Japan’s services PPI lifts to 7-month high

Chris Scicluna

Markets largely steady; Kiwi bond yields and dollar rise as RBNZ joins the BoC and forecasts a rate hike next year
After making a strong start to the week, Wall Street closed slightly weaker on Tuesday with the S&P500 falling 0.2% amidst news of a steep decline in new home sales in April and a sharp pullback in consumer expectations in the Conference Board’s latest survey. And while the latter survey nonetheless pointed to a further strengthening of the US labour market, Treasury yields also moved lower – the 10Y UST slipping 5bps to 1.56% – as Fed Vice-Chair Clarida reiterated the FOMC’s view that current price pressures would prove largely transitory, even as he acknowledged that a discussion on QE tapering may begin at some point at upcoming meetings. The greenback closed fractionally weaker.

Since the close, US equity futures have rebounded a few tenths and the 10Y UST has nudged up to 1.57%. So on another quiet day for data in the region, most of the major Asia-Pacific bourses were steady today. In Japan, the TOPIX closed up just 0.1%, with little reaction to a speech by BoJ Board member Suzuki who stated that it was desirable to refrain from ETF purchases during normal times not least given associated risks to the Bank’s balance sheet. Suzuki also championed the Bank’s recent fractional widening of the trading range for the 10Y JGB, lamenting the loss of investor interest caused by the loss of volatility under the Bank’s Yield Curve Control policy. In mainland China the CSI300 closed unchanged on the day following yesterday’s advance of more than 3%. Ahead of tomorrow’s BoK policy review stocks were similarly flat in South Korea. Gains were made in Hong Kong with the Hang Seng rising 1.1%, but Singapore was closed for a public holiday.

In the Antipodes, the focus today was on the RBNZ. As widely expected, the Bank left all policy settings unchanged and continued to advise that “considerable time and patience” would be required to meet the requirements for policy tightening. However, that message was undermined substantially by the Bank’s own projections, which now point to a first hike in the OCR as soon as Q3 next year (more on this below). Unsurprisingly, the market – which was already leaning to earlier tightening – responded by driving the Kiwi dollar up 1% and Kiwi 10Y bond yields by 8bps to 1.86%, notwithstanding the slippage in UST yields. The Aussie dollar was also dragged higher – some investors perhaps seeing scope for similar developments from the RBA in coming months – adding to gains that followed a Q1 construction report that was slightly firmer than expected. For the same reason, the 10Y AGCB underperformed USTs, with the yield unchanged at 1.68%.

Japan’s services PPI inflation picks up to 1.0%Y/Y
Another quiet day in Japan brought only the release of the BoJ’s services PPI report for April, which proved fractionally stronger than anticipated by the few respondents to Bloomberg’ survey of analysts. While in headline terms the index fell 0.4%M/M, this decline was smaller than in the same month a year earlier. As a result, the annual rate of inflation increased 0.3ppts to a 7-month high of 1.0%Y/Y. The most significant contributor to the lift in annual inflation was real estate services, for which annual inflation increased 2.9ppts to 3.7%Y/Y. Advertising services – always a volatile component – also contributed significantly, with prices rising 11.7%Y/Y compared with 6.0%Y/Y in March. Hotel charges fell 7.8%Y/Y, but this was much smaller than the 16.7%Y/Y decline registered in March.

French business sentiment leaps to 3-year high, consumer confidence up too
In a similar vein to yesterday’s German ifo survey and Friday’s flash PMIs, this morning’s May INSEE French business and consumer survey results reported much improved confidence across the board thanks not least to the more favourable coronavirus trend. Indeed, due particularly to an improvement in the forward-looking indices, the business survey’s headline index surged 12pts – the most since last June – to 108, well above the long-run average and the best since April 2018.

The biggest transformation of business fortunes was reported in retail and services, the former benefiting from the reopening of non-essential stores a week ago and the latter flagging much greater optimism in hospitality, similarly buoyed by plans for a gradual reopening. Indeed, the headline retail sentiment index leapt almost 17pts to 107, the highest since December 2019, while the equivalent indicator for services jumped 15pts, also to 107, the best since January 2020 and similarly well above the long-run average. Wholesalers were unsurprisingly also much more upbeat (the respective indicator leapt 11pts to 110, the best since November 2017). And confidence among manufacturers, who have been increasingly optimistic since the turn of the year, continued to rise too, with the index up 3pts to 107, the highest since August 2018. That reflected rising orders and increased production prospects, and the highest selling-price expectations since 2011. While the construction index was unchanged, at 109 it remained elevated with improved orders and increased expectations for the coming three months.

With new coronavirus cases much lower and the business environment improving, the INSEE consumer confidence survey also reported greater optimism, with the headline index up 2pts in May albeit only to 97, the best since March 2020 but still below the long-run average (100). The increase reflected improved expectations for consumers’ personal financial situation over the coming twelve months back to the long-run average. The share of households judging that it is a suitable time to make major purchases was unchanged above its long-term average.

