Japan’s IP slumps steeper than expected

Chris Scicluna

Quiet markets as investors continue to await Friday’s US payrolls report
While the Conference Board’s survey reported a material upside surprise in consumer sentiment – with jobs viewed as more plentiful than at any time since July 2000 – neither equities nor bonds changed greatly on Tuesday. After opening higher, the S&P500 closed up less than 0.1% – albeit setting a new record high – while the yield on the 10Y UST finished steady at 1.47% after briefly approaching 1.51% earlier in the session. In FX markets, the greenback made gains against most counterparts aside from the yen, with the AUD declining to a one-week low as concerns about the recent outbreak of coronavirus continued to weigh.

Since the close, US equity futures have firmed just a tenth while Treasury yields have lifted just a notch. So, with US markets failing to provide much direction the focus has been on the local data flow, with both Japan’s IP report for May and China’s non-manufacturing PMI for June providing notable downside surprises for investors (more on these releases below). Nonetheless, with most bourses in the region having posted material declines on Tuesday, the tone in equity markets has been mostly slightly firmer during today’s end-of-month/quarter trade. In mainland China, the CSI300 has increased 0.6% with a marked softening of the PMI survey price indicators perhaps easing worries about possible PBoC policy tightening, with markets also posting gains in South Korea, Taiwan, Singapore and Australia (the latter despite more coronavirus cases emerging, this time in South Australia, leading to a further tightening of restrictions). However, Japanese stocks struggled to make headway in light of the disappointing IP report, even as the latest housing starts and consumer confidence reports made for better reading later in the day. Meanwhile, with USTs largely steady, it was a very quiet day for Asia-Pacific bond investors. The 10Y AGCB initially lifted a couple of basis points to 1.55% with the RBA earlier reporting that growth in housing credit had reached a four-year high in May, but that rise proved fleeting.

Japanese IP slumps almost 6%M/M in May, far weaker than expected, as pandemic restrictions sap domestic demand
The highlight – or perhaps in retrospect, lowlight – of today’s Japanese economic data was the industrial production report for May. Guided by last month’s forecast by firms of a pullback in production – and since reinforced by a surprise sub-50 reading in the manufacturing PMI output index – the consensus expectation was for a 2.1%M/M decline in output this month. As it turns out, output decreased 5.9%M/M – far weaker than even the most pessimistic forecaster in Bloomberg’s survey – as ongoing pandemic-driven restrictions impacting domestic demand clearly dominated the improving fortunes of exporters. Thanks to base effects associated with last year’s first wave slump in activity, output was still up a whopping 22.0%Y/Y. However, the decline in May – the largest in 12 months – almost erased this year’s entire advance. As far as the other headline figures are concerned, shipments declined a slightly less severe 4.7%M/M in May and thanks to base effects were up 22.5%Y/Y. As a result, inventories declined 1.7%M/M and so were down a steep 9.3%Y/Y. The latter owed not least to a 35.7%Y/Y decline in inventories of electronic parts and devices – a decline that is probably linked to the global semiconductor shortage and which should eventually lead to a sharp lift in production. Inventories of autos and business machinery fell 8.2%Y/Y and 7.5%Y/Y respectively.

Production of durable consumer goods suffered by far the largest decline in May, with output slumping 17.3%M/M but still up more than 56%Y/Y from last year’s especially depressed levels. Of particular note was an 18.4%M/M decline in production of autos, which firms likely reacting to both the forced pause in demand and ongoing difficulties created by chip shortages. As usual, production of non-durable consumer goods was considerably less impacted by the pandemic restrictions, although output was still down 1.5%M/M and so up just 1.5%Y/Y. Less positively, following a very strong start to the quarter, total production of capital goods fell 5.6%M/M in May. However, again thanks to base effects, output of these goods still increased more than 21%Y/Y. Excluding transportation equipment, production of capital goods declined a similar 5.5%M/M, with production of ICT equipment increasing fractionally but production of general machinery falling 5.5%M/M. On a brighter note, production of construction goods increased 2.9%M/M – the third consecutive following an earlier lift in housing starts – and so was up 7.8%Y/Y.

Looking ahead, the good news is that firms expect the quarter to end on a considerably more positive note. According to METI’s survey, firms forecast a substantial 9.1%M/M lift in output in June, up from the 5.0%M/M lift forecast a month ago. Normally, firms are too optimistic in formulating their June forecasts and so METI estimates a bias-corrected 5.4%M/M increase in output for the month (with a ±1.8ppt range at the 90% confidence level). So while, at this stage, firms’ forecast a 1.4%M/M decline in output in July, today’s figures for April and May and METI’s bias-corrected forecast for June still imply that manufacturing output will lift by a little over 1%Q/Q in Q2, providing a weak offset to a further contraction in service sector activity. Of course, at the time that firms made this forecast, they may have anticipated a more material easing of pandemic restrictions than has so far proven possible, perhaps suggesting some downside risk to the rebound in June. Nonetheless, unsurprisingly, METI retained its overall assessment that “production is picking up”. Moreover, tomorrow’s BoJ Tankan survey will doubtless point to a considerable lift in optimism in the manufacturing sector, not least due to expectations of ongoing vaccination progress and continued accommodative policy settings.

