Equity markets firmer as Treasury yields reverse post-FOMC minutes gains
With Treasury yields giving up their post-FOMC minutes gains – the 10Y yield falling 4bps to 1.63% – and initial jobless claims falling to a fresh post-pandemic low, Wall Street firmed for the first time in three days yesterday. Propelled in particular by a rebound in technology stocks, the S&P500 closed with a 1.1% gain while the Nasdaq advanced 1.9% to a two-week high. The recovery in risk sentiment was detrimental to the greenback, which fell around ½% against its major counterparts.
US equity futures have firmed a couple of tenths further in Asia today, with risk sentiment helped by a ceasefire between Israeli and Hamas forces. Despite the positive backdrop, it has been a mixed day for bourses in the Asia-Pacific region. In Japan, the TOPIX firmed 0.5% even as the flash PMI reports for May pointed to a somewhat weaker business conditions, especially in the service sector (see below). Sadly, while Japan has now sanctioned the use of three vaccines to combat coronavirus, economic conditions will likely be pressured further in the near term with a state of emergency set to be extended to Okinawa today (effective Sunday through to 20 June). Meanwhile, multiple media reports suggest that the Government is considering a further 2-3 week extension of the state of emergency currently in place in Tokyo and Osaka, as it endeavours to lower coronavirus case numbers ahead of the scheduled opening of the Olympics on 23 July. Reports suggest that PM Suga and the Tokyo’s Governor will meet later today to discuss developments in the virus.
Looking elsewhere, in China the CSI300 has declined 1.0%, perhaps not helped by the EU’s decision finally to suspend ratifying its ‘Comprehensive Agreement on Investment’ with China, continuing the spat that has emerged since the EU joined other nations in condemning China for alleged human rights abuses. Equity markets were steadier in Hong Kong, Singapore and South Korea, but were stronger in Taiwan. In Australia, the ASX200 increased just 0.2% despite the released of encouraging retail sales and PMI reports, while AGCB yields moved lower in response to the UST rally.
Japan’s composite PMI weakens in May, unsurprisingly led by the service sector
The past week or so has provided some contrasting news on business conditions in Japan. While last week’s Economy Watchers survey reported a weakening of conditions, yesterday’s Reuters Tankan found firms to be in a more positive mood despite the extension of trading restrictions due to the upswing in local coronavirus cases. Sadly, the flash PMI readings for May, released today, provided support for the message of the Economy Watchers survey. Indeed, the composite PMI output index declined 2.9pts to a four-month low of 48.1 – a result that, unsurprisingly, owes mostly to developments in the services sector.
In the detail, conditions remained relatively robust in the manufacturing sector. However, the headline manufacturing index still fell 1.1pts to a three-month low of 52.5 and the output index fell 1.2pts to 53.1. This slowdown appears to reflect developments in domestic demand, as the export orders index fell just 0.3pts to 53.5 whereas the new orders index fell a steep 3.0pts to a four-month low of 51.6. The employment index increased 0.4pts to a 16-month high of 51.0, perhaps suggesting that firms expect the slowdown in demand to be short-lived. As far as inflation is concerned, amidst rising commodity prices, the input prices index increased 1.7pts to 62.1, marking the highest reading since October 2018. But firms appear to be absorbing higher input costs, as the output prices index nudged down 0.1pts to 51.3.
Turning to the services sector, the headline services index – the business activity index – fell a steep 3.8pts to a nine-month low of 45.7 in May, which clearly reflects the impact of restricted trading conditions, especially in the hospitality sector and large. And with restrictions recently being extended in scope and duration, there is surely a risk of downward revision when the final report is released. The new orders index fell a comparatively modest 2.3pts to a three-month low of 47.6, but the business expectations index slumped 4.9pts to a nine-month low of 51.6. The employment index also weakened, falling 1.2pts to 51.3. Given the marked weakening of activity, price pressures also softened in May. The input prices index fell 1.1pts to 52.9, while the output prices index fell 0.8pts to 50.2 – both indexes remaining above their long-run averages nonetheless.
