Japanese IP rebounds in June

Emily Nicol

Wall Street firmer Thursday, but sentiment slides after the close following Amazon earnings report and as China-related concerns re-emerge
Despite news that the US economy grew a less-than-expected 6.5%AR in Q2, the S&P500 still advanced 0.4% on Thursday to close just short of Monday’s record high. Investors were probably comforted by the larger 7.7%AR lift in final sales and an especially strong 11.8%AR increase in private consumption. And with the core PCE deflator rising a robust 6.1%AR as expected, the 10Y UST yield finished the session 3bps higher at 1.27%. The greenback continued its post-Fed slide.

The tone in markets has weakened considerably since the US close, however, with S&P mini futures presently down 0.9% and Nasdaq futures down 1.4%. Sentiment wasn’t helped by Amazon’s miss on both earnings and guidance – likely reflecting the re-opening of brick and mortar stores – with the stock declining around 7% in extended trade. Meanwhile, ahead of tomorrow’s official PMI readings, China-related regulatory concerns have re-emerged, while reports of China curbing steel production to meet emissions targets has also sent metals prices lower during Asian trading. So after recovering somewhat over the previous two days, as we write the CSI300 is down 0.6% and the Hang Seng is almost 2%.

The decline in US futures and Chinese stocks has rubbed off elsewhere. This includes Japan where the TOPIX has declined 1.4% despite reporting improved IP, employment and retail spending data for June. Of course, the picture in July and August may prove less favourable, with PM Suga set to confirm later today that state of emergency conditions will be extended to the Saitama, Chiba, Kanagawa and Osaka prefectures. In South Korea, the weakness in tech stocks has weighed on the KOSPI, which was also down just over 1%. And stocks are down more than 3½% in the Philippines, with Manila set to go back into lockdown for two weeks from 6 August. However, Australia’s ASX200 fell only modestly following the release of robust credit data for June. And news that new virus infections in Sydney had fallen back to 170 cases over the past day has allowed AGCB yields to move fractionally higher.

Japanese IP rebounds 6.2%M/M in June; firms’ forecasts for July and August mixed
The focus during today’s dump of Japanese economic data was the industrial production report for June, especially in light of the 6.5%M/M slump in output recorded in May. Guided by last month’s forecast by firms of a sharp rebound pullback in production – appropriately discounted given the tendency of firms to be too optimistic – the consensus expectation was for a 5.0%M/M increase in output this month. As it turns out, output rebounded a larger-than-expected 6.2%M/M, with some relaxation of pandemic-driven restrictions during the month boosting domestic demand and adding to the continued good trading conditions experienced by exporters. Thanks to base effects associated with last year’s first wave slump in activity, output was up a whopping 22.6%Y/Y. However, more meaningfully, output in June was just 0.6% higher than the pre-pandemic level in February 2020. Based on these preliminary figures, output grew just 0.8%Q/Q in Q2, providing only a small offset to an undoubted contraction in activity in the services sector.

As far as the other headline figures are concerned, shipments – which had recorded a smaller decline than output in May – rebounded 4.3%M/M in June and thanks to base effects were up 18.7%Y/Y. As a result, inventories increased 2.3%M/M but even so remained down 4.8%Y/Y. The latter owed not least to a 17.2%Y/Y decline in inventories of electronic parts and devices, albeit inventories of these items grew steeply in June for the first time since August last year – perhaps pointing to an easing of the global semiconductor shortage. Inventories of autos also rebounded sharply and thanks to base effects were up more than 50%Y/Y.

In the detail, production of durable consumer goods – which had suffered a 17.3%M/M slump in May – rebounded 14.8%M/M in June, and so was up more than 44%Y/Y from last year’s depressed levels. Of particular note was a 19.4%M/M increase in production of autos. Production of non-durable consumer goods, less impacted by the pandemic restrictions, grew just 2.2%M/M and 1.2%Y/Y. Total production of capital goods rebounded 6.8%M/M in June after declining 5.6%M/M in May. Again, thanks to base effects, output of these goods increased a very flattering 24.0%Y/Y. Excluding transportation equipment, production of capital goods increased a similar 5.6%M/M, thanks to an 8.9%M/M rebound in output of production machinery. On a less bright note, production of construction goods declined 1.3%M/M – the first decline since February – but was still up 6.0%Y/Y.

Looking ahead, according to METI’s survey, firms forecast a 1.1%M/M decline in output in July, which was very similar to the two-month-ahead forecast made last month. Given that firms are usually too optimistic in formulating their forecast, METI estimates a bias-corrected 2.2%M/M decline in output for the month (with the usual ±1.8ppt range at the 90% confidence level). At this stage firms forecast a 1.7%M/M increase in output in August, and so METI retained its overall assessment that “production is picking up”. However, this monthly profile would suggest only modest growth compared with the Q2 average at best.