Japan’s housing starts rise 9.9%Y/Y in May; consumer confidence rises to a 16-month high
Turning to the day’s other Japanese data, which thankfully printed a little firmer than market expectations, the MILT reported that housing starts fell a modest 0.9%M/M in May. But having leapt 9%M/M back in March, starts increased 9.9%Y/Y and so far in the current quarter are tracking almost 6% higher than the average through Q1. Meanwhile, in a similar vein, orders at Japan’s 50 largest construction companies increased 7.4%Y/Y in May, with private domestic orders declining 4.3%Y/Y but public sector orders rising almost 50%Y/Y. These orders are very volatile from month to month, however the average for the quarter to date increased 5.3%Y/Y with private domestic orders up 3.4% following a more positive reading in May.

Finally, the Cabinet Office survey of consumer confidence indicated that households perceived an improving outlook in June, with the headline index rising by a greater than expected 3.3pts to a 16-month high of 37.4 – now just a little below pre-pandemic levels. By far the largest driver of the improvement was the employment index, previously hard hit by the pandemic, which jumped 7.3pts to a 16-month high of 35.0. Given the improved outlook for the labour market, unsurprisingly respondents were more positive about the outlook for income growth and more inclined to buy durable goods. This bodes well for retailers heading into the new quarter, providing that accelerated vaccination is successful in preventing a resurgence of the most recent outbreak.

China’s manufacturing PMI nudges lower in June; non-manufacturing PMI sharply weaker
The focus in China today was on the release of the latest ‘official’ PMIs for the manufacturing and non-manufacturing sector. Starting with the manufacturing sector, the closely-watched official manufacturing PMI edged down 0.1pt to a four-month low of 50.9 in June – an outcome that was nonetheless a notch firmer than the consensus expectation. The small decline owed to the experience of both large- and medium-sized firms, but at 51.7 and 50.8 respectively nonetheless remained at expansionary levels. The index for small firms increased 0.3pt to 49.1, but remained well below the April high of 50.8. In the detail, however, the manufacturing output index fell 0.8pt to 51.9, so matching the recent February low. The new orders index inched up 0.2pt to 51.5, but the new export orders index fell 0.2pt to a notably sub-par 48.1. The business activity expectations index declined 0.3pt to 57.9, but remains comfortably above the historic average. Supplier delivery times shortened slightly but remained longer than usual, hinting at continued bottlenecks affecting production. Strikingly, with commodity prices off their highs – in part due to government jawboning – the input prices index fell a steep 11.6pts to an eight-month low of 61.2. More surprisingly, after reaching a record high last month, the output prices index declined a similarly steep 9.2pts to a 13-month low of 51.4.

Amidst a small pick-up in reported coronavirus cases, the news from the non-manufacturing sector was considerably softer this month. The headline PMI declined an unexpected 1.7pts to a four-month low of 53.5, albeit still much firmer than the 51.4 reading registered in February. As a result, the headline composite PMI – which combines the output index from the manufacturing PMI and the headline non-manufacturing PMI – fell 1.3pts to 52.9 in June, albeit leaving the average through Q2 (53.6) 0.4pts firmer than the previous quarter (China will report Q2 GDP figures in just over a fortnight). Returning to the non-manufacturing sector, the new orders index fell 2.6pts to a four-month low of 49.6 in June and the business activity expectations index softened 2.1pts to a five-month low of 60.8 (about in line with the average reading over the past decade). As in the manufacturing sector, the PMI pricing indicators weakened this month with the input prices index falling 4.3pts to 53.4 and the output prices index falling 1.4pts to 51.4 – results that should further reduce fears that the PBoC might see the need to tighten financial conditions significantly.

Inflation data the focus in the euro area today, with headline rate for the region set to decline, but flash French figure slightly higher as expected
Following yesterday’s flash inflation figures from Germany and Spain, today brings the release of the equivalent data from the euro area, Italy and several smaller member states. With the annual rate of energy inflation now likely to have peaked, we expect the headline euro area HICP rate to fall back 0.2ppt to 1.8%Y/Y – which would mark the first decline since last September, with the core measure also easing 0.1ppt to 0.8%Y/Y. In line with expectations, however, French HICP inflation edged up 0.1ppt to 1.9%Y/Y, with the national measure also rising 0.1ppt to 1.5%Y/Y. On the national measure, French energy inflation slowed 0.8ppt to 10.9%Y/Y while inflation of services moderated 0.2ppt to 0.9%Y/Y. But inflation of manufactured goods leapt 1.0ppt, also to 0.9%Y/Y, principally reflecting changes to the monthly schedule of discounting last year. Other new data due today include figures for German jobless claims for the current month.

