Japan’s services PPI falls in May

Chris Scicluna

UST yields a little higher overnight; markets generally very quiet in Asia today
A very quiet session on Wall Street saw the S&P500 close with a modest 0.1% loss on Wednesday with the index traversing a narrow range on lower than usual volumes. While both the Markit services PMI and new home sales reports were weaker than expected, Treasuries were a little weaker with the yield on the 10Y UST rising 3bps to 1.49%. Comments made by the Atlanta Fed’s Bostic drew some attention, with the current voting member suggesting that the Fed could decide to announce its QE taper within months, while also expressing his support for a first rate hike next year. The Dallas Fed’s Kaplan, next scheduled to vote in 2023, again echoed Bostic’s comments. In commodity markets, industrial metals continued to recover from their mid-month swoon. The greenback was little changed, although higher UST yields did help ¥/$ breach 111.

US equity futures have firmed a couple of tenths since the US close, while Treasury yields are little changed. Against that background, and with very little in the way of local macro news, it has been a very quiet start to the day in the Asia-Pacific region. In equity markets, the major bourses have recorded no more than modest gains or losses, with the TOPIX posting a small 0.1% loss, the Hang Seng currently up 0.2% and the CSI300 up just 0.1%. Regional bond markets have also been quiet with the Antipodean markets failing to follow UST yields higher as investors continued to monitor the coronavirus outbreak in Sydney and the risk that travellers may have transported the infection to Melbourne and Wellington. Short-term money market rates nudged lower in China as the PBoC added liquidity via a 7-day reverse repo. However, money market rates increased in South Korea after BoK Governor Lee warned that the Bank would likely begin to withdraw policy stimulus this year, with the exact timing to be determined by developments in the economy, financial imbalances and the pandemic.

Attention will now turn to the release of further European business sentiment indicators and the BoE’s MPC announcements, to be followed later in the day by key May activity indicators and a swathe of Fedspeak in the US.

Japan’s services PPI falls in May but base effects lift annual inflation to 1.5%Y/Y
A quiet day for data in Japan brought only the release of the BoJ’s services PPI report for May. In headline terms, the index fell 0.2%M/M – the second consecutive monthly decline – thanks to lower prices for office rentals and advertising services. However, the annual rate of inflation increased 0.4ppt to 1.5%Y/Y, which was bang in line with market expectations. The most significant contributor to the lift in annual inflation was advertising services, with prices rising 15.3%Y/Y compared with 11.8%Y/Y in April (an increase that also accounts for 0.6ppt of the lift in the headline index over the past year). Of course, this reflects the depressed prices seen this time last year during the first wave of the pandemic, especially as regards television advertising. In a similar vein, hotel charges increased 0.3%Y/Y in May compared with an 8.3%Y/Y decline in April, and sharply higher prices for ocean freight helped to drive a 1.1%Y/Y increase in the transportation group.

Business sentiment surveys again the highlight in the euro area today
Today brings further national business surveys – from Germany's ifo institute and France's INSEE – which seem highly likely to tally with yesterday's flash PMIs and point to firm economic expansion at the end of Q2 despite ongoing challenges posed by supply bottlenecks. (Among other things, the euro area composite PMI rose to a fifteen-year high). In particular, the ifo expectations balance, which measures German firms' optimism about the coming six months, is forecast to rise again in June to a ten-year high of 103.6. And the current assessment balance is expected to rise for the fifth successive month to a new pandemic-era high of 97.2 in June, albeit remaining some 1.6pts below the pre-pandemic level in February 2020. Meanwhile, INSEE's measure of French business confidence is expected to rise a further 2pts to 110 in June, which would be the highest since January 2018. Final Spanish GDP data for Q1 are expected to confirm the current estimates of contractions of 0.5%Q/Q and 4.3%Y/Y.

BoE MPC meeting takes centre stage in the UK, but policy settings and guidance is unlikely to change
The week's main event in the UK comes today in the form of the BoE's monetary policy announcement. Since the BoE published forecasts following its previous MPC meeting on 6 May, economic activity appears to have improved a touch ahead of expectations. And inflation has also picked up a little ahead of the BoE's forecast, with the headline measure having risen above the target to 2.1%Y/Y and the core measure up to 2.0%Y/Y in May – at last month's meeting, the BoE did not expect its inflation target to be passed until much later in the year. Today, however, the MPC will likely continue to judge recent price pressure to be transitory and expect inflation will return close to target over the medium term. But it will also underscore again that the outlook for the economy, including the relative movements in demand and supply, remains highly uncertain. The recent pickup in new coronavirus cases – to more than four times the rate at the time of the MPC's May meeting – and delay to further economic reopening provides a reminder of the downside risks, but signs of tighter conditions in various segments of the labour market – accentuated by the exodus of EU citizens over the past year or so – flag upside risks ahead.

So, we do not expect any change to current policy or guidance today. Given his concerns about upside risks to inflation, Chief Economist Haldane – for which this will be his last meeting – will likely vote again for reducing the target stock of asset purchases from £875bn, which will be fulfilled by the end of the year. But while we cannot exclude the possibility that a further policymaker might join him – a hawkish step that might excite the Gilt market – Haldane will also likely again be the sole MPC member to vote for such a reduction. And the MPC will also repeat that it does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target.

Final Q1 GDP report ahead in the US today, together with advance activity indicators for May; also a busy day for Fedspeak while the Fed will release bank stress test results
Today’s relatively busy US economic diary includes the ‘final’ release of GDP figures for Q1. Daiwa America’s Mike Moran expects only minor revisions from the second release, with the current GDP growth estimate of 6.4%AR perhaps inching up due to upward revisions to retail spending. Greater interest should centre on the advance readings on durable goods orders and merchandise trade for May, while advance inventory data for May will also be released. Mike expects a solid 2.5%M/M rebound in total durable goods bookings following the transport-driven dip in April (core capex orders will be of particular interest after an encouraging 2.2%M/M increase last month). However, he expects that exports may have struggled to hold on to all of the sharp gains recorded over the past two months, causing the merchandise trade deficit to widen by around $3.3bn to $89.9bn in May. As always the weekly jobless claims report will be of interest while a busy day for Fedspeak includes appearances by Barkin, Bostic, Harker, Williams, Bullard and Kaplan. The Fed will also release the results of its latest round of bank stress tests, which will likely clear the way for many banks to boost dividends and/or stock buybacks.

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