Japan’s unemployment rate rises to 5-month high

Chris Scicluna

Risk off in Asia today as worries about the delta coronavirus variant build
With concerns about the delta variant of the coronavirus gaining ground – as evidenced by some governments imposing restrictions on visitor arrivals from the UK – investors leapt back into technology stocks on Monday, boosting the Nasdaq by 1% to a new record high. But with companies supplying the stay-at-home economy benefitting at the expense of the likes of airlines and accommodation providers, the S&P500 was restricted to a modest 0.2% gain, albeit setting a fresh record of its own. In the bond market, despite some upbeat comments by the Richmond Fed’s Barkin – who mused that ‘substantial further progress’ in the labour market might be seen in short order – Treasury yields erased Friday’s post-inflation increase, with the 10Y UST declining 5bps to 1.48%. The currency market exhibited a slight risk-off bias with the greenback gaining modestly against sterling and the antipodean dollars, but not against the yen. Meanwhile, after setting a post-pandemic high earlier in the session, crude oil retreated seemingly as market participants pondered whether the latest flare up in coronavirus cases might soon weigh on demand.

The renewed focus on coronavirus has continued during today’s Asia-Pacific session, especially with Hong Kong having yesterday announced a ban on UK visitors and direct flights from the UK. While US equity futures are only a couple of tenths weaker since Wall Street closed, most of the major bourses in the region have posted material weakness today. In Japan, the TOPIX declined 0.8%, with the latest round of labour market and retail sales data confirming a continuing negative impact from the trading activity restrictions that were in place in more than half of the country (see more below). Similar declines were also seen in mainland China, Hong Kong and Singapore as investors continued to await tomorrow’s key official Chinese PMI reports, while stocks in South Korea are presently down around ½%.

In the Antipodes, new coronavirus case discoveries have resulted in additional snap lockdowns in Australia, with Perth and Brisbane today joining Sydney and Darwin in issuing stay-at-home orders. But despite almost half of the population now being subject to restrictions, the ASX200 outperformed most bourses in the region with gains in technology stocks limiting the index to a 0.1% decline. Also bucking the trend, Kiwi stocks rose modestly as the Government announced that temporary gathering restrictions in Wellington will be removed later today after testing revealed no evidence of virus transmission from an infected Aussie traveller. While their stock markets diverged, both Aussie and Kiwi 10Y bond yields fell by around 5bps as they reacted to the overnight rally in USTs, with RBNZ Governor Orr’s remarks in a local speech offering no new insights for investors.

Japan’s unemployment rate rises to 5-month high of 3.0% in May as employment falls for 3rd consecutive month
The focus in Japan today was on the labour market with the MIC and MHLW releasing data for May. Not surprisingly, MIC’s household-based survey pointed to a further impact from the pandemic-related trading restrictions, with employment declining by 130k – a third consecutive decline that has lowered employment by a cumulative 520k over that period. So, while base effects meant that employment was still up 0.2%Y/Y, more meaningfully, the level of employment in May was almost 1mn (1.7%) lower than in February 2020. As in previous months, the decline in employment over the latter period owes mostly to job losses in the hospitality sector (down 370k) and the retail and wholesale sector (-460k), with smaller losses seen in construction, manufacturing and personal/amusement services firms. Partially offsetting gains continued in the health- and welfare-related services sub-sector, professional and technical services and in information and communication services.

Given the soft result for employment, for a second consecutive month the unemployment rate increased 0.2ppt to 3.0% – 0.1ppt higher than the consensus expectation and the highest rate since December last year. And the increase would have been larger were it not for a further 60k decline in the estimated labour force as job searching activity continued to be impacted by rising coronavirus cases. After increasing sharply last month, the male unemployment rate was steady at 3.2%. However, females felt last month’s job losses more heavily, with their unemployment rate increasing 0.4ppt to 2.7%. Meanwhile, the MHLW reported that the effective jobs-to-applicant ratio was steady at 1.09 in May. The total number of job applicants fell 0.4%M/M – with the number of new applicants slumping 11.7%M/M as the virus hindered job hunting – but thanks to base effects was still up 16.2%Y/Y. The number of job offers declined a modest 0.3%M/M in May. And while job offers were up 7.7%Y/Y thanks to base effects, more meaningfully they remained almost 14% lower than in February 2020.

