Japan’s MoF Business Outlook Survey points to weaker business conditions

Chris Scicluna

Treasury yields make new lows despite another upside surprise in US CPI
Treasury yields initially rose yesterday following another US CPI report that exceeded market expectations, with a 0.7%M/M lift in core prices in May boosting that key measure of inflation to a 29-year high of 3.8%Y/Y. However, the sell-off proved short-lived, with investors clearly content to dismiss the outcome as being mainly due to pandemic-related price normalisation (e.g. airfares and accommodation) and special factors including supply-chain disruptions (e.g. autos and auto rental fees), rather than a sign of stronger-than-anticipated demand pressures that might disturb the Fed’s dovish policy outlook. Indeed, at the close of the US session the 10Y UST yield stood at just 1.43% – down 4bps on the day and the lowest yield since early March. So even with initial jobless claims setting a fresh post-pandemic low, pointing to ongoing retightening of the labour market, the S&P500 advanced 0.5% to a new record high. In the FX market, the decline in UST yields weighed on the greenback. However, €/$ was little changed with the euro given relief by the ECB’s decision to continue with accelerated asset purchases over the coming quarter, even as the Bank revised up its near-term growth and inflation forecasts.

US equity futures have moved sideways in Asia today, while the 10Y UST has nudged up just 1bp from its US session close. There was little reaction to news that a bipartisan group of US senators agreed a $1.2trn infrastructure deal (over 8 years), which it will now put before the White House and party leaders. Despite the overnight gains on Wall Street, markets in Asia have had a relatively mixed day. The CSI300 has declined 0.9%, erasing yesterday’s rally, with China sure to be a topic of discussion at the G-7 summit that begins in earnest today. In Japan, the TOPIX edged down 0.1% even as the MoF’s latest Business Outlook Survey indicated that firms expect business conditions to improve over the second half of this year (more on this below). Bourses in Hong Kong, Taiwan, South Korea and Australia were all at least somewhat firmer, however. Meanwhile, bond yields generally fell in the region as investors reacted to the further rally in USTs, with the 10Y AGCB falling to a near four-month low of 1.49%.

Japan’s MoF Business Outlook Survey points to improved conditions in H2, with sales, profits and capex expected to lift in FY21
The domestic focus in Japan today was on the MoF’s Business Outlook Survey, which usually provides a good directional predictor of key indicators in the more widely-followed and comprehensive BoJ Tankan survey – the next instalment of which will be released on 1 July. In summary, and unsurprisingly, the MoF survey pointed to less favourable business conditions – especially domestic business conditions – over the past three months, particularly in the non-manufacturing sector, due to the disruption caused by the latest wave of coronavirus cases and associated restrictions on activity. However, on balance, large and medium-sized firms expect conditions to improve over the second half of this year. The survey points to a marked lift in sales, profits and capex in FY21, but not quite as strong as forecast in the prior survey.

Turning to the key figures, in net terms, around 5% of large firms reported weaker business conditions in Q2 – similar to the previous quarter – with weaker conditions cited by around 1% of manufacturers but over 6% of non-manufacturers. Improving conditions in international markets clearly provided a buffer against much weaker conditions domestically. Indeed, on net almost 14% of large firms reported weaker domestic economic conditions in Q2, with 5% of manufacturers and almost 18% of non-manufacturers citing a deterioration. As always, the experience of medium- and especially small-sized firms was significantly worse than that for larger firms. For example, a net 44% of small firms perceived a deterioration in domestic economic conditions in Q2.

Despite the downturn, given the extreme tightness of the labour market prior to the pandemic, a net 9% of large firms continued to report labour shortages in Q2, with shortages especially notable in the non-manufacturing sector. Looking ahead, on net almost 8% of large firms indicated that they expected business conditions to improve over the coming quarter, with a similar proportion expecting a further improvement in the final quarter of this year. Firms were slightly more optimistic in the manufacturing sector, while expectations regarding overall and domestic business conditions were similarly positive. As a result, firms anticipate that labour market conditions will remain relatively tight over the coming two quarters.

