Treasury yields up as FOMC minutes refer to eventual QE tapering
Investors leapt upon one sentence in an otherwise unremarkable set of April FOMC minutes on Wednesday. That sentence was: “A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” While this was surely a statement of the obvious, and while qualified with an ‘if’, a ‘might’, a ‘some point’ and a ‘begin’, the mere mention of QE tapering sent the 10Y UST to a peak of 1.69%, having earlier traded at a session low below 1.62%. At the close the note was yielding 1.67%, providing a boost to the greenback but leaving the S&P500 down 0.3%. The decline in stocks was propelled by a sharp decline in energy and materials stocks, as both oil and industrial metals continued to decline from their recent highs. Cryptocurrencies remained very much in the news with Bitcoin plunging to as low as $30k at one point – less than half its recent high – before rebounding to just under $40k as we type.
Turning to Asia. Japanese stocks have been resilient today with the TOPIX closing little changed on the day. While Japan’s machinery orders rebounded less than expected in March, exports in April were stronger than expected and the Reuters Tankan posted a further improvement in May (more on these reports below). In vaccination news, with Japan lagging badly relative to its peers – a fact surely weighing on PM Suga’s approval ratings – the NHK reported that an expert panel is expected to convene late today to consider the approval of both the AstraZeneca and Moderna vaccines (currently only Pfizer’s vaccine is approved). In China, where as expected the prime 1-year and 5-year loan rates were retained at 3.85% and 4.65% respectively for a 13th consecutive month, the CSI300 edged up 0.3%. However, after being on holiday yesterday, stocks are down 0.5% in Hong Kong and were also slightly weaker in South Korea.
In the Antipodes, although the decline in commodity prices weighed on related stocks, Australia’s ASX200 rebounded 1.3% after shedding 1.9% on Wednesday. The gains were led by technology stocks, and picked up a little after Australia reported a surprise decline in employment in April (more on this below). But with this decline likely reflecting survey variability, and the unemployment rate declining to 5.5% nonetheless, the ACGB 10Y bond yield closed only 1bp lower at 1.76%. Meanwhile, Kiwi bond markets were also little moved as the Government unveiled an improved fiscal outlook in its latest Budget, but with a forecast reduction in the borrowing requirement that was considerably smaller than many local analysts had expected (more on this below too). The Kiwi stock market rallied 1.3%, clearly happy with the Government’s decision to hike social welfare benefit rates.
Japanese exports continue to lift in April, import rebound led by energy products
As signalled by both China’s trade figures and local manufacturing indicators, trading conditions continued to improve for Japanese exporters in April with export receipts increasing a further 2.5%M/M. Given base effects – exports had declined nearly 11%M/M in April last year following a steep decline in March – this result lifted annual growth to a very flattering 38.0%Y/Y, which was much firmer than market expectations. Perhaps more meaningfully, the level of exports in April was just under 9% higher than in February 2020. Not surprisingly, the strongest annual growth rates were generally recorded by those industries that had fared worst a year earlier, with exports of transport equipment increasing 69.4%Y/Y. Exports of raw materials increase an even stronger 75.6%Y/Y, reflecting the additional impact of surging commodity prices. Exports of manufactured goods increased 27.4%Y/Y following a 14.5%Y/Y decline a year earlier. By destination, a 45.1%Y/Y increase in exports to the US followed a 37.9%Y/Y decline a year earlier. While exports to China increased ‘just’ 33.9%Y/Y, they had declined only 4.1%Y/Y a year earlier.
Meanwhile, import values increased a strong 7.5%M/M in April – the fifth consecutive increase and now up 12.8%Y/Y. This result can be mostly attributed to a rebound in imports of energy products and other raw materials, with imports of petroleum more than double that seen a year earlier. By contrast, imports of manufactured goods increased just 4.1%Y/Y and imports of general machinery increased just 3.0%Y/Y. However, electrical machinery and transport equipment registered double-digit annual growth in April. Taken together, the outcomes for exports and imports resulted in a modest seasonally-adjusted surplus of ¥65bn in April, which was close to market expectations and much narrower than the upwardly-revised ¥372bn surplus now reported for March.
