Japan’s April IP growth revised up; capacity utilization lifts

Chris Scicluna

Quiet start to the week as investors await Wednesday’s FOMC meeting
A quiet end to the week on Wall Street left the S&P500 with a modest 0.2% gain on Friday, albeit to a new record high. With the University of Michigan’s survey reporting a recovery in consumer sentiment in June, Treasury yields nudged higher – the 10Y UST closing up 2bps at 1.45% – even as the survey pointed to a decline in inflation expectations following a steep increase in May. In currency markets, the greenback made gains against all key counterparts.

Today US equity futures and the 10Y UST yield have reopened just a smidgen firmer, with investors now awaiting guidance from the Wednesday’s FOMC meeting, which will also bring updated Fed projections for the fed funds rate and perhaps some hints regarding the eventual tapering of the Fed’s asset purchases (more on this below). In the Asia-Pacific region it has also been a slow start to the week with very few economic releases and markets closed for public holidays in China, Hong Kong, Taiwan and Australia. In Japan the TOPIX inched up 0.3%, while bourses were virtually unchanged in South Korea and Singapore.

Japan’s April IP growth revised up to 2.9%M/M; capacity utilization rises to 19-month high
In an otherwise quiet day for Japanese economic news, today METI released the final IP figures for April. Total production is now estimated to have increased 2.9%M/M – 0.4ppt more than indicated by the provisional report, but still not quite as robust as analysts had earlier expected. Given this revision, annual growth was also revised up 0.4ppts to a very flattering 15.8%Y/Y. More meaningfully, output was just 1.3% higher than in February 2020.

Elsewhere in the report, growth in shipments was revised up a similar 0.5ppt to 3.1%M/M and 16.2%Y/Y. As a result, inventories fell an unrevised 0.1%M/M and 9.8%Y/Y. As always, the brand new content in today’s release concerned capacity utilization, which in aggregate increased 1.1%M/M in April to the highest level since September 2019 (i.e. just ahead of the consumption tax hike). However, it is worth noting that firms’ productive capacity fell 0.3%M/M in April and has declined 1.1% since September 2019.

BoJ meeting likely to be non-event; trade, machinery orders and Reuters Tankan of interest this week, while May CPI also due
Looking ahead, while the BoJ’s Policy Board will conclude its latest meeting on Friday, this should be a relative non-event for markets with there being little likelihood of any change in the Bank’s key policy settings or its characterization of the economic outlook. However, one point of interest will be whether the Bank gives notice that it will extend its special coronavirus support – which provides cheap financing to financial firms to support lending to SMEs – which is currently due to expire at the end of September. With the pandemic and associated state of emergency still weighing heavily on economic activity, the case for extending the support would seem strong, although it is possible that the Board delays this decision until the next meeting in July, at which time the Bank will also issue an updated Outlook Report.

On the data front, tomorrow METI will release the Tertiary Industry Activity Index for April, casting some light on how the service sector was coping with the upswing in coronavirus cases early this quarter. On Wednesday, merchandise trade data for May should paint a more positive picture for Japan’s exporting manufacturers, while the April machinery orders report will also be of interest in light of the modest pullback in machinery investment in Q1. On Thursday, the Reuters Tankan for June will cast further light on how firms are viewing the near-term economic outlook. The week will conclude with the release of the national CPI for May, which in common with the advance Tokyo CPI will likely point to a modest lift in core prices during the month while leaving annual inflation below zero due to the previous month’s sharp decline in mobile phone call charges.

China’s key domestic activity indicators released this week
With Chinese markets closed for a public holiday, there were no significant economic reports today. Tomorrow’s economic diary is empty too. However, Wednesday will bring the release of key domestic activity indicators for May, which are likely to report somewhat slower annual growth as base effects associated with the onset of the pandemic continue to wane. While the focus is usually mainly on the IP report, developments in retail spending may garner even greater attention this month as signs of a more pronounced recovery would increase the likelihood of surging producer prices feeding into CPI inflation. News on Chinese home price developments in May will follow on Thursday.

Further relaxation of English pandemic restrictions to be postponed today; plenty of top-tier UK data due over coming days
Attention in the UK today will be on the government’s decision as to whether to further relax pandemic containment measures from 21 June – reports suggest that full reopening will be delayed by four weeks, meaning, among other things, that home-working will continue to be encouraged where possible and larger gatherings still prohibited. But following Friday’s upbeat GDP report for April, the remainder of the week will give further clues as to the strength of GDP in May, with the latest labour market report (due tomorrow) and retail sales data (Friday), as well as inflation figures for May (on Wednesday). With the Job Retention Scheme still operating, and further easing of restrictions having occurred in May, we expect to see a further tightening in labour market conditions, including a solid increase in payrolls and vacancies last month. In addition, the unemployment rate is likely to nudge down further in the three months to April – marking the fourth successive decline – from 4.8% in the three months to March. And growth in average labour earnings (excluding bonuses) seems likely to rise above 5.0%Y/Y. Meanwhile, we expect headline CPI inflation to rise 0.3ppt to a seventeen-month high of 1.8%Y/Y in May, thanks in particular to further upward pressure from energy prices. However, we also expect a pick-up in inflation of clothing as well as certain reopening services to be reflected in an increase in the core CPI measure to 1.5%Y/Y, the highest since July 2020. Finally, retail sales are expected to have remained firm in May, following the rebound in April. We expect to see growth of around 1½%M/M in retail sales excluding petrol, pushing them up about 15% from the pre-pandemic level in February 2020.