Elsewhere in the survey, respondents also provided their second estimate of expected growth in sales, profits and capex for FY21. Led by a predicted 4.6%Y/Y increase in the manufacturing sector, business sales are forecast to rise 2.8%Y/Y – down 0.4ppt from the previous survey, doubtless reflecting the disruption experienced during the current quarter. As a result, ordinary profits are forecast to increase 6.8%Y/Y, down from the 8.8%Y/Y rebound predicted previously, with slightly firmer growth expected in the manufacturing sector. Encouragingly, spending on plant and equipment and software is forecast to rebound 7.4%Y/Y – just 0.2ppt less than in the prior survey – led by a near 11%Y/Y increase in spending in the manufacturing sector.

China credit growth steadies in May, but much weaker than a year earlier
Late yesterday the PBoC released the monetary and credit aggregates for May, which were somewhat mixed compared with market expectations. Aggregate financing grew CNY1.92trn, which was fractionally stronger than in April, just slightly below market expectations but a considerable CNY1.27trn less than a year earlier when credit growth was turbo-charged as China emerged from lockdown conditions. Given the latter, annual growth in the total stock of aggregate financing slowed to a 15-month low of 11.0%Y/Y from 11.7%Y/Y previously. Bank lending grew CNY1.50trn, which was also very similar to that in April (CNY1.46trn) but slightly above expectations. With regard to the monetary aggregates, growth in M1 eased a further 0.1ppts to 6.1%Y/Y but growth in M2 increased 0.2ppts to 8.3%Y/Y – a rate that is below China’s target for nominal GDP growth this year, but likely close to where nominal GDP will print given subdued CPI inflation.

Close to expectation, UK GDP accelerates in April thanks to services reopening
Broadly in line with expectations, UK GDP rose 2.3%M/M in April, an acceleration of 0.2ppt from March and the firmest rate in nine months, as pandemic containment restrictions in services were gradually eased. The growth in April left the level of GDP 1.2% above the previous pandemic era peak in October but still some 3.7% below the pre-pandemic level in February 2020. Notwithstanding the risks of a delay to full reopening of the economy later this month, the expansion leaves UK well on track to surpass the pre-pandemic level of output by the end of the year.

UK GDP growth in April was driven by services, for which activity rose a steeper-than-expected 3.4%M/M, which was also the best rate in the sector since July and left the level 4.1% below that before the pandemic. Services growth was led by hospitality, up 44.0%M/M on the reopening of outdoor service, albeit still more than 40% below the pre-pandemic level. In addition, the further return of pupils back to school saw education activity rise 11.1%M/M to the highest level since the arrival of Covid-19. And the reopening of non-essential stores helped wholesale and retail output rise 8.9%M/M back above the pre-pandemic level.

Beyond services, the other major sectors saw declines in production, seemingly reflecting temporary factors. Manufacturing output edged down just 0.3%M/M principally due to a plunge in production of pharmaceuticals of 16.0%M/M back to the lowest level since 2019, and a fall in transport equipment of 2.8%M/M, likely reflecting supply bottlenecks, with car production now more than 11% below the pre-pandemic level. Construction output slipped back 2.0%M/M in April, seemingly merely representing payback from vigorous growth of 5.8%M/M in March. And planned maintenance at oil fields saw mining and quarrying output drop a steep 15.0%M/M.

Preliminary UoM consumer sentiment survey for June closes out this week’s US diary
This week’s US economic diary concludes with the release of the preliminary findings of the University of Michigan’s consumer sentiment survey for June. Confidence fell sharply last month not least due to increased concerns about inflation. However, Daiwa America’s Mike Moran expects a modest recovery this month, citing the positive influence of a continued improvement in the labour market and rising financial asset prices. Aside from the confidence reading, investors will also take note of developments in the survey’s measures of inflation expectations.

Kiwi manufacturing PMI remains elevated in May, despite supply side problems
The BNZ-Business NZ manufacturing PMI increased a modest 0.3pts to 58.6 in May – one of the highest readings in the 19-year history of the survey and more than 5pts above the historic average for the index. In the detail, the production index increased 1.1pts to 65.3 – over 11pts above the long-term average – while the new orders index increased 2.7pts to 63.7. The employment index nudged down 0.7pts to 51.5, albeit still indicating that firms remain in expansion mode. In their commentary, the compilers of the survey noted frequent comments from respondents concerning supply-side disruptions. 

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