BoJ Tankan and China Caixin manufacturing PMI figures disappoint

Chris Scicluna

Another quiet day in the US as investors await payrolls; Asian equities struggle today
While it was a good day on Wall Street for blue chip stocks – the DJI rising 0.6% – the S&P500 increased just 0.1% on Wednesday, albeit sufficient to set a fresh record high and sealing another positive quarter for equity investors. While the ADP report pointed to a near 700k rise in private payrolls in June and pending home sales unexpectedly rebounded 8%M/M in May, the Chicago PMI eased in June, albeit to a still highly-elevated 66.1. So while the 10Y UST had fallen as low as 1.44%, a very late bounce saw the yield end essentially unchanged at 1.47%. The Fedspeak included the Dallas Fed’s Kaplan, who called for QE tapering to begin before the end of this year. Meanwhile, the Atlanta Fed’s Bostic suggested that the labour market might show clear signs of improvement in September as schools reopen. In FX markets, the greenback gained against all its major counterparts, sending ¥/$ back above 111 and $/€ down through 1.19. In the commodity markets, crude oil firmed ahead of today’s OPEC+ meeting, with participants waiting to see how much production quotas will lift in response to this year’s bounce in demand and prices.

Since the close, US equity futures have firmed modestly but Treasuries have moved sideways. However, equity markets have generally struggled a little across most of Asia today, perhaps reflecting ongoing worries about the delta variant of the coronavirus and some slightly disappointing data. In Japan, the BoJ’s Tankan survey pointed to a smaller improvement in business conditions than analysts had expected. So while firms’ forecasts for profits and capex in FY21 firmed nicely, and despite an upward revision to Japan’s manufacturing PMI for June, the TOPIX has declined 0.2% today. While PMI Suga appears determined to go ahead with the Olympics, Samoa became the second country – joining North Korea – to withdraw its athletes from the games. Samoa cited high coronavirus infection rates in the Tokyo area, which today rose to a one-month high with the delta variant estimated to account for around a third of all new cases. In mainland China, the CSI300 has shrugged off earlier losses even as the Caixin manufacturing PMI declined more than expected in June to a four-month low. Speaking in Beijing to mark the 100-year anniversary of the CCP, President Xi mainly focused on the party’s achievements over that period. However, in a message to outsiders, he also said that China “…will never allow any foreign forces to bully, coerce and enslave us,” and warned that the perpetrator of any such attempts would “…surely break their heads on the steel Great Wall built with the blood and flesh of 1.4bn of Chinese people”. Xi also warned that unifying China and Taiwan was “an unshakeable commitment”.

In the Antipodes, Australia’s ASX200 declined despite news of a surge in export receipts, record job vacancies, a further sharp lift in house prices and an upward revision to the manufacturing PMI (see more below). With Australia’s vaccination rate the second lowest in the OECD – slightly better than New Zealand’s and just behind Japan – the coronavirus outbreak in Sydney extended with a further 24 cases reported today. However, in common with USTs, the 10Y AGCB was little changed. Meanwhile, amidst news of house price inflation hitting a rampant 22.8%Y/Y in June, economists from New Zealand’s largest bank advised that the RBNZ might need to begin tightening policy as soon as late this year, with a tightening labour market forecast to drive a sizeable lift in wage and CPI inflation.

BoJ Tankan reports smaller improvement in business conditions than expected, but capex plans firmer nonetheless
Turning to today’s economic reports, the focus in Japan was on the BoJ’s Tankan survey, which will feed into the Bank’s analysis in this month’s updated Outlook Report. In summary, consistent with other business survey indicators, respondents to the Tankan indicated an improvement in business conditions over the past quarter, especially in the manufacturing sector. But the improvement was a little less than analysts had anticipated and firms appeared unconvinced that conditions will improve much further over the coming quarter. Nevertheless, looking at FY21 as a whole, they anticipate a rebound in their sales, profits and capex. With firms reporting less spare capacity and excess inventories, inflation pressures picked up a little but inflation expectations remained very weak and nowhere near consistent with the BoJ’s long-term target.