BoJ’s preferred core inflation measure turns negative as mobile phone call charges dive in April
In other Japanese news, as usual the national CPI report mirrored the indications from last month’s release of advance data for the Tokyo area, which had surprised the market by signalling a larger-than-expected impact from reductions in mobile phone call charges. The national index confirmed a whopping 27.6%M/M in mobile phone call charges in April, sufficient to subtract 0.5ppts from annual headline inflation and even more from the core measures of inflation (reflecting the increased relative weight of call charges as other items are removed). So this time it was no surprise to see the headline CPI decline a seasonally-adjusted 0.4%M/M, which was sufficient to cause annual inflation to decline 0.2ppts to -0.4%Y/Y despite the partially-offsetting influence of higher fuel and transportation prices (just 0.1ppts firmer than the consensus estimate in Bloomberg’s survey).
Elsewhere in the detail, prices for fresh food declined a further 1.1%M/M in April – the third consecutive decline – and so were down 7.3%Y/Y. But declines in fresh food prices at around this time of the year are not unusual, and so the BoJ’s forecast measure of core inflation – which excludes fresh food – declined 0.5%M/M, while leaving annual inflation steady at -0.1%Y/Y (also just 0.1ppts firmer than market expectations). Meanwhile, energy prices recorded a further 1.9%M/M lift in April to be up 0.7%Y/Y, contrasting sharply with the 4.3%Y/Y decline in March. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – declined by 0.7%M/M, causing annual inflation to decline 0.5ppts to -0.2%Y/Y – 0.1ppts weaker than market expectations. The narrower measure of core prices used overseas – which excludes all food and energy – declined 0.9%M/M, lowering annual inflation by 0.6pts to -0.2%Y/Y.
Boosted by higher energy prices, goods prices increased 0.2%M/M in April but were down 0.3%Y/Y. Industrial product prices increased 0.3%M/M and 1.1%Y/Y, but a lesser 0.2%M/M and 0.6%Y/Y excluding the impact of higher energy prices. Services prices fell 0.9%M/M in April due to the impact of the sharp increase in mobile phone call charges. As a result, annual inflation in the services sector – which had turned positive in March for the first time in 15 months – fell 0.7ppts to -0.6%Y/Y.
So in summary, inflation remains essentially non-existent at the CPI level in Japan. While the BoJ might like to characterise core inflation as being mildly positive after excluding the impact of decline in mobile phone charges, the trimmed mean – next updated this coming Tuesday – has been running at 0.0%Y/Y or weaker since July last year.
UK retail sales surge to record high as stores reopen and consumer confidence rebounds
UK consumers were evidently desperate to get back to the shops last month. As non-essential stores reopened in England and Wales from the 12th of the month and in Scotland from the 26th, British retail sales in April surged 9.2%M/M, the most since last June. Following solid growth of 5.1%M/M in March, that left the level of sales up 10.6% from the pre-pandemic level in February 2020, 3.6% above the previous series high reached last October, and a whopping 13.5% above the Q1 average, underscoring the vigour of the recovery now underway.
Within the detail, sales were led by those in clothing stores, up 69.4%M/M to just below the pre-pandemic level, as households looked forward to the reopening of hospitality this month and a gradual return to the workplace. Sales of household goods were strong too, up 10.2%M/M to a new series high almost 20% above the pre-pandemic level. And department stores fared well too, with sales up 4.7%M/M to a level 7.6% above that in February 2020. Sales of food dropped 1.0%M/M but were still some 8.6% above the pre-pandemic level. And the share of sales online fell back almost 5ppts from March to 30.0%. With consumer confidence further improved this month – the headline GfK index rose 6pts to -9, back in the pre-pandemic range, thanks to an improvement in perceptions of the climate for making major purchases to a thirteen-month high – sales should remain elevated over the remainder of the quarter even as consumers spend more on services, which reopened further this week.
