Investors bide time ahead of FOMC meeting and Chinese domestic activity data
With today’s FOMC meeting firmly on the radar, US asset prices were largely steady on Tuesday. The S&P500 receded just 0.2% from Monday’s record high, with a slightly weaker May retail sales report countered by sturdy upward revisions to spending in March and April. Meanwhile, the 10Y UST yield closed unchanged at 1.49%, receding from a peak of 1.51% shortly after the May PPI exceeded analysts’ expectations. The greenback was similarly steady against most currencies following some volatility early in the European session.
Since the close, US equity futures and Treasuries have continued to track sideways, offering little direction to markets in the Asia-Pacific region. So with investors awaiting China’s domestic data (due very shortly at 3pm local time, 8am BST) and the FOMC meeting later in the day, it has mostly been a quiet day in Asia with bourses mixed but generally recording no more than modest gains or losses. The main exception was China, where the CSI300 is down 1.4% as we write. Of note, Chinese policymakers appear to be continuing their campaign to lower commodity prices, with Bloomberg reporting that the Assets Supervision and Administration Commission has ordered state enterprises to limit their exposure to overseas commodity markets, while the National Food and Strategic Reserves Administration said it will soon release state stockpiles of copper, aluminium and zinc.
Japanese exports take a breather in May following strong growth in prior months
After growing by a cumulative 9% over the previous two months, Japan’s merchandise export receipts were essentially unchanged in May. However, given base effects – exports had declined nearly 9%M/M in May last year to what proved to be the post-pandemic low – this outcome lifted annual growth to a very flattering 49.6%Y/Y, which was just a touch weaker than market expectations. Perhaps more meaningfully, the level of exports in May was just over 8% higher than in February 2020. Not surprisingly, generally the strongest annual growth rates were recorded by those industries that had fared worst a year earlier, with exports of transport equipment and raw materials more than doubling. Exports of manufactured goods increased 45.7%Y/Y following a 23.8%Y/Y decline a year earlier, but were just under 8% higher than in February 2020. By destination, an 87.9%Y/Y increase in exports to the US followed a 50.6%Y/Y decline a year earlier, while exports to Australia more than doubled from their previously depressed levels. While exports to China increased ‘just’ 23.6%Y/Y, they had declined only 1.9%Y/Y a year earlier.
Meanwhile, after growing 7.0%M/M in April, import values increased by a relatively modest 0.7%M/M in May. This marked the sixth consecutive increase and left imports up 27.9%Y/Y – slightly firmer than market expectations. This growth partly owes to a sharp rebound in imports of mineral fuels, especially petroleum. However, even excluding mineral fuels, imports increased 21.9%Y/Y, led by a 68.7%Y/Y rebound in imports of transport equipment following a 55.8%Y/Y decline a year earlier (imports were still more than 25% lower than in May 2019). Imports of manufactured goods increased just 9.7%Y/Y and imports of general machinery increased just 3.7%Y/Y. However, imports of electrical machinery increased 24.7%Y/Y, albeit following a 17%Y/Y decline a year earlier. Taken together, the outcomes for exports and imports resulted in a modest seasonally-adjusted surplus of ¥43bn in May, which was somewhat below market expectations but just a fraction narrower than the upwardly-revised ¥83bn surplus now reported for April.
As usual, a little later in the day the BoJ released its analysis of the export and import data, helpfully adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ’s analysis, real exports declined a negligible 0.2%M/M in May and were up 37.1%Y/Y. Even so, given solid gains in earlier months, real exports over the first two months of the current quarter are tracking 3.4% higher than seen on average through Q1. By contrast, the BoJ estimates that real imports declined 3.1%M/M in May – this following a 9.1%M/M jump in April – and so were up a relatively modest 4.2%Y/Y. However, imports over the first two months of the current quarter are tracking 3.9% above the average through Q1. So with a month to go, this does not bode well for a positive contribution to GDP growth from net exports in Q2. The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to the US grew 77.7%Y/Y while exports to the EU increased 38.8%Y/Y – both reflecting especially weak year-earlier readings, with exports still well below pre-pandemic levels. By contrast, exports to Asia grew 21.9%/YY and exports to China grew 15.6%Y/Y, with the latter more than 20% above pre-pandemic levels.
Japan’s core domestic machinery orders creep higher in April
In other news, today the Cabinet Office released its machinery orders report for April, which contained good news for Japan’s exporting manufacturers but proved somewhat disappointing concerning domestic demand. Total machinery orders jumped 18.2%M/M and so were up 19.5%Y/Y. This growth owed mostly to a 46.2%M/M rebound in foreign orders – which have been especially volatile in recent months – to a level almost 68% higher than a year earlier. By contrast, the closely-followed measure of core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) increased just 0.6%M/M in April, which was less than analysts had expected. While this outcome left core orders up 6.5%Y/Y, this reflected the base effect associated with the slump in orders at the onset of the pandemic last year. So core orders were still just over 5% lower than in February 2020. In addition, the level of orders in April is fractionally below the average through Q1, thus at this point tracking below the 2.5%Q/Q growth that had been forecast in the Cabinet Office’s survey of machinery producing firms.