Quiet day ahead in the UK and US today
There are no further economic reports of any note out of the euro area today, and nor are there any ahead in either the UK or US. However, after Bank of France President Villeroy yesterday insisted that the ECB will be at least as patient as the Fed in maintaining highly accommodative policy, he’ll be speaking publicly again this morning. And the Fedspeak will continue with Governor Quarles scheduled to speak on the economic outlook at an event hosted by the Brookings Institution (including a moderated Q&A).

Australian construction activity lifts in Q1, led by residential construction
The countdown to the release next week of Australia’s national accounts for Q1 continued today with the ABS releasing news on construction activity. The total value of construction work undertaken increased 2.4%Q/Q – slightly above the market consensus but still down 1.1%Y/Y (activity fell a revised 1.5%Q/Q, compared to the 0.9%Q/Q decline estimated previously). As expected, growth was led by a further recovery in housing-related activity with residential construction rising 5.1%Q/Q and 4.2%Y/Y. Engineering-related construction (i.e. infrastructure) increased 2.2%Q/Q but was down 0.3%Y/Y. However, non-residential construction – which always lags the cycle – fell a further 1.6%Q/Q in Q1 and so was down 10.4%Y/Y.

Further information on non-construction investment will be released tomorrow in the Q1 CAPEX survey, which just as importantly will also cast light on firms’ investment intentions over the coming financial year.

RBNZ leaves policy settings unchanged but new projections point to a lift in OCR as soon Q3 next year
As widely expected, today the RBNZ decided to hold its Official Cash Rate (OCR) at 0.25%. As had also seemed likely, the Bank opted to maintain the $NZ100bn cap on its bond purchase programme (LSAP) and made no changes to its Funding for Lending Programme (FLP). In its post-meeting statement, the Bank characterised its medium-term outlook for growth as similar to the scenario presented in the February Statement. In the final paragraph, setting out the outlook for policy, it again noted that the MPC agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2% target midpoint, and that employment is at its maximum sustainable level – requirements that as before “will necessitate considerable time and patience”. The previous reference to a preparedness to lower interest rates further was removed, however.

While the rhetoric was broadly unchanged, the formal projections contained in the accompanying Monetary Policy Statement pointed to a much less dovish central bank – one that has unexpectedly embraced the policy outlook that markets had recently begun to price. Indeed, the Bank’s projection now points to as many as two 25bps hikes in the OCR in the second half of next year, with a further three 25bps rate hikes forecast in 2023 to lift the OCR back to 1.5%. By contrast, previously the Bank’s model had pointed to an “unconstrained OCR” of -0.24% being appropriate in Q322, thus motivating the Bank’s use of the LSAP and FLP to provide additional policy support.

The less dovish outlook appears to reflect ongoing positive surprises in the labour market (a pointer as to what may evolve at the RBA later this year). The unemployment rate, which the Bank had previously seen peaking at 5.2% in the current quarter, is now estimated to have already peaked with a gradual decline from its current rate of 4.7% expected over the forecast period. As a result, the economy is estimated to return to a state of excess demand in Q122 – two quarters earlier than forecast in February. Moreover, private sector unit labour cost inflation is expected to lift from its current pace of 1.6%Y/Y to around 2½%Y/Y by the end of this year, remaining at around that level in subsequent years. So putting aside the expected near-term lift in CPI inflation due to base effects and current supply bottlenecks, sustained inflation above the target midpoint is now forecast to be reached in Q223 – three quarters sooner than forecast previously.

As Governor Orr stressed during the post-meeting press conference, these projections are of course conditional on a number of important assumptions, including that the pandemic does not impede a strong outlook for global growth or the easing of border restrictions early next year. Domestically, the Bank estimates that GDP contracted in Q1 to weaker consumption – a forecast that looks on shaky ground in light of the strong retail sales numbers released on Monday – and house price inflation is assumed to slow markedly in response to both higher LVR restrictions and the measures being taken by the government.

Kiwi merchandise trade surplus widens in April
In other Kiwi news, New Zealand recorded a merchandise trade surplus of $NZ388m in April, almost $NZ350m more than last month but almost $1bn less than same month a year earlier when lockdown conditions and a plunge in oil prices weighed heavily on imports. Exports declined a seasonally-adjusted 0.7%M/M and were up just 1.2%Y/Y, with annual growth significantly reduced by a near 9% appreciation of the trade-weighted exchange rate. By contrast, following a strong uplift, imports declined 8.4%M/M but were up 26.0%Y/Y. Of particular note was a more than five-fold increase in imports of crude oil and a more than 75% increase in imports of motor vehicles. Imports of consumption goods increased almost 17%Y/Y and imports of machinery and plant increased almost 20%Y/Y.

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