Flash May PMIs to signal pickup in activity in the euro area, notable acceleration in the UK
Today’s main focus in Europe will be the flash May PMIs, which should be consistent with an acceleration in the pace of recovery this month in both the euro area and UK. Among other things, gradual relaxation of pandemic restrictions is expected to push the euro area services activity PMI up about 2pts to 52.5, which would be the highest since last July. And the euro area manufacturing output PMI is expected to remain close to the record highs above 63 recorded in March and April. But the survey will also likely report backlogs close to record highs and continued very strong price pressures in the sector too. The euro area composite PMI is expected to rise from 53.8 in April to around 55, which would be the highest since the first half of 2018, underscoring the return to positive GDP growth in Q2. The flash UK May PMIs also seem bound to suggest a pickup in economic activity this month. Indeed, the composite PMI is likely to rise further above April's 6½-year high of 60.7, thanks not least to reopening in hospitality and leisure. Yesterday’s CBI survey also points to the possibility of a series high on the manufacturing PMI too.
Also scheduled for release today is the European Commission’s preliminary euro area consumer confidence index for May, which seems likely to report an improvement in optimism this month reflecting the drop in new Covid-19 cases and accelerated progress with vaccination programmes.
Existing home sales and flash PMI readings ahead in the US today
This week’s US economic diary concludes with news on existing home sales for April and the flash Markit PMI readings for May. Daiwa America Chief Economist Mike Moran expects home sales to have been steady during the month, while the PMIs – not a huge focus for US investors – will likely have remained very elevated, even if not quite at the highs reached in April.
Aussie retail sales make a solid start to Q2
The focus in Australia today was on the ABS’s release of preliminary retail sales data for April, based on responses from retailers that account for about 80% of total turnover. The good news is that following an unrevised 1.3%M/M increase in March, spending is estimated to have increased a further 1.1%M/M in April – more than double market expectations. With spending having plunged in April last year in response to the national lockdown, annual growth jumped to 25.1%Y/Y from 2.2%Y/Y in March. More meaningfully, spending in April stands 1.8% above the average level through Q1, boding well for positive growth through the current quarter.
In the detail, the ABS noted that spending increased around 2%M/M in both New South Wales and Victoria, with growth in all industries except for department stores. Spending at cafes, restaurants and takeaway stores increased 2.5%M/M as spending patterns continue to normalise, while food retailing increased 1.5%M/M after declining in both February and March.
Australian PMIs remain very strong in May, with pricing indicators again up sharply
In other Aussie news, the flash Markit PMIs – which, like in the US, tend to play second fiddle to more established surveys – continued to point to very strong growth momentum in May, even if not quite as strong as the record reading seen in April. The composite PMI output index declined just 0.8pts to 58.1, thus remaining about 6pts above the average reading since this indicator was first constructed in 2016.
In the detail, the headline manufacturing PMI increased 0.2pts to a new record high of 59.9. The output index fell 2.2pts to 57.5 and the new orders index fell just 0.4pts from last month’s record reading to 60.3. However, the new export orders index increased 1.0pts to 54.2, marking the highest reading since November 2018. The activity indicators in the services PMI were almost equally strong, with the headline business activity index falling just 0.6pts to 58.2. After surging to a record level last month, the new orders index fell 2.6pts to a still solid 57.6 while the employment index increased 1.7pts to set a new record high of 56.5.
On the pricing front, the news was also favorable for the RBA, with the composite input prices index rising 0.5pts to 62.6 and the composite output prices index increasing an especially notable 2.4pts to a record 56.9. Given the limited history of this index, it is unclear exactly what this high reading – now around 5pts above the average – might imply for future inflation, but in any case the RBA has made clear that it will remain focused on actual inflation outcomes, rather than on indicators and forecasts.