Japan’s goods PPI rises above expectations; Tokyo office vacancies continue to rise

Chris Scicluna

Asian equity markets firmer as Treasury yields decline to 3-month lows ahead of today’s ECB meeting and US CPI report
After trading briefly above its 7 May record closing high, a late decline saw the S&P500 close with a modest 0.2% loss on Wednesday. There was no sign of any fear in the bond market ahead of today’s important US CPI report, as the Treasury market rallied for a second day with the 10Y yield declining 5bps to 1.49% – a closing level last seen in March, with a strong 10Y auction simply consolidating the gains. The 30Y bond closed at 2.17%, which was the lowest yield since 1 March. This might suggest that investors are wary of a downward surprise in the CPI today, especially with the Fed likely to dismiss any upside surprise as merely temporary.

US equity futures have moved a tenth higher in Asia today, while Treasury yields have nudged a further basis point lower. So, after trending lower yesterday, bourses in the Asia-Pacific region were mostly firmer today. China’s markets led the gains, with the CSI300 up about 0.75%, after the Commerce Secretaries of US and China had pledged during a morning phone call to promote “pragmatic co-operation in trade and investment”. Meanwhile, Chinese bond yields nudged lower after PBoC Governor Yi forecast that CPI inflation would remain below 2%Y/Y this year – below the Government’s 3% target – notwithstanding yesterday’s PPI surprise.

Looking elsewhere, Aussie stocks also firmed as PM Morrison confirmed that his government would take its dispute over China’s wine tariffs to the WTO. Meanwhile, Aussie 10Y bond yields slumped 9bps to 1.47% – the lowest since February – as investors responded to the further decline in UST yields, even as Australian consumer inflation expectations hit a 14-month high. While stocks in Singapore and South Korea made gains of around ½%, Japan’s TOPIX closed little changed after a firmer than expected May PPI report pointed to increased cost pressures that will not be easily passed onto to consumers.

Ahead of the US CPI data, attention now moves to the euro area, with the ECB at lunchtime set to signal that the pace of its net asset purchases should remain little changed over the coming quarter. Its choice of wording of its commitment, however, will be closely scrutinised for any hints of complacency and/or disagreement on the Governing Council.

Japan’s goods PPI rises above expectation in May as commodity price surge and weaker yen continue to feed through; Tokyo office vacancies continue to rise
Today the BoJ released the goods PPI for May. In common with yesterday’s Chinese counterpart, and outcomes over the previous two months, the report delivered an upside surprise. Not only was a further 0.7%M/M lift in the headline index 0.2ppt above market expectations, but the previous month’s outcome was revised up 0.2ppt to 0.9%M/M as well. So with last May’s 0.4%M/M decline in prices dropping out of the calculation, annual growth in prices lifted 1.1ppt to 4.9%Y/Y – 0.4ppt above market expectations and the highest reading since September 2008.

Higher prices for scrap and waste (up a whopping 10.1%M/M and 91.6%Y/Y) and utilities (up 3.3%M/M but down 3.9Y/Y) contributed to this month’s outcome. However, the PPI for manufactured goods still increased a solid 0.5%M/M, lifting annual inflation to 5.4%Y/Y from 4.3%Y/Y previously. The key drivers of the increase in prices for manufactured goods were mostly familiar: namely, a 1.5%M/M increase in the price of energy products (which are now up more than 53%Y/Y) and a 5.1%M/M increase in the price of non-ferrous metals (which are now up almost 42%Y/Y). In addition, this month also saw a further 4.6%M/M increase in lumber prices (now up 9.7%Y/Y) and a 1.2%M/M increase in iron and steel prices (now up 7.0%Y/Y).

As in recent months, the weakening of the yen is contributing to price increases at the producer level, especially for raw and intermediate materials. Measured in yen, import prices increased a further 2.2%M/M in May to the highest level since December 2018, and so were up more than 25%Y/Y. Even so, final producer goods prices increased just 0.3%M/M in May, with domestic prices rising just 0.1%M/M and the prices of imported goods rising 0.8%M/M. Final consumer goods prices increased an even smaller 0.1%M/M – both domestic and import prices rising similarly – but base effects meant that annual inflation still increased 0.8ppts to 3.5%Y/Y.

Meanwhile, reflecting the ongoing impact of the pandemic – perhaps including a more persistent change in working habits – the office vacancy rate in the Tokyo business area increased a further 0.25ppt to 5.90% in May. This marks the highest level since August 2014 and is comfortably 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 0.8%M/M in May – a tenth consecutive decline with rates now down a cumulative 7.2% from the July 2020 peak. Clearly this does not bode well for a rapid recovery in non-residential construction, which in lagged reaction to the pandemic declined 3.0%Q/Q in Q1.