Japan’s unemployment rate declines to 2.9% in June as employment rebounds; retail sales also lift in June; housing starts decline slightly in June but up more than 5%Q/Q in Q2
Turning to the rest of today’s Japanese data, the easing of pandemic restrictions in June also had a positive impact on the labour market. MIC’s household-based survey pointed to a 210k lift in total employment – the first increase since February. Base effects meant that employment was up 0.4%Y/Y. However, the level of employment in June was still 770k (1.4%) lower than in February 2020. While the labour force participation rate increased to an eight-month high, the rebound in employment was sufficient to lower the unemployment rate by 0.1ppt to 2.9% – a better result than the market had expected. Meanwhile, the MHLW reported that the effective jobs-to-applicant ratio increased 0.04ppt to 1.13 in June – the highest reading since May last year. Given the growth in employment during the month, the total number of job applicants fell 3.6%M/M – even with the number of new applicants rebounding 5.5%M/M – but thanks to base effects was still up 8.8%Y/Y. The number of outstanding job offers was unchanged in June, even with a 4.9%M/M lift in new job offers. And while job offers were up 9.8%Y/Y thanks to base effects, they remain almost 14% lower than in February 2020.

In a similar vein, after slumping 4.6%M/M back in April and slipping further in May, retail sales grew 3.1%M/M in June – also slightly firmer than the consensus expectation. Even so, with spending having rebounded very sharply in June last year as the first wave of the pandemic passed, annual growth slowed to just 0.1%Y/Y from 8.3%Y/Y in May. Spending on general merchandise and apparel jumped more than 15%M/M after recording steep declines over the previous two months, while increased mobility contributed to an 11.8%M/M increase in spending on fuel. Even with today’s result, retail spending contracted 2.1%Q/Q in Q2. 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 June (ahead of any revisions, and assuming a firmer result in June, in May the latter was on track to decline around 1.5%Q/Q).

Completing the day’s Japanese data, MILT reported housing starts and construction orders for June. Housing starts fell a modest 1.0%M/M in June, which was similar to the decline registered in May. But having leapt 9%M/M back in March, starts increased 7.7%Y/Y and slightly more than 5%Q/Q in Q2. Meanwhile, orders at Japan’s 50 largest construction companies increased 32.3%Y/Y in June, with private domestic orders increasing more than 34%Y/Y and public sector orders rising over 21%Y/Y. Removing the month-to-month volatility, total orders increased almost 17%Y/Y in Q2 with private and public domestic orders posting similar rates of growth. Total orders were only 4% above their Q219 level, however.

Euro area GDP set to confirm recovery; French GDP broadly aligns with expectations
While yesterday’s Commission sentiment survey signaled ongoing momentum in the euro area’s recovery at the start of Q3, today brings an update on where economic output stood in Q2, with flash GDP estimates due from the euro area and member states. We anticipate a moderate rebound in euro area GDP in Q2 following the modest contraction (-0.3%Q/Q) in Q1, with growth of 1.2%Q/Q to leave output up almost 13%Y/Y but still 3.9% below the pre-pandemic level.

Among the member states to have already published their national accounts figures, France’s GDP – published this morning – was broadly in line with expectations, with growth of 0.9%Q/Q in Q2 following a stable outturn in Q1 (having initially been estimated to have contracted -0.1%Q/Q). This left output up a sizeable 18.7%Y/Y but still 3.3% below the pre-pandemic level. Within the expenditure detail, household consumption accelerated in Q2 (+0.9%Q/Q) as lockdown restrictions eased over the quarter, with a sizeable rebound in spending on hotel and accommodation services (+48%Q/Q) and stronger consumption of transport services (+11.4%Q/Q) due to the recovery of mobility. But due to the closure of ‘non-core’ stores during the third lockdown in April, consumption of goods fell sharply (-4.7%Q/Q). And overall, household expenditure still remains 5.9% below its pre-crisis level. More encouragingly, a fourth consecutive increase in fixed investment (+1.1%Q/Q) – led by increased capital spending in services and construction – saw it return above its pre-pandemic level for the first time. And government spending increased moderately for the first quarter in three too (+0.5%Q/Q). But with imports narrowly outpacing exports, net trade remained a drag on growth (-0.2ppt) albeit to a lesser extent than Q1.

This morning will also bring German, Italian and Spanish releases. Germany is likely to have more than fully reversed its 1.8%Q/Q contraction in Q1 and Spain is also likely to have grown by a touch above 2.0%Q/Q. Like in France, Italy is expected to have grown by around 1%Q/Q.

