Japan's virus trends in focus as the Olympics nears

Chris Scicluna

Bond yields a little higher following Friday’s US inflation data; Asia-Pacific equity markets mostly little changed today
While US personal spending was flat in May, a solid upward revision to spending in April countered any disappointment. So with the report also providing confirmation of a lift in the core PCE inflation rate to a 29-year high of 3.4%Y/Y, Treasury yields moved higher on Friday, with the 10Y bond rising 3bps to 1.52% and the 30Y bond rising 5bps to 2.15%. Even so, propelled in part by gains in financials, the S&P500 ground out a 0.3% advance to close at a fresh record high. US equity futures have reopened only fractionally firmer today while Treasuries are trading with a fractionally weaker bias.

Against that background, and with little in the way of local data to digest, it has been a very quiet start to the week in Asia-Pacific equity markets, while bond markets have generally weakened slightly in reaction to the rise in UST yields. In Japan, where investors are awaiting Thursday’s BoJ Tankan survey, the TOPIX has nudged up just 0.15%. The minutes from this month’s BoJ Board meeting indicated increasing confidence in the global recovery thanks to progress in vaccinations. However, over the weekend, pandemic-response head Minister Nishimura stated that if necessary a new state of emergency would be called in Tokyo, which is again seeing rising case numbers despite operating under quasi-emergency conditions.

The pandemic is also dominating headlines in Australia following the weekend announcement by the NSW government of an extension of lockdown conditions to the entire greater Sydney area until at least 9 July. But while isolated cases in other states has also prompted a snap 48-hour lockdown in Darwin and tightened conditions on gathering and mask use in Queensland, Perth and Canberra, the ASX200 was little changed today while AGCB yields tracked UST yields higher. Elsewhere, equities in mainland China are roughly flat as investors await Wednesday’s official PMI reports while trading in Hong Kong resumed in the afternoon session after delays caused by weather.

BoJ Tankan survey and key activity data for May the focus in Japan this week
While there were no major economic reports released today, the remainder of this week’s Japanese economic diary is a reasonably busy one with a number of important indicators that will feed into the BoJ’s updated Outlook Report in mid-July. The dataflow begins tomorrow with MIC releasing news regarding the labour market and METI releasing retail sales figures, both for May, with both likely to be weaker on account of ongoing trading restrictions impacting the retail and hospitality sector. On Wednesday, METI will release IP data for May, with firms previously signaling a pullback in activity following solid growth over the previous two months (an outcome that seems even more likely in light of last week’s manufacturing PMI report). News on housing starts and construction orders during May will also be released on Wednesday, as will the Cabinet Office’s measure of consumer sentiment (the latter perhaps benefitting from a step-up in the pace of vaccination).

Thursday will bring the final manufacturing PMI and vehicle sales data for June. However, most attention will centre on the BoJ’s Tankan Survey for Q2, which will cast light on recent business conditions and firms’ expectations for sales, profits and capex for the current fiscal year. Based on developments in the Reuters Tankan survey, the headline business conditions diffusion indices should lift markedly in the manufacturing sector. In the non-manufacturing sector firms are likely to indicate only a small improvement in business conditions but greater optimism regarding conditions over the coming three months as restrictions ease and the Tokyo Olympics get underway (albeit with limited crowds, at best). Given base effects, firms should indicate a healthy lift in capex. Unfortunately, at least for the BoJ, while firms are likely to indicate significant upward pressure on input prices, expectations for output price increases and inflation are likely to remain very subdued. The week will end on Friday with monetary base data for June, with growth set to moderate further as the impact of last year’s BoJ liquidity provision subsides.

China’s industrial profits growth moderates to 36.4%Y/Y in May; official PMI reports for June the focus this week
Over the weekend, China released figures on industrial profits in May. Growth remained flattering due to base effects associated with last year’s lockdown. But with those base effects beginning to peter out, and production lacking vigour over recent months, growth moderated to 36.4%Y/Y from 57.0%Y/Y in April. Cumulative profits increased 83.4%YTD/Y on sales that grew 30.5%YTD/Y. Over that period, the strongest growth was in ferrous and non-ferrous metal smelting, where profits grew almost five-fold, while profits in the chemical sector more than tripled.

Looking ahead, the focus in China this week will be the official PMI reports for June, released on Wednesday. According to Bloomberg, analysts anticipate a further modest slowing of growth momentum in the manufacturing sector, but are hopeful for a small lift in growth momentum in the non-manufacturing sector. The Caixin manufacturing PMI, focusing on SMEs, follows on Thursday and is the only other data release scheduled in China this week. However, President Xi is scheduled to speak on Thursday to mark the 100th anniversary of the founding of the CCP.

Euro area inflation likely to edge lower in June according to flash estimate; plenty of spending, labour market and sentiment data due too
This week’s euro area economic data seem likely largely to maintain the positive tone of recent releases, featuring further sentiment survey results for June, spending figures for May and updates on the labour market. But the flash estimates of inflation in June – with German and Spanish numbers due tomorrow, and French, Italian and aggregate euro area data on Wednesday – will be watched closely and are more uncertain than most. With the annual rate of energy inflation now likely to have peaked, however, we expect the headline euro area HICP rate to fall back 0.2ppt to 1.8%Y/Y with the core measure also perhaps easing 0.1ppt to 0.8%Y/Y. Tomorrow will also bring the June Commission sentiment survey, which will signal a notable acceleration in 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. Among other releases, spending data from Spain and France, tomorrow and Wednesday respectively, will provide an insight into consumption mid-quarter, while new car registration data from France, Italy and Spain are due on Thursday when the final June manufacturing PMIs are due. German labour market figures for June are due on Wednesday, with aggregate euro area unemployment numbers for May due the following day. Finally, in a busy week for scheduled speeches from ECB Governing Council members, Christine Lagarde will speak publicly tomorrow, Thursday and Friday.

