German PPI the highest since 1982

Chris Scicluna

Equity markets weaker again in Asia following overnight losses in Europe/US
The negative tone in markets evident during yesterday’s Asian session – prompted by growing concerns about the uplift in new coronavirus cases – proved a good indication of what to come later in the day, with equity markets falling very sharply in Europe and not quite as much in the US. At the close, the S&P500 had declined 1.6% – slightly off the session lows. In addition to sharp losses in industrials and raw materials, financial stocks took a hit as the Treasury curve bull-flattened with the 10Y UST closing down 10bps at 1.19% and the 30Y UST down 10bps at 1.82% – in both cases the lowest levels since February. Meanwhile, risk aversion granted a modest bid to the greenback and the yen.

Sentiment appears to have improved a little during Asian time, with US equity futures presently up around 0.4% and the 10Y UST yield rising 1bp to 1.20%. And so while equity markets are again weaker in Asia today, for the most part the losses are smaller than yesterday. In Japan, where today’s CPI report provided no surprises, the TOPIX closed down 1.0% – its fifth consecutive day in the red – with the 10YJGB yield down to around 0.0%. Much of the focus has remained on the impending Olympics – so unpopular with the Japanese public that further top-tier sponsors have decided not to send senior executives to the opening ceremony following the lead of Toyota, which also pulled its related TV advertising. In Mainland China, where the PBoC made no changes to its benchmark prime loan rates, the CSI300 is currently down just 0.1%. In South Korea, the KOSPI also fell less than 0.5%. But markets are presently down over 1% in Hong Kong and Taiwan (a number of other Asian markets, including Singapore, are closed for a public holiday).

In Australia, the ASX200 closed with a 0.5% loss, with the market cushioned by a 7bps decline in the 10Y AGCB yield and a weaker Aussie dollar (indeed, in trade-weighted terms at its lowest level since December and more than 5% below the February peak). Positive news of lower virus cases in New South Wales was countered by confirmation that Victoria’s lockdown would be extended for seven days, while South Australia’s new seven-day lockdown got underway following a rise in case numbers there. Given this situation, local commentary is increasingly focused on whether the RBA might choose to defer the tapering of its QE purchases planned for when the current programme ends in early September.

Japan’s national CPI provides no surprises with core inflation still muted
The only economic report in Japan today was the national CPI for June. As usual, this largely mirrored the indications from the advance data for the Tokyo area – which at the time had surprised with a larger-than-expected increase in fresh food prices – and so both headline inflation and the various core measures printed exactly in line with surveyed market expectations.

The headline CPI index increased 0.3%M/M in seasonally adjusted terms, which caused annual inflation to increase 0.3ppts to 0.2%Y/Y – the first positive reading since August last year. Prices for fresh food rebounded a further 4.1%M/M and so were up 0.6%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased by a much smaller 0.1%M/M, although this was still sufficient to lift annual inflation by 0.1ppts to 0.2%Y/Y. Sadly, this mildly positive inflation rate owes to base effects associated with the rebound in energy prices. These prices increased a further 1.1%M/M in June, lifting annual growth to 4.8%Y/Y. And so while the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – also increased 0.1%M/M in June, annual ‘inflation’ remained steady at -0.2%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – also increased just 0.1%M/M, which left annual inflation steady at an even lower -0.3%Y/Y.

Elsewhere in the detail, while total goods prices increased 0.4%M/M, prices increased just 0.1%M/M excluding the impact of higher prices for fresh food. Industrial goods prices were unchanged during the month but up 1.4%Y/Y (and just 0.5%Y/Y excluding the impact of higher energy prices). In the services sector prices were steady for a second consecutive month, although the annual decline in services prices moderated by 0.1ppts to -0.6%Y/Y (a decline that can be attributed to the sharp reduction in mobile phone call charges back in April). So overall, as the BoJ characterised in last week’s updated Outlook Report, consumer prices presently appear to be moving sideways in Japan.