As usual, a little later in the day the BoJ released its analysis of the export and import data, helpfully adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ’s analysis, real exports increased 2.6%M/M in April and were up 28.1%Y/Y. As a result, real exports in April were 3.6% higher than seen on average through Q1. By contrast, the BoJ estimates that real imports rebounded 9.4%M/M in April – this following a 6.0%M/M slump in March – and yet were down 0.2%Y/Y. So imports in April were 5.9% higher than the average through Q1. While at face value this does not bode well for a positive contribution to GDP growth from net exports in Q2, it is early in the quarter so much will depend on how things have evolved in May. The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to the US grew 37.8%Y/Y while exports to China increased 29.3%Y/Y. By contrast, exports to Asia grew just 23.0%/YY and exports to the EU grew just 12.9%Y/Y – the latter following a near 28%Y/Y decline a year earlier.
Japan’s core machine orders rebound a little in March, still down in Q1
In other news, today the Cabinet Office released its machinery orders report for March. Total machinery orders slumped 30.0%M/M, which was hardly a surprise after an unsustainable 26.4%M/M leap in February, and so were down 46.7%Y/Y. These sharp movements owed to significant volatility in foreign orders that, following a 76.2%M/M increase in February, fell 53.9%M/M in March to a level almost unchanged from a year earlier. The closely-followed measure of core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) increased 3.7%M/M in March, which was a slightly smaller than analysts had expected following an 8.5%M/M decline in February. This outcome left core orders down 2.0%Y/Y and meant that orders were down 5.3%Q/Q – only slightly less than the 6.0%Q/Q decline that machinery-producing firms had forecast at the beginning of the quarter, and following a strong 12.9%Q/Q rebound in Q4.
In the detail, orders from the domestic manufacturing sector fell a negligible 0.1%M/M in March, with orders from the non-ferrous metals sector returning to more typical levels and shipbuilding orders falling to a two-year low, offsetting increased orders from the ICT and electrical machinery industries. Even so, manufacturing orders were up 2.9%Y/Y, compared with the 2.8%Y/Y decline reported in February. Core orders from the non-manufacturing sector increased 9.5%M/M in March, rebounding from a 10.9%M/M decline in February. As a result, these orders were down 4.9%Y/Y, compared with the 10.9%Y/Y decline reported in February. Orders from the information services sector increased to the highest level since July 2019 and construction orders increased to a three-month high. By contrast, orders from the wholesale and retail trade sector and finance and insurance sector fell to a seven-month low. Finally, government orders, which are typically volatile, increased 2.7%M/M in March but were down 4.0%Y/Y.
Looking ahead, the Cabinet Office’s latest survey of machinery producing firms indicates a forecast 2.6%Q/Q lift in total machinery orders in Q2, while core private sector domestic orders are forecast to increase a similar 2.5%Q/Q. The latter would require an average level of orders that is slightly more than 3% higher than the base provided by the March outcome.
Japan’s Reuters Tankan points to further improvement in business conditions in May
Staying with Japan, in contrast to the last week’s softening in the Economy Watchers survey, today’s Reuters Tankan indicated that both manufacturing and non-manufacturing firms perceived an improvement in business conditions over the past month, with the manufacturing sector continuing to go from strength to strength – likely reflecting demand stimulated by the well-performing US and Chinese economies. The overall diffusion index (DI) for manufacturers increased a further 8pts to 21 in May, marking the best reading since December 2018 (and well above the long-term average, which sits around zero). The forecast DI – which measures expected business conditions three months ahead – also increased 8pts to 21, indicating that respondents expect business conditions to remain at similarly favourable levels in the near term. At the industry level, most sectors reported improved business conditions, with especially notable increases seen in the metal products, electrical machinery and chemicals sectors – for which conditions are viewed very favourably – while pessimism in the steel and metals sector reduced significantly. The autos and transport equipment sector was less positive this month, however, which may reflect ongoing issues caused by the global semiconductor shortage.