Drop in UK GDP in Q1 a touch larger than thought previously at 1.6%Q/Q; Lloyds business barometer steady in June with skill shortages flagged
The final estimates of UK GDP in Q1 released this morning showed that the decline was only 0.1ppt larger than previously thought, at 1.6%Q/Q, leaving the level of GDP 8.8% below the pre-pandemic peak in Q419. Compared to a year earlier, however, GDP was still down 6.1%Y/Y, unchanged from the prior estimate. Within the detail, the revisions were somewhat larger, with private consumption now estimated to have dropped 4.6%Q/Q, 0.7ppt more than previously thought, as the household saving ratio jumped 3.8ppts to 19.9%, the second highest on the series after the peak of 25.9% in Q220 during the first lockdown. Growth in government spending was also softer than thought, at 1.5%Q/Q (1.1ppts lower than in the prior estimate), while the decline in business investment was 1.2ppts less than thought at 10.7%Q/Q. All in all, the revisions change little, with GDP already rebounding vigorously in Q2 led by household consumption, and on track to be back above the Q419 level in the final quarter of this year.

Lloyds latest UK business barometer, meanwhile, suggested that confidence was steady in June at a 3-year high of 33%, above the long-run average but below the range from previous cyclical upswing from 2014 through to 2017. While optimism in the broader economic outlook fell a touch, employment expectations rose to a 2½-year high. Tallying with anecdotal evidence and concerns about the exodus of EU citizens from the UK labour market over the past year or so, almost one fifth of firms reported significant difficulties in finding staff with the appropriate skills and experience. At the sectoral level, confidence among services firms rose to its highest level in three years (31%) but retail (36%) and manufacturing (35%) sentiment both eased back somewhat from recent elevated levels.

ADP employment, Chicago PMI and pending home sales the focus in the US
Today’s line-up of US economic data is dominated by indicators that might cast some light on their more closely followed counterparts that will come over the remainder of the week. First up is the ADP employment report for June. While a solid lift in private payrolls seems almost certain – especially in light of the buoyant ‘jobs plentiful’ reading in Tuesday’s Conference Board survey – the implications for Friday’s official payrolls data will be less than clear given that the ADP report overstated the official measure by almost 500k in May. A little later in the morning, and ahead of tomorrow’s ISM manufacturing report, the Chicago PMI will likely struggle to sustain last month’s extremely elevated reading of 75.2. The dataflow concludes with the pending home sales report for May. Amidst tight inventories and rising prices, in recent months home sales have returned to the pre-pandemic levels and will likely remain around there in May. The day’s Fed-speak is limited to further remarks by the Richmond Fed’s Barkin and a speech by the Atlanta Fed’s Bostic.

Aussie private sector credit lifts 0.4%M/M in May as housing credit expands at the fastest pace in four years
In an otherwise quiet day for Australian economic news, the RBA released the money and credit aggregates for May. Private sector credit grew 0.4%M/M – a notch firmer than the consensus had expected – lifting annual growth to an eight-month high of 1.9%Y/Y. Reflecting the buoyancy of the housing market, housing-related credit grew 0.6%M/M, marking the largest advance in four years. Loans to owner-occupiers increased 0.7%M/M and lending to investors increased at a slower pace of 0.4%M/M – a distribution that regulators will continue to view favourably, while still keeping a close eye on banks’ management of loan quality. Other personal loans increased 0.2%M/M – up for a third consecutive month but still down 6.4%Y/Y, reflecting households’ elevated savings rate during the pandemic. Business credit also expanded by a modest 0.2%M/M but remained down 2.0%Y/Y, reflecting weak demand for investment financing and base effects associate with last year’s scramble for liquidity at the onset of the pandemic.

Kiwi business activity expectations confirmed at near 4-year high; inflation pressures mounting
The domestic focus in New Zealand today was the release of final information from the ANZ’s Business Outlook survey for June. Encouragingly, the ANZ’s closely-watched Activity Outlook index was revised up to 31.6 – up from a final reading of 27.1 in May. This marks the highest reading since August 2017 and is comfortably above the long-run average for the index – a very positive outcome considering that both activity and employment have already surpassed their pre-pandemic highs. Firms’ investment intentions were revised up markedly to a new four-year high, while employment intentions were only fractionally weaker than the four-year high posted in May. Perhaps of greater interest, the net proportion of firms reporting an intention to raise their selling prices was confirmed to have increased to a fresh record high of 63% in June, while firms’ forecast of year-ahead inflation was revised up to 2.41% – up 0.19ppts from last month and now at the highest level since 2014.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.