PBoC says prime lending rates unchanged for 15th consecutive month
In light of the recent decline in the China’s Reserve Requirement Ratio (RRR), there had been some speculation that the PBoC might also announce a modest decline in the benchmark lending rates for mortgages and corporate loans. But as most analysts had expected – and as suggested by the steady 1Y MLF auction rate last week – today the PBoC left these rates unchanged for a 15th consecutive month. So the 1Y loan prime rate (the benchmark for corporate loans) was left at 3.85%, while the 5Y loan prime rate (the benchmark for mortgages) was left at 4.65%.

German PPI inflation highest since 1982 but still limited pass-through to consumer and capital goods; ECB Bank Lending Survey still to come
German producer price inflation accelerated 1.3ppts in June to 8.5%Y/Y, the fastest since January 1982. On the month, prices rose another marked 1.3%M/M, down just 0.2ppt from May’s thirteen-year high. Given developments in global oil markets, but exacerbated by the carbon-pricing scheme, energy prices rose a further 2.2%M/M and 16.9%Y/Y, the highest annual rate since 2008. Excluding energy prices, however, PPI inflation rose a further 1.0ppt to a record 6.0%Y/Y. That was due to a further big rise in prices of intermediate goods, up 1.8%M/M and a series high of 12.7%Y/Y, with broad-based pressures led by metals and timber (both up more than 80%Y/Y) and chemicals (18.8%Y/Y). But crucially, pass-through to producer prices of capital goods (up 0.2%M/M and 1.3%Y/Y) and consumer durables (0.2%M/M and 1.8%Y/Y) remained relatively limited. And while producer prices of consumer non-durables rose a relatively firm 0.7%M/M, that took the annual rate to a still moderate 1.5%Y/Y, with food inflation up to 1.9%Y/Y. Overall, therefore, this morning’s data suggest that manufacturers continue largely to absorb higher input costs in their margins, rather than pass them on in terms of higher prices of finished goods.

Looking ahead, the ECB’s latest quarterly bank lending survey will provide insights into financial conditions, and euro area external current account data for May are also due this morning. There are no new economic data due from the UK today.

The data focus in the US today remains on housing; corporate earnings news also ahead
Following yesterday’s modest decline in the NAHB housing index for July, the data focus in the US today will remain on housing with the release of the housing starts and building permits report for June. In a similar vein, Daiwa America’s Mike Moran expects this report to reveal a modest decline in housing starts amidst the recent moderation of new home sales and an associated rise in inventories. Aside from the economic data, a busier day for corporate reporting will see the release of earnings from 15 of the largest firms.

RBA Board minutes provide no surprises; Aussie consumer confidence takes a hit due to lockdowns
While the RBA’s Board had made key decisions on its 3Y bond yield target and its QE programme at this month’s meeting, predictably the minutes from that meeting didn’t add much to the detailed comments and explanation given in a subsequent speech by Governor Lowe. With regard to the decision to retain the April 2024 bond as the target bond, it was noted that “the faster-than-expected recovery in economic conditions over the course of 2021 had widened the range of alternative plausible scenarios for the economic outlook and therefore the cash rate over the period to November 2024”. The minutes indicated some debate amongst Board members about whether to taper the QE programme, but on balance the Board was persuaded by the improvement in the economic outlook.

Attention will now turn to next month’s Board meeting, which will also include updated economic projections that will also need to factor in next week’s CPI release and – more difficultly – an early assessment of the repercussions of the current virus outbreak in Australia. In light of the near-term uncertainty about the near-term outlook it is possible that the Board could indicate a willingness to defer the tapering of QE purchases. That said, it is worth noting that Governor Lowe has made clear that the he regards the flow of purchases as being less significant a measure of support than the outstanding stock of purchases, such that the tapering was viewed as having little impact on the policy stance. Moreover, bond yields and the Aussie dollar have already declined of their own accord, partly in response to the latest developments.

In other news, the extended lockdown in Greater Sydney combined with the new lockdown in the state of Victoria took its toll on the consumer sentiment last week, with the ANZ-Roy Morgan consumer confidence index declining 5.2% to 104.3 – the lowest reading since early November. Unsurprisingly, respondents were much less optimistic about the year-ahead outlook for the economy and about buying conditions for major household items, while optimism regarding the longer-term outlook also took a hit. Given the extension of the Victoria lockdown and the new lockdown in South Australia, one can only imagine that confidence will have declined further in next week’s update.

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