More surprisingly, despite restrictions on activity in the hospitality sector, the overall non-manufacturing DI also improved in May, albeit by a smaller 5pts to a far less impressive reading of 2 – still a little below the long-term average. This was nonetheless the best reading since February last year, when the index stood at 15 just prior to the onset of the pandemic. Moreover, the forecast DI leapt 11pts to 13, indicating that firms expect a notable improvement in business conditions over the next three months (presumably once pandemic restrictions are eased, and perhaps in anticipation of activity associated with the Olympics). At the industry level, the aggregate improvement owed mostly to a sharp improvement in the DI for the transport and utility sector, which increased 33pts to 12 – the first positive reading since the pandemic began. By contrast, the retailers DI fell 9pts to -9 – the lowest level since June last year – although respondents expected business conditions to improve over coming months. Unsurprisingly, optimism in the information services industry remained sky high, although the DI did fall 4pts to 60 this month.
Attention will now turn to tomorrow’s release of the flash PMI results for May, to see whether they support today’s improvement in the Reuters Tankan survey or last week’s softer Economy Watchers survey.
German PPI inflation up to highest in almost 10 years; euro area construction output data and UK CBI industrial trends survey to come
German industrial producer price inflation continued to rise in April, up a steep 1.5ppts to a near-ten-year high of 5.2%Y/Y. Given the sharp drop in oil prices a year earlier, and the additional pressure from Germany’s carbon pricing scheme, unsurprisingly energy inflation rose further, up 2.6ppts to 10.6%Y/Y. However, excluding energy, core producer price inflation still rose 1.2ppts to 3.6%Y/Y, also the highest since 2011. Intermediate goods inflation continued to accelerate, rising 2.5ppts to be up 8.2%Y/Y, also the highest in about a decade. That principally reflected higher prices of metals on firmer demand, increased global prices of iron ore, and supply-chain challenges. Among other intermediate items, however, inflation of electronic components weighed (prices of integrated circuits were down 13.9%Y/Y). And of the other major categories, inflation of durable consumer goods rose just 0.2ppts (1.6%Y/Y), with inflation of capital goods (1.0%Y/Y) and non-durable consumer goods (-0.6%Y/Y) including food (-1.3%Y/Y) also still subdued. With last year’s trough in energy prices reached last May, energy price base effects will push producer price inflation higher still over the near term. But at this stage the pressures continue to be absorbed largely in margins, e.g. German consumer price inflation of durable goods fell 0.2ppt in April to a modest 1.1%Y/Y.
Looking ahead, euro area construction data are due this morning. Following a drop of 2.1%M/M in February, we will see a rebound in euro area construction output in March, particularly thanks to a rebound in Germany of more than 10%M/M that month. But given weakness earlier in the quarter, the growth in March will likely result in activity in the sector being little changed over Q1 as a whole compared with Q4 when construction output rose 0.7%Q/Q. In the UK, the CBI Industrial Trends Survey is likely to reveal a further improvement in manufacturing optimism in the three months to May, as the phased reopening in the UK continues to lift the mood among firms. In particular, the measures of new orders, employment and investment plans are all likely to improve even if the survey again highlights firms’ concerns about rising costs. Beyond the data, ECB President Lagarde and Chief Economist Lane will both speak publicly on separate panel discussions.
Leading indicator, Philly Fed survey and jobless claims ahead in the US today
Today the Conference Board should report another hefty increase in its leading index for April, with Daiwa America’s chief Economist Mike Moran expecting a 1.4%M/M increase to take the series past its pre-pandemic high. The Philly Fed will release its manufacturing index for May, which will doubtless remain robust even if slipping from the record high reported in April. Those reports aside, the weekly jobless claims report will be of interest, as always.
Aussie unemployment rate falls to 13-month low of 5.5% in April despite decline in part-time employment
Hard on the heels of yesterday’s wage data, the domestic focus in Australia today remained on the labour market with the ABS releasing the Labour Force Survey for April – the first survey to capture the expiry of the Government’s JobKeeper programme. With job advertising running at levels not seen since 2008, analysts were looking a solid 20k increase in employment despite the likelihood that some jobs would be terminated due to the end of the JobKeeper programme. As it turns out, employment fell almost 31k (0.2%M/M) in April. Even so, base effects associated with last year-year’s lockdown meant that annual growth in employment jumped to a very flattering 5.1%Y/Y. In their commentary, the ABS noted that its analysis of the data did not point to a clear impact from the end of the JobKeeper programme, instead suggesting that the movement may reflect the month-to-month variability for which the survey is well known.
