surprisingly, the largest driver of the deterioration in current conditions came from the household sector index, which fell 11.9pts to 35.4. The indices measuring sentiment amongst those respondents interacting with the retail, food and services sectors all recorded large declines, although the more than 20pt slump in the food DI was of particular note. The corporate sector index was somewhat more resilient, declining 5.0pts to 45.8 and so simply unwinding the improvement registered in March. The non-manufacturing index fell 6.2pts to 44.4, whereas the manufacturing index fell just 3.8pts to 47.6. Similar relativities were evident in the sectoral expectations indices, with the largest declines occurring in indexes linked to the household sector.

Japan’s bank lending growth slows in April due mostly to base effects; Tokyo office vacancies continue to climb but corporate bankruptcies remain very low
Turning to the rest of today’s Japanese news, the BoJ reported that total bank lending increased 4.8%Y/Y in April, down sharply from 6.2%Y/Y in March. This slowdown mostly reflects base effects associated with last year’s scramble by corporates to access bank liquidity, with this year’s modest 0.1%M/M decline in lending replacing a 1.3%M/M increase last April (with even larger increases seen in the following two months). Similarly modest declines in monthly lending were observed at both major city and regional banks. So combined with the impact of base effects, growth in lending by the major city banks slowed 2.8ppts to 3.9%Y/Y while that by regional banks slowed 0.6ppts to 4.6%Y/Y. Lending by shinkin banks increased during the month, so annual growth slowed only 0.3ppts to 8.3%Y/Y. On the other side of the ledger, as usual bank deposits grew strongly in April, but base effects meant that annual growth slowed 0.4ppts to 9.5%Y/Y – a 4-month low, but still indicative of significant precautionary behaviour by households.

Meanwhile, reflecting the lagged impact of last year’s decline in corporate profits and perhaps a more persistent change in working habits in light of the pandemic, the office vacancy rate in the Tokyo business area increased a further 0.23ppts to 5.65% in April – the highest level since September 2014 and now clearly above the long-run average. Not surprisingly, the rising vacancy rate is weighing on office rental rates, which for buildings more than a year old fell for a ninth consecutive month in April – a cumulative decline of 6.6%. So while business spending on plant and equipment appears to have troughed, as usual last year’s economic contraction is likely to have a delayed impact on commercial construction. Meanwhile, given the significant support provided by banks and the government to the corporate sector, just 477 bankruptcies were recorded in April – down by more than a third from a year earlier.

Finally, balance of payments data revealed an adjusted current account surplus of ¥1.70trn in March, down from ¥1.84trn last month and around ¥0.2trn narrower than the consensus estimate. While the goods and services surplus increased to a 3-month high, the often-volatile surplus on primary income, which last month increased to a record high, fell to a 7-year low in March.

China’s credit growth slows more than expected in April
Late yesterday the PBoC released the monetary and credit aggregates for April, which were weaker than market expectations almost across the board. Aggregate financing grew just CNY1.85trn – CNY0.44trn below the consensus expectation and CNY1.25trn less than a year earlier when credit growth was boosted as China emerged from lockdown conditions. As a result, annual growth in the total stock of aggregate financing slowed to a 13-month low of 11.7%Y/Y from 12.3%Y/Y previously. Bank lending grew CNY1.47trn, which was also below expectations and down from CNY1.7trn a year earlier. Slower annual growth was also evident in the broad monetary aggregates, with growth in M1 declining an unexpected 0.9ppts to 6.2%Y/Y and growth in M2 declining a much greater than expected 1.3ppts to a 21-month low of 8.1%Y/Y – a rate that is below China’s target for nominal GDP growth this year.

UK RICS house price balances rises to 31-year high in April as supply shortage bites
With UK house prices on the official ONS series having risen in March by 8.6%Y/Y, the most since 2014, today’s RICS residential market pointed to additional pressure in April against the backdrop of a shortage of supply. Indeed, the RICS survey net balance of house price growth rose in April by 13ppts to +75%, the highest in 31 years, with pressures widespread across the country. RICS also reported than an increased number of surveyors expect home prices to continue to rise over the coming quarter, with the respective net balance up 4ppts to +47%. And a net balance of +68% of surveyors expect prices to rise further over the coming year. The price rises come against the backdrop of a pickup in demand, with the respective net balance of +44% the highest since September. The easing of the pandemic as well as the extension of the temporary increase in the stamp duty threshold (from £125k to £500k) through to June before tapering through to September seem bound to support demand over the near term. And a BoE survey recently suggested that some 12.5% of households that had accumulated extra savings throughout the pandemic were considering putting those funds towards the purchase of a new property. At the same time, however, the net balance of new instructions from owners looking to sell-up dropped to -4%, down 25ppts. And stock levels reported by estate agents fell too.

Inflation focus continues with US PPI report ahead today
Following yesterday’s shock CPI reading, the focus in the US will remain on inflation today with the release of news on producer prices. Daiwa America’s Chief Economist Mike Moran expects the headline index to have increased a relatively sedate 0.2%M/M in April, but the recovering economy is expected to generate a 0.3%M/M lift in the core index with annual inflation in the latter likely to exceed 3½%Y/Y. Needless to say, any further significant upside surprises in the PPI – which is notoriously volatile at the best of times – would raise concerns of a more enduring lift in consumer prices over the coming year. Today will also bring the weekly jobless claims report – of particular interest in light of last week’s disappointing payrolls report. There are also a number of Fed speeches ahead today, which will help investors to gauge how the Fed is viewing yesterday’s CPI surprise.

Kiwi house prices continue to rise in April
According to REINZ, there were 7,218 house sales in New Zealand in April, down from a huge 9,721 sales in March – not least due to the impact of the Easter and ANZAC Day holiday’s – but still up more than 400%Y/Y due to base effects associated with last year’s lockdown. The median sales price eased back to $NZ810k from $NZ826k in March, causing annual inflation on this measure to slow to 19.1%Y/Y from 24.3$Y/Y previously. However, the House Price Index – which corrects for the composition of sales – still increased during the month to a new record high and was up 26.8%Y/Y, compared to 24.0%Y/Y in March. 

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