Bailey’s Mansion House speech on Thursday to be the week’s UK highlight
After last week’s relatively dovish MPC announcements, perhaps this week’s main event in the UK will be BoE Governor Bailey’s annual Mansion House speech on Thursday evening. Data-wise, the week should be relatively quiet in the UK with little in the way of top-tier releases. The calendar kicks off tomorrow with the latest BoE bank lending figures for May as well as the Nationwide house price index for June, which is expected to show an acceleration in house price inflation to more than 13%Y/Y, the strongest since 2004. On Wednesday, final Q1 data are expected to confirm that GDP contracted by 1.5%Q/Q, more than reversing the growth of 1.3%Q/Q in Q4 to leave output down 6.1%Y/Y and 8.7% below the pre-pandemic level in Q419. These figures will be accompanied by balance of payments data for Q1. As in the euro area, Thursday brings the final manufacturing PMIs for June, after the preliminary results suggested that growth in output was a touch less vigorous this month with the respective PMI slipping back 0.9pt to 62.1

US economic diary highlighted by Friday’s official employment report for June
Another busy week of data looms in the US, culminating in this week’s main event – Friday’s official employment report for June. Daiwa America Chief Economist Mike Moran expects a strong above-consensus 800k lift in non-farm payrolls, which would be the firmest gain since August last year, up from 559k in May. While this should be sufficient to lower the U-3 unemployment rate by a further 0.2ppt to 5.6%, Mike does note that the labour force is likely to receive a boost as more attractive wage offers and the looming expiration of supplemental unemployment benefits will likely encourage some individuals to seek work. With one eye on inflation, the average earnings data from this report will also be of some interest.

Turning to the rest of the US diary, a quiet start today brings only the Dallas Fed’s latest manufacturing survey. Tomorrow, most interest will centre on the Conference Board’s consumer survey for June. Given the continued easing of pandemic-related restrictions and an improving labour market, Mike 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. Tomorrow will also see the release of the Case-Shiller and FHFA home price measures for April. Wednesday will bring the ADP employment report for June, the Chicago PMI for June and pending home sales for May.

On Thursday, most interest will centre on the ISM manufacturing index for June. Mike expects only a modest decline in the headline index to a still-elevated 60.5, with an easing of supply bottlenecks perhaps leading to an improvement in the supply delivery index. Meanwhile, given a pipeline of work in progress, Mike expects Thursday’s construction spending report for May to point to a further 0.8%M/M lift in activity notwithstanding the recent downtrend in housing starts. While the employment report will dominate investors’ attention on Friday, that day will also see the release of the trade balance and factory orders for May. Based on the advance data already released, Mike expects the trade deficit to have widened $2.6bn to $71.5bn while the already-reported rebound in durable goods orders should help to lift total factory orders by a solid 1.5%M/M. Finally, this week’s Fed speaking diary presently features only a small numbers of speakers, starting today with Governor Quarles – talking on central bank digital currency – and presidents Williams and Barkin.

Home price, credit and trade data of greatest interest in Australia this week
It has been a quiet start to the week in Australia with no major economic releases today, leaving most interest centred on the coronavirus outbreak in Sydney. Looking ahead, tomorrow will bring just the weekly ANZ-Roy Morgan consumer confidence survey while Wednesday features only the RBA’s money and credit aggregates for May. On Thursday, there will be some interest in the Corelogic house price data for June, with regulators monitoring developments closely in light of the rapid price increases seen in recent months. Also that day, the ABS will doubtless report another big lift in job vacancies over the May quarter, together with what is likely to be the largest trade surplus on record for May. The final Markit manufacturing PMI results for May are also due on Thursday, while the housing finance data for May will close out the week on Friday. RBA Governor Lowe was scheduled to participate in a panel discussion at a Sydney Conference on Wednesday, but this has now been postponed due to the coronavirus outbreak.

Kiwi filled jobs rise in May; confidence and housing data the focus over the remainder of the week
The only economic report in New Zealand today was the new monthly Employment Indicators report for May. Consistent with other upbeat indicators, this report – which uses data sourced from tax records – indicated a 0.4%M/M lift in the number of filled jobs, marking the largest increase this year. Looking ahead, the next economic report of any note is Wednesday’s release of final ANZ Business Outlook Survey results for June, although this will probably mirror the upbeat preliminary findings released earlier. On Thursday, attention will be on the housing market with Corelogic releasing home price data for June – perhaps showing some slowing of growth due to government and RBNZ policy actions – and Statistics New Zealand releasing data on building approvals for May. The week will conclude on Friday with the release of the ANZ Consumer Confidence Index for June. A speech by RBNZ Governor Orr tomorrow, accompanying the release of the Bank’s annual ‘Statement of Intent’ is unlikely to cover new ground.

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