In the detail, after growing by almost 100k in March, part-time employment registered a decline of 64.4k in April. By contrast, and more encouragingly, full-time employment increased 33.8k to surpass the pre-pandemic high (and up 2.9%Y/Y). Amongst the larger states, employment was reported to have declined 0.9%M/M in New South Wales and 0.3%M/M in Queensland, but to have grown modestly in Victoria. Meanwhile, after increasing a steep 2.3%M/M in March, aggregate hours worked fell 0.7%M/M in April but thanks to base effects were up 12.5%Y/Y. The labour force participation rate, which had increased to a record high last month, fell 0.33pts to a 6-month low of 66.0%. The resulting decline in the labour force was larger than the decline in the unemployment rate, causing the unemployment rate to decline to a 13-month low of 5.5% from a an upwardly-revised 5.7% in April. 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 0.2ppts to 7.8%, marking the lowest reading since May 2014.
Given the well-known variability of this survey, the results this month perhaps need to be taken with a grain of salt, especially given the very buoyant readings seen in other labour market indicators (including record employment intentions in NAB’s survey). Moreover, we doubt that today’s report will have much impact on Bank’s rhetoric at next month’s Board meeting, which in any case is likely to be a ‘holding’ meeting with key decisions regarding the future of the Bank’s 3Y yield target and QE programme scheduled to be made at the subsequent meeting in July.
Kiwi fiscal baseline improves, spending increased, debt projections lowered but by less than expected
Today the Government released its Budget for the coming fiscal year, and updated forecasts stretching to the years beyond. As widely expected, the fiscal baseline has improved significantly since the December update. The Treasury now expects an OBEGAL (operating) deficit of $NZ15.1bn (4.5% of GDP) in the current fiscal year (ending June), down from $NZ21.6bn forecast previously. In part this reflects an improved economic outlook compared with the very cautious economic assumptions adopted in the December update, which has both lowered expenses and raised revenue compared with that forecast previously. However, most of the savings on spending merely reflect delays in spending money from the Coronavirus Response and Recovery Fund (CRRF).
Looking ahead, the Government expects an additional $NZ18bn of core Crown tax revenue over the next four fiscal years compared to that forecast in December – probably still a conservative forecast if recent trends are maintained. Meanwhile, today’s Budget has also seen the Government raise its forecast for core Crown expenses by almost $NZ15bn. The largest increase is the coming fiscal year, with the Government announcing new spending on its key priorities, including an across the board increase in welfare benefit rates, and due to the aforementioned spending pushed through from the previous year. As a result, for the coming year the Treasury forecasts an OBEGAL deficit of $NZ18.4bn (5.3% of GDP), which is actually $NZ2.0bn higher than forecast in December and so is expected to deliver a positive fiscal impulse to the economy in that year. Thereafter, the forecast deficits are a little smaller than forecast previously, with a deficit of just $NZ2.3bn (0.6% of GDP) forecast in 2024/25 and the operating budget assumed to move back into surplus in the following year. The Government has also increased capital spending, albeit repurposing some unspent money from the CRRF to invest in a so-called Housing Acceleration Fund – an attempt to speed up the building of social housing.
Given the overall improved fiscal outlook and the increased denominator providing by a larger forecast nominal economy, net core Crown debt – estimated to end the current year at 34.0% of GDP – is forecast to peak at 48.0% of GDP in FY22/23, instead of the 52.6% of GDP peak forecast in the December update. Even so, today the NZDMO announced that the NZGB borrowing programme for the coming fiscal year will be maintained at the $NZ30bn level forecast in December. The forecast programme in the following two years has been reduced by $NZ5bn per year to $NZ25bn and that for 2024/25 has been maintained at $NZ25bn. Given upcoming maturities, this amounts to an additional net $NZ61bn of borrowing over the next four years. The NZDMO advised that it expects to issue just $NZ1bn of lIBs, while Treasury bill issuance will be flexible depending on market conditions. The NZDMO expects to introduce two new maturities over the coming fiscal year, one of which will be a 2051 nominal bond. While today’s Budget delivered a smaller decline than many local analysts had expected, Moody’s reaffirmed its rating on NZGBs as being among the strongest of AAA-rated nations.