Euro area flash inflation set to rise back to (or above) ECB’s 2% target
The flash estimate of euro area July inflation will also be closely watched. Yesterday saw German HICP inflation jump a stronger-than-expected 1ppt to 3.1%Y/Y, a thirteen-year high, due not least to base effects from the temporary VAT cut a year earlier. And this morning’s French inflation figures came in a touch above expectations, although the HICP rate still moderated 0.3ppt to 1.9%Y/Y. The national measure of inflation also eased 0.3ppt to 1.2%Y/Y, principally due to lower clothing inflation (down 1.8ppts to -1.1%Y/Y), impacted by the timing of summer sales this year and last. Services inflation also moderated slightly (down 0.1ppt to 0.7%Y/Y). And with energy inflation having accelerated, today’s release suggests that core inflation dropped further in July (from 0.7%Y/Y previously).

On balance, we see slight upside risks to our forecast that headline euro area inflation will rise just 0.1ppt to the ECB’s 2.0% target in July. With this likely principally reflecting higher energy prices, and with services inflation still subdued and non-energy goods inflation having likely eased back after a jump in June, core inflation is likely to slip back from 0.9%Y/Y in June. Finally, this morning will also bring euro area labour market figures for June, which are expected to show the unemployment rate moving sideways at 7.9%, 0.6ppt lower than the peak last year.

Consumer income, spending and inflation data ahead in the US today; labour costs also a key focus, while corporate reporting continues
Another busy data of economic data looms in the US today. The personal income and spending report for June will cast light on the monthly profile of income, spending and the core PCE deflator that was implicit in yesterday’s GDP report. Daiwa America’s Mike Moran expects only a modest increase in income, but the upside surprise in private consumption in Q2 – despite the downside surprise to overall GDP growth – points to a reasonable lift in spending (perhaps combined with upward revisions). Mike expects a 0.6%M/M increase in the core PCE deflator in June, which will lift the Fed’s preferred core inflation metric to a new high of 3.7%Y/Y. Also of note today is the Employment Cost Index for Q2. Amidst reports of rising wage pressures, Mike expects a second consecutive 0.9%Q/Q increase in employee compensation, which compares with the 0.7%Q/Q average seen in the year prior to the pandemic. The Chicago PMI for July and finalised results of the University of Michigan survey for July complete the week’s economic diary, with the latter perhaps improving on its preliminary reading if this week’s Conference Board survey is any guide. Finally, a quieter day for earnings will still see more than twenty major corporates reporting, including the likes of Exxon Mobil, Chevron, Proctor and Gamble, Colgate-Parmolive and Caterpillar.

Aussie PPI inflation remains subdued in Q2; private sector credit jumps in June as business and housing credit grow strongly
Today saw the release of Australia’s PPIs for Q2, together with the RBA’s money and credit aggregates for June. The final demand PPI (excluding exports) increased 0.7%Q/Q, led by a 12.1%Q/Q increase in the price of petroleum refining. Even with this increase, annual PPI inflation stood at just 2.2%Y/Y (albeit up from 0.2%Y/Y in Q1). Meanwhile, private sector credit grew 0.9%M/M – well above market expectations – lifting annual growth to a 13-month high of 3.1%Y/Y. This was the largest monthly increase since March last year, when businesses scrambled to obtain credit at the onset of the pandemic. And the business sector was also largely responsible for the surprise this month, with business credit lifting 1.6%M/M (but up just 0.6%Y/Y given base effects). Housing-related credit grew 0.7%M/M, which was the most since March 2010, lifting annual growth to 5.3%Y/Y. That growth owed mostly to an especially robust 0.9%M/M increase in loans to owner-occupiers, as lending to investors increased just 0.3%M/M – a distribution that regulators will continue to view favourably. Perhaps reflecting the impact of lockdowns during the month, other personal loans declined 0.5%M/M and were still down 6.3%Y/Y.

Kiwi consumer confidence nudges lower but dwelling approvals hit new record high
Following yesterday’s news of a modest pullback in the business confidence, today the ANZ reported that its consumer confidence index also eased slightly in July, with the headline index slipping 0.9%M/M to 113.1. This was the lowest reading since March, and so remains slightly below the long-term average for the index. On a brighter note, responding to the tremendous growth in house prices over the past year, the number of new dwelling approvals increased 3.8%M/M in June to a new record high, with approvals also up 24%Y/Y. The value of non-residential building approvals declined more than 27%Y/Y, but this was off a high base and followed a very strong reading in June (for the year ended June, these approvals increased more than 13%Y/Y).

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