In the detail, orders from the domestic manufacturing sector actually increased a sizeable 10.9%M/M in April and so were up 14.2%Y/Y. However, this partially reflected an increase in shipbuilding orders, which had slumped to a two-year low in March. Orders from the non-ferrous metals and petroleum sectors also picked up, as did orders for production- and business-orientated machinery. However, after increasing sharply in March, orders declined from the ICT and electrical machinery industries. Core orders from the non-manufacturing sector declined 1.1%M/M in April and so were down 16.6%Y/Y. After previously rising to the highest level since July 2019, orders from the information services sector fell almost 20%M/M, while orders from the telecommunications and transportation sectors also weakened (the latter after a steep increase in March). By contrast, orders from the wholesale and retail trade sector and finance and insurance sector rebounded from the seven-month lows plumbed in March. Finally, government orders, which are typically volatile, declined 2.7%M/M in March April and were down 4.2%Y/Y.
UK CPI inflation data beat expectations on higher prices of fuel, clothing and eating out
UK inflation rose above expectations in May, with the headline CPI rate up 0.6ppt (twice the consensus) to a 22-month high of 2.1%Y/Y. There were numerous pressures. The largest individual contribution came from transport, with petrol prices up almost 20%Y/Y, accentuated by base effects (prices fell almost 19%Y/Y a year earlier). In addition, the reopening of the hospitality sector helped push up inflation of clothing and footwear (up 2.0ppts to 2.1%Y/Y), and eating and drinking out (up 0.9ppt to 1.7%Y/Y). In addition, inflation of games, toys and hobbies jumped 3.3ppts to 2.7%Y/Y seemingly reflecting the composition of the best-seller lists. As a result, core inflation rose 0.7ppt to 2.1%Y/Y, the highest since August 2018. A rare offset to the higher inflation story came from food, prices of which fell for the first time in May for five years to push the respective inflation rate down 0.9ppt to -1.3%Y/Y. Looking ahead, the outlook is highly uncertain. But we suspect that UK inflation will move broadly sideways until August, when base effects associated with last year’s hospitality subsidies and VAT cut are likely to see headline inflation take a further step up to 2½%Y/Y or above. And inflation would then seem likely to remain above target until Q4 next year.
FOMC the focus in the US today; housing starts; building permits and import price data also due
Without a doubt, the focus in the US today will be on the Fed. The FOMC will conclude its latest policy meeting, following which the Fed will release updated projections for the economy and Chair Powell will host his usual press conference. One initial point of interest will be on what the projections imply about the future course of the fed funds rate, while the focus in Chair Powell’s press conference will be on the potential timing of a tapering of the Fed’s QE purchases. Powell might also hint at the likelihood of an increase in the interest rates on reverse repos and/or excess reserves (if these rates are not hiked at this meeting).
With regard to the FOMC’s forecasts, Daiwa America’s Mike Moran suspects that the median view of Fed officials on GDP growth this year will show a slightly faster pace than the March projection of 6.5%. The Fed’s forecast for inflation is also likely to be revised up from the 2.4%Y/Y forecast made previously, with both headline and core inflation on track to exceed 5%Y/Y this quarter, albeit with much of the increase likely to be viewed as transitory. So whereas previously only seven Fed officials forecast a rate hike in 2023, Mike suspects that the updated forecast will indicate that at least three further members have joined that camp to shift the consensus forward to a first rate hike in that year.
Regarding eventual tapering of QE, Mike suspects that Chair Powell will use the press conference to indicate that this is now on the minds of officials, as hinted at in a very guarded way in the minutes from the FOMC’s April meeting. While many market participants are expecting an increase in either the reverse repo rate or IOER or both in order to nudge money-market rates slightly higher and minimize the risk of dropping into negative territory, Mike notes that some policymakers might be reluctant to make an adjustment at this time lest it be viewed as a policy tightening.
Ahead of the Fed, today will also bring news on housing starts, building permits and import prices during May. Regarding housing starts, Mike expects that strong demand and a lean inventory of homes for sale should lead to a solid gain in single-family starts after a light reading in April. So while multi-family activity could drop after two strong months, he still expects total starts to have increased by almost 4%M/M in May.
RBNZ adds debt serviceability restrictions to macro-prudential toolkit
Faced with record levels of house price inflation, not least due to its own monetary policy settings, the RBNZ today announced that it had reached an agreement with the Minister of Finance to add debt serviceability restrictions to the range of macro-prudential tools it is able to deploy (loan-to-value ratio restrictions are already available and in use). In a press statement, the RBNZ said that its analysis had found that restrictions such as a debt-to-income (DTI) limit would impact investors most powerfully, while having limited impact on first home buyers, and would decrease the likelihood of mortgage defaults. The RBNZ will now work with the Treasury to update the wording for the Memorandum of Understanding, which will need to be approved by the Minister. Over the coming months that Bank will discussing with financial institutions the feasibility of implementing a DTI limit and other debt servicing restrictions. Any decision on implementing debt serviceability restrictions will be preceded by a full public consultation process, along with a Regulatory Impact Assessment, suggesting that their use is unlikely until at least the end of this year.