Turning to the detail, a net 3% of the more than 9,400 respondents reported unfavourable business conditions in Q2, down from 8% in Q1 and the best reading since Q419. The closely-watched diffusion index (DI) for large manufacturers improved by a less than hoped 9ppts to 14, which is nonetheless the highest level since Q418. The improvement was reasonably broad-based across industries, with only the petroleum and motor vehicle sectors reporting a worsening of conditions. The shipbuilding/heavy machinery industry continued to view conditions as unfavourable on balance, but the DI for this sector did improve 26ppts this quarter. The general machinery and non-ferrous metals industries viewed conditions most favourably, with the DIs for these sectors rising 22ppts and 18ppts respectively. Looking ahead, a net 13% of large manufacturers expect favourable business conditions to prevail in Q3, indicating that conditions are expected to remain broadly stable – a slight disappointment, with the consensus expecting that firms would forecast a further incremental improvement. That said, it is worth noting that this forecast is based on an assumed exchange rate of ¥105.57/$ in FY21, so these firms would likely be more confident if the yen were to remain anywhere close to its current much weaker level. As is usually the case, small- and medium-sized firms were more downbeat in their assessment about both the past quarter and prospects for the coming quarter. For example, the DI for small manufacturing firms increased 6ppts to -7 (albeit above the long-term average of -12), while a similar net 6% of firms expect that business conditions will remain unfavourable in Q3.

Moving to non-manufacturers, the DI for large firms increased by a disappointingly small 2ppts to 1 – the first positive reading since Q120, but still below the long-term average of 5 due to the disruptions caused by the latest wave of coronavirus cases. Not surprisingly, conditions remained dire in the hospitality sector, with the relevant DI improving just 7ppts to a still dreadful -74. Firms providing services to individuals also remained very downbeat, albeit with the relevant DI rising 20ppts to -31. Meanwhile, the previous quarter’s optimism in the retail sector evaporated, with the relevant DI falling 17ppts to 2. As was the case last quarter, conditions were viewed most favourably in the communications and information services sector. Looking ahead, a net 3% of large non-manufacturing firms expect favourable conditions over the coming quarter, representing a smaller incremental improvement than the consensus expectation. While the hospitality sector expects conditions to become somewhat less dire – presumably reflecting an assumption that pandemic restrictions will be eased and that the Olympics will generate some activity – a number of industries thought that business conditions might become less favourable (generally those where current conditions are viewed most favourably). As in the manufacturing sector, small- and medium-sized firms were more negative about both Q2 and the outlook for Q3. For example, the DI for small non-manufacturing firms increased just 2ppts to -9 (albeit now in line with the long-term average), while a net 12% of firms expect that conditions will remain unfavourable in Q3.

Elsewhere in the survey, firms are understandably more positive about the outlook for FY21. Firms now forecast that aggregate sales will increase 2.8%Y/Y, up from the last survey’s first forecast of 2.4%Y/Y. Unsurprisingly, that growth is led by a sizeable upward revision to expected sales growth in the manufacturing sector (now 5.6%Y/Y), while firms in non-manufacturing sector revised down their forecast slightly (to 1.4%Y/Y). Equally unsurprisingly, the biggest upward revisions were made by large manufacturers and especially exporters, with the latter now forecasting sales growth of 8.5%Y/Y. In aggregate, current profits are now estimated to have fallen 20.1%Y/Y in FY20 – an improvement of more than 10ppts from the prior survey. Off that improved base, profits are forecast to increase 9.1%Y/Y in FY 21, up slightly from the 8.6%Y/Y rebound forecast in the prior survey. That improvement was led by an expected 12.8%Y/Y increase for non-manufacturing firms (whose profits are estimated to have fallen by more than 30%Y/Y in FY20), whereas manufacturing profits are forecast to increase 4.8%Y/Y following a modest 3.8%Y/Y decline in FY20. As a result, the overall profit margin for all firms is forecast to increase to 4.81% in FY21 from an upwardly-revised 4.53% in FY20 (but still down from 5.23% in FY19). The profit margin for manufacturers is forecast to be 6.34% while that for non-non-manufacturers is forecast to be 4.02% (versus long-term averages of 4.6% and 2.8% respectively).

The improved outlook for profits has translated into a more positive outlook for capital spending in FY21, albeit coming off a weaker base. Given the disruption to activity in Q1, in aggregate firms reported that total capex (including land investment) had declined 8.5%Y/Y in FY20, compared with the 5.5%Y/Y decline estimated previously. However, looking ahead, firms forecast a 7.1%Y/Y increase in capex in FY21, led by an 11.5%Y/Y lift in the manufacturing sector. Amongst large firms, capex is expected to increase 9.6%Y/Y – led by a 13.3%Y/Y increase amongst manufacturers – which compared favourably with the consensus forecast of 7.2%Y/Y in Bloomberg’s survey. It is also worth recalling that the early forecasts during a new fiscal year are typically conservative, with later estimates usually improving during periods of economic recovery. As far as employment is concerned, led mostly by the non-manufacturing sector, firms continued to indicate a shortage of labour in slightly greater numbers than in the last survey, with the labour market expected to tighten a little further in Q3. While that might seem surprising in light of the reported decline in employment in recent months, this outcome points to a mismatch between the available labour and firms’ requirements – a mismatch that firms continued to address by boosting capex. A net 18% of firms described the lending stance of financial institutions as “accommodative” – unchanged from the last two surveys and still favourable by historical standards (of course, supported by government and BoJ subsidies).