ECB to maintain PEPP purchases close to recent pace, but wording of commitment to be closely watched; inflation outlook still sub-par
Quieter markets, including lower net bond issuance, could give some scope to the ECB to moderate somewhat the pace of asset purchases in Q3, particularly in August, if it wants to do so. However, if the Governing Council is appropriately prudent, today’s ECB policy announcements will avoid any suggestion of any meaningful slowing from the “significantly higher” pace agreed in March and conducted over the past quarter. Sure, thanks to the drop in coronavirus cases, gradual reopening and good progress with vaccinations, there’s a decent case for nudging up the ECB’s GDP outlook. Indeed, the growth projection for 2022 could be revised up by about 0.3ppt to 4.4% or thereabouts. And the forecast for headline inflation this year could be pushed up by up to 0.3ppt to 1.8%Y/Y. But with the core measure still very subdued, the case for increasing the inflation projection for future years is weak. Christine Lagarde is likely to underscore that recent price pressures are likely to be transitory, and that the outlook for inflation remains subdued and incompatible with the ECB’s objectives.

Of course, financial conditions will be judged to remain accommodative, with the further upwards move in yields since the 11 March meeting, when the Governing Council committed to conduct purchases at a “significantly higher pace”, to be judged to reflect the more favourable economic conditions and higher market inflation expectations. But the risks of a tightening of financial conditions due to clumsy communication, at a time when underlying inflation remains inadequate, should persuade the majority on the Governing Council to avoid any ambiguity about its intended pace of asset purchases and signal that the pace will be broadly steady around the recent rate over the coming quarter. Some of the hawks might be dissatisfied with that outcome, however. And assuming that economic growth does indeed rebound over the summer, and the Fed signals more clearly its plans to taper by then, we would certainly expect a slowing in the pace of purchases to be discussed – and likely agreed – in September.

Italian IP data to come after France posts modest drop in production on auto sector weakness as supply bottlenecks continue to bite
Data-wise in the euro area, Italian industrial production data for April are due shortly. Unlike the drop in Germany, modestly positive growth is expected in Italy, although production will highly likely remain below the pre-pandemic level. In France, data just released showed that total IP edged down just 0.1%M/M in April following upwardly revised growth of 1.0%M/M in March. Manufacturing production was down a slightly larger 0.3%M/M following growth of 0.6%M/M previously as another steep fall in car production (down 5.9%M/M for a second month on supply-chain disruption) weighed on overall output. That left French manufacturing production some 6.6% below the pre-pandemic level in February 2020, with output of autos down some 23% on an equivalent basis.

UK RICS housing survey flags continued price pressures on shortage of supply
With UK house price inflation on the Nationwide series having risen in May to 10.9%Y/Y, the highest since 2014, the latest RICS residential market survey underscored the ongoing pressures in the market against the backdrop of a shortage of supply. Indeed, the RICS survey net balance of surveyors reporting house price growth rose a further 7ppts to +83%, the highest in more than 30 years, with gains reported in every region of the UK. RICS also reported that the number of surveyors expecting home prices to continue to rise over the coming quarter remained elevated, with the respective net balance down just 2ppts to +45%. And a net balance of +64% of surveyors expect prices to rise over the coming year. The survey did, however, report some moderation in demand, with the net balance of new buyer enquiries down 13ppts from April’s 7-month high to +32%, perhaps reflecting the imminent tapering and conclusion of the increase in the stamp duty threshold (from £125k to £500k). At the same time, however, the net balance of new instructions from owners looking to sell dropped a further 19pts to -23%, while the stock of unsold homes reported by estate agents remained down on the autumn and winter months too.

May CPI report the focus in the US today; federal budget data and jobless claims also due
Today brings this week’s most important economic report: namely, the release of the US CPI for May. Following last month’s shock upside surprise, albeit largely reflecting a more rapid than expected normalization of prices depressed by the pandemic, Daiwa America’s Mike Moran expects a further solid 0.3%M/M lift in both the headline and core CPI measures, which would nevertheless be below the consensus forecasts Given those movements, annual headline inflation on Mike’s view would rise to around 4½%Y/Y while the likely 3.3%Y/Y increase in the core CPI would be the largest in almost 30 years. Unfortunately, with the Fed now in its pre-FOMC meeting black out period, we will have to wait until the coming Tuesday’s post-meeting statement and press conference for Fed policymaker reaction to whatever these figures portray. Today will also bring the release of federal budget data for May while the weekly jobless claims data will be of interest to see whether the welcome downtrend in initial claims has continued.

Australian consumer inflation expectations rise to 14-month high in June
According to the Melbourne Institute, consumer expectations of inflation lifted 0.9ppt to 4.4%Y/Y in June, marking the highest reading since April 2020 and 1.1ppt firmer than a year earlier. The latest reading is also 0.7pts firmer than the average reading over the past five years.

Kiwi consumer spending post further strong growth in May
As had perhaps been suggested by the rise in business sentiment to a four-year high, today Statistics New Zealand reported a strong 1.7%M/M lift in the value of electronic transactions processed through retail stores during May – especially impressive considering the upwardly-revised 4.4%M/M jump recorded in April. Growth was recorded across all storetypes, but was especially strong for autos and apparel (the latter perhaps not surprising given that winter clothing purchases were extremely weak last year).

Given today’s result, spending through this quarter is running almost 5% higher than the average through Q1 (the latter impacted by two periods of restricted trading activity). With many retail stores closed through at least part of May last year, annual growth stood at a flattering 18.1%Y/Y, with spending at hospitality venues almost double that seen a year earlier and spending on apparel almost 50% higher. More meaningfully, spending was 5.9% higher than in February 2020, just before the pandemic struck. 

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