A quieter week ahead in the euro area starting with modestly positive IP figures today
This week’s euro area economic data calendar is relatively quiet with few new top-tier data to come. Following the mixed national industrial production data of the past week – with Germany and to a lesser extent France posting falls in IP in April, while Italy, Spain and several smaller member states saw an increase in production, despite the significant supply bottlenecks – euro area industrial production data due today are likely to reveal a relatively modest increase in output in April. We expect to see a rise of roughly ½%M/M to a level about 1% below that in February 2020. On Tuesday, final May inflation data from Germany, France and Italy are due for release, followed by the publication on Thursday of final euro area CPI figures for last month. The preliminary May data showed the headline euro area measure rising 0.4ppt to 2.0%Y/Y in May, the highest level since October 2018. The core rate edged up 0.2ppt to a still subdued 0.9%Y/Y. Other data due this week include euro area April goods trade figures tomorrow and EU new car registrations data for May on Thursday. Survey-wise, the Bank of France is due to publish its latest surveys for industrial sentiment and retail trade today.

FOMC the key focus in the US this week, but important data also lie ahead
Without a doubt, the focus in the US this week will be on the Fed. The FOMC will conclude its latest policy meeting on Wednesday, following which it will publish new projections and Chair Powell will host his usual press conference. The initial point of interest will be on what the projections imply about the future course of the fed funds rate, while the focus in Chair Powell’s press conference will be on the potential timing of a tapering of the Fed’s QE purchases. There might also be hints on the likelihood of an increase in the interest rates on reverse repos and/or excess reserves (if these rates are not hiked at this meeting).

With regard to the FOMC’s forecasts, Daiwa America’s Mike Moran suspects that the median view of Fed officials on GDP growth this year will show a slightly faster pace than the March projection of 6.5%. The Fed’s forecast for inflation is also likely to be revised up from the 2.4%Y/Y forecast made previously, with both headline and core inflation on track to exceed 5%Y/Y this quarter, albeit with much of the increase likely to be viewed as transitory. So whereas previously only seven Fed officials forecast a rate hike in 2023, Mike suspects that the updated forecast will indicate that at least three further members have joined that camp to shift the consensus forward to a first rate hike in that year. Regarding eventual tapering of QE, Mike suspects that Chair Powell will use the press conference to indicate that this is now on the minds of officials, as hinted at in a very guarded way in the minutes from the FOMC’s April meeting. While many market participants are expecting an increase in either the reverse repo rate or IOER or both in order to nudge money-market rates slightly higher and minimize the risk of dropping into negative territory, Mike notes that some policymakers might be reluctant to make an adjustment at this time lest it be viewed as a policy tightening.

On the data front, it is a quiet start to the week with no US economic releases of note today. However, the dataflow begins with a rush tomorrow with a large number of releases due. Of particular interest will be the retail sales and IP reports for May. Mike expects a drop in auto sales to lead to a 0.8%M/M decline in overall retail spending, but he expects ex-auto spending to be down only fractionally. Meanwhile, a solid gain in factory sector employment and a pick-up in the rotary rig count point to a 0.7%M/M lift in introduction production during the month. Tomorrow will also bring the release of the New York Fed’s manufacturing survey for June, business inventories for April and the NAHB housing index for June. In addition, news on potential pipeline inflation pressures will come from the PPI for May. On that score, Mike expects a combination of pandemic-related adjustments, strong demand, and supply-chain disruptions to cause the core PPI to increase 0.5%M/M, pushing annual inflation close to 5%Y/Y. Over the remainder of the week, the main focus will be Wednesday’s housing starts and building permits news for May, while the Philadelphia Fed manufacturing survey for June and Conference Board leading index for May will follow on Thursday. There are no major economic reports scheduled on Friday.

RBA commentary and May labour force report the focus in Australia this week
There were no economic reports of note in Australia today due to the Queen’s Birthday holiday. Looking ahead, tomorrow will bring the release of the ABS House Price Index for Q1 – surely up very strongly given monthly indicators – while the minutes from this month’s RBA Board meeting will be read closely for any hints on the QE and 3Y bond yield target decisions that will be made at next month’s meeting. On Thursday, RBA Governor Lowe will address the Australian Farm’s Institute Partner Forum. The topic of the speech is a somewhat upbeat “From Recovery to Expansion”, which may well lay the groundwork for those decisions. Shortly afterwards, the ABS will release the Labour Force report for May. According to Bloomberg’s survey, following last month’s surprise decline in employment – at odds with other buoyant labour market indicators – the market expects a 30k rebound in employment but a steady unemployment rate of 5.5%.

Kiwi services PMI falls back from record high in May; Q1 GDP report ahead this week
After surging to a record 61.2 in April, the often-volatile BNZ-Business New Zealand services PMI fell 5.1pts to 56.1 in May – still around 2pts above the historic average for the index. In the detail, the activity/sales index fell 3.5pts to a still sturdy 58.7, while the new orders index fell 6.0pts to 62.1. The employment index was also softer, declining 6.5pts to 54.5.

Looking ahead to the remainder of the week, the focus will be on Thursday’s dated Q1 GDP report. Whereas the RBNZ had forecast a 0.6%Q/Q decline in output in its May Monetary Policy Statement, recent much partial indicators have led the market to estimate that economy expanded 0.6%Q/Q – a result that would presumably reinforce the RBNZ’s recent adoption of a tightening bias. 

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