Japanese retail sales edge lower in May as trading restrictions still weigh
In today’s other Japanese news, after slumping 4.6%M/M in April, retail sales are estimated to have declined a further 0.4%M/M in May. This took spending the lowest level in 12 months, albeit still up 8.2%Y/Y due to the particularly severe contraction in spending that occurred in April last year. The decline would have been larger were it not for a 0.5%M/M increase in spending on food and beverages, as spending on general merchandise fell a further 9.7%M/M – this following a 5.9%M/M decline in April – and spending on motor vehicles, fuel and household machines fell by 4%M/M or more. Given the decline in May, spending in Q2 is now tracking just over 3%Q/Q lower than through Q1. However, a much better indication of overall consumer spending will be provided by next week’s release of the BoJ’s Consumption Activity Index for May (ahead of any revisions, the latter indicated that spending in April was similar to the Q1 average).

Commission euro area sentiment index on track for two-decade high, while flash German and Spanish inflation should moderate slightly in June
Today will bring the June Commission sentiment survey, which seems bound to signal a notable acceleration in economic activity at the end of Q2. Judging from the national surveys, not least from Germany and Italy, the headline euro area ESI is likely to rise to the highest since 2000. Indeed, this morning’s German ifo employment survey reported a broad-based pickup in job growth in the euro area’s largest economy to the strongest pace since 2018 led by services, with a marked turnaround in those sub-sectors (such as hospitality) that had been most affected by pandemic restrictions. Like the flash PMIs, the Commission indicators are highly likely to highlight ongoing strong price pressures associated with supply bottlenecks and increased commodity prices. Separately, ahead of Wednesday’s flash euro area figures, today brings the preliminary estimates of German and Spanish inflation in June. With energy inflation likely to have peaked, we expect consumer price inflation on the EU-harmonised HICP measure to ease back slightly from 2.4%Y/Y in both countries. Spanish retail sales figures for May are also due. Beyond the data, Christine Lagarde will give a keynote speech this afternoon to the Brussels Economic Forum, while German and French national bank governors Weidmann and Villeroy de Galhau will also speak publicly later on.

UK house price inflation leaps to highest since 2004
According to the Nationwide index, UK house prices rose 0.7%M/M in June taking the annual inflation rate to 13.4%Y/Y, the highest since 2004. Strength was seen across all regions of the UK, led by Northern Ireland and Wales, up 14%Y/Y and 13.4%Y/Y respectively in Q2, with Scotland (7.1%Y/Y) and London (7.3%Y/Y) lagging somewhat. Given base effects – prices fell in both May and June last year before rebounding from July on – the annual rate will slow from next month on, with the ending of the government’s stamp duty holiday in September also likely to weigh. However, BoE lending data due later this morning will likely report another month of elevated mortgage approvals in May – above the range from the global financial crisis to last summer – albeit probably down slightly from 86.9k in April. And with unemployment declining, consumer confidence firmer and affordability near the long-term average thanks to near record-low mortgage rates, demand should remain firm over coming months.

Consumer confidence a focus in the US today; home prices data also due
As far as data are concerned, most interest in the US today might centre on the Conference Board’s consumer survey for June. Given the continued easing of pandemic-related restrictions and an improving labour market, Daiwa America’s Mike Moran expects the headline index to increase 1.8pts to 119.0 – a positive result but still almost 14pts shy of its pre-pandemic level. As always, the ‘jobs plentiful’ indicators from this release will be of interest too. Today will also see the release of the Case-Shiller and FHFA home price measures for April, which are bound to continue to report a rapid increase in prices amidst solid demand and low inventory levels. Today’s only Fed speaker is the Richmond Fed’s Baskin, who will take part in a virtual discussion hosted by MNI.

Aussie consumer confidence steady last week despite weaker sentiment in Sydney
The only economic release in Australia today was the weekly ANZ-Roy Morgan consumer confidence index. The overall index fell a negligible 0.2% to 112.2, despite a marked – and understandable – decline in sentiment in Sydney. This leaves confidence close to the midpoint of this year’s narrow range and just fractionally below pre-pandemic levels. However, in light of recent developments in coronavirus cases across the country, it would be surprising if confidence were not to take a larger hit over coming weeks.

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