Reflecting the underlying improvement in firms’ perception of the business environment, a smaller net proportion of both manufacturing and non-manufacturing firms reported excess supply conditions and excessive inventories in Q2. Therefore, unsurprisingly, the Tankan provided slightly better news for the BoJ’s (very) long-term goal of lifting inflation towards its 2% target, albeit suggesting that present conditions remain nowhere near sufficient to achieve that goal. Of particular note was a sharp increase in the number of manufacturing firms citing higher input prices, presumably reflecting developments in both commodity prices and the yen. However, on net only a small number of firms reported that they had raised output prices in Q2 and only slightly more said that they would do so in Q3. In aggregate, firms forecast a 0.5% increase in their output prices over the next 12 months and only a cumulative 1.7% increase over the entire 5-year forecast horizon (albeit up 0.3ppt and 0.2ppt respectively from the prior survey). Regarding general consumer prices, firms expect only a 0.6% increase over the next 12 months, with annual inflation expected to be running at just 1.1% in five years’ time – the latter revised up just 0.1ppt from the previous survey but the highest level since Q419.

Japan’s manufacturing PMI revised up 0.9pts to a final reading of 52.4 in June
Turning to the day’s other Japanese data, the final results of the manufacturing PMI survey for June pointed to a smaller pull-back than suggested by the preliminary findings. The headline manufacturing PMI was revised up 0.9pt to 52.4, and so was just 0.6pts lower than the May reading. Of particular note, the output index was revised up 1.6pts to 50.7, but was still down 3.0pts from last month with supply bottlenecks likely part of the explanation (the supplier deliveries index was revised down to the lowest level since April last year). As far as the activity indicators were concerned, the other sizeable revision was to the new orders index, with the previously reported decline trimmed by 1.3pts to a final reading of 51.9 (now also down just 0.6pts from May). The other sizeable revisions were to the survey’s pricing indicators, where previously reported 1.0pt declines in both the input and output price indexes were revised away completely. Indeed, the latter is now estimated to have increased 0.2pt to 51.6, leaving it not far below the post-pandemic high seen back in March.

Finally, in other news, the number of vehicle sales increased 9.2%Y/Y in June. While this was down from growth of 30.9%Y/Y in May, sales in May 2020 had been very depressed and so base effects in June were much less favourable. Sales of cars increased 8.8%Y/Y, but were about 20% down on both June 2018 and June 2019 levels. Sales of trucks increased 12.2%Y/Y but sales of buses were down 11.4%Y/Y, even after being down 48%Y/Y a year earlier.

China’s Caixin manufacturing PMI declines 0.7pts to a three-month low 51.3 in June
Following yesterday’s ‘official’ PMI reading, today the Caixin manufacturing PMI cast more light on the conditions faced in the private SME sector. The headline PMI fell a much steeper than expected 0.7pt to a three-month low of 51.3. The key activity sub-components all weakened this month, including the output index which fell 1.2pts to 51.0, leaving the average through Q2 (52.0) identical to Q1. The new orders index fell 1.8pts to a three-month low of 51.6 and the new orders index fell 2.1pts to a four-month low of 50.1. Consistent with the official PMI, the pricing indicators also softened markedly this month. After rising to a more than four-year high in May, the input price index declined 7.7pts to a seven-month low of 56.7. Meanwhile, the output prices index declined 7.2pts to a seven-month low of 57.6

German retail sales rebound in May; unemployment data and flash PMIs to come
German retail sales rebounded in May as pandemic restrictions were lifted, but still fell a touch short of expectations. Indeed, the rise of 4.2%M/M was not sufficiently strong to reverse April’s drop of 6.8%M/M, the second-steepest of the pandemic. Nevertheless, sales still rose almost 4.0% above the pre-pandemic level of February 2020, with the average level for the first two months of Q2 some 2.0% above the Q1 average, strongly signalling a substantive return to positive growth in consumption and GDP this quarter.

