Japanese merchandise exports and imports advance

Emily Nicol
Chris Scicluna

Asian