Looking ahead, this morning’s labour market data are expected to show that the euro area unemployment rate in May was stable at 8.0%, 0.7ppt below the pandemic peak last summer but still 0.9ppt above last year’s trough. However, with pandemic restrictions easing and government short-time work programmes still providing support, the risks are skewed towards a third successive monthly decline. Figures for new car registrations in June from France, Italy and Spain are also due today, as are the final manufacturing PMIs for the same month. According to the flash estimates, manufacturing production accelerated for the first time since March, with the respective output index up 0.2pt to 62.4, less than 1pt below the series high recorded three months earlier. For the first time Markit will also publish the June survey results from Italy and Spain.

Final UK manufacturing PMIs also due with BoE’s Bailey speaking at Mansion House
As for the euro area, today will bring the UK’s final manufacturing PMIs for June. According to the flash estimates, growth in manufacturing output was reportedly a touch less vigorous last month with the respective index slipping back 1pt to 62.0. Growth in new orders also reportedly slowed not least due to a softening in export demand for UK goods. And the adverse impacts of supply bottlenecks reported in the euro area PMIs were also evident in the UK. Meanwhile, BoE Governor Bailey will publish his speech to a financial services event at Mansion House this morning.

ISM manufacturing survey, construction spending and auto sales the focus in the US today
Today most interest in the US will centre on the ISM manufacturing survey for June. Daiwa America’s Mike Moran 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 the pipeline of work in progress, Mike expects today’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. Today will also bring the release of auto sales data for June – Mike expects sales to be similar to the 17mn/AR recorded in May – and the weekly jobless claims report.

Aussie exports lift sharply in May; job vacancies hit a fresh record high; house prices also up sharply and manufacturing PMI remains firmly expansionary
A reasonably busy day for data in Australia pointed to considerable buoyancy in the economy. The key official report was the full (goods plus services) trade balance for May. While the surplus of A$9.7bn was a little less than markets had expected, it was still one of the highest on record and more than A$3.0bn higher than a year earlier. Exports surged 6.1%M/M and were up 23.1%Y/Y, led by an 11.2%M/M and 63.2%Y/Y jump in exports of metal ores. With a travel bubble opening with New Zealand, exports of services increased 4.7%M/M but were still down 10.6%Y/Y and more than 40% below the pre-pandemic peak. Meanwhile, imports increased 2.9%M/M in May and were up 17.7%Y/Y. Imports of consumption goods increased 1.0%M/M and so were 28.0%Y/Y above last year’s depressed levels, while imports of capital goods increased 3.2%M/M and 17.2%Y/Y. Imports of services increased 4.6%M/M and 15.5%Y/Y in May, but are still running at less than half of the pre-pandemic peak.

In today’s other news from the ABS, the number of job vacancies surged a further 23.4% to a record 362.5k in the three months to May – now a whopping 57% above the pre-pandemic level. Growth was broad-based across both regions and industries, but with especially strong growth recorded in industries previously hard-hit by the pandemic (retail trade and the hospitality sector) and in health and social assistance services. Meanwhile, a recovering labour market and historically low interest rates continue to boost house prices according to the CoreLogic house price index. Across the eight capital cities, prices increased a further 1.9%M/M in June, lifting annual inflation to 12.4%Y/Y from 9.4%Y/Y previously.

In other Aussie news, the headline manufacturing PMI was revised up 0.2pts to a very solid 58.6 in June, albeit leaving it 1.8pts below the record high set in May. Small upward revisions were recorded across all of the key activity indicators, although at 56.8 the new orders index remained 4.1pts below the previous month’s record high (but still about 3pts above the historic average). On the pricing front, the output prices index was revised up 0.6pts to 61.6, but was still down 1.3pts from May.

Kiwi house prices continue to rise sharply in July; supply responding, with new dwelling approvals remaining near a record high in May
The domestic focus in New Zealand today was on the housing market with the release of news on both house prices and dwelling approvals. Disappointingly for the RBNZ and the government – both aiming to reign in house price inflation – the Corelogic house price index increased a steep 1.8%M/M. This growth was down only modestly from 2.2%M/M gain in May, and took the gain for the June quarter to 7.2% and increased house price inflation to a whopping 22.8%Y/Y from 20.5%Y/Y in May. These rapid gains are very unlikely to be sustained over the remainder of this year, especially with longer-term mortgage rates beginning to move higher and increased housing supply gradually coming on stream. On that score, while the number of new dwelling approvals declined 2.8%M/M in May, the previous month had been a record high and the number of approvals was still up more than 17%Y/Y. The news regarding non-residential construction prospects was also very firm, with the value of non-residential building approvals rising more than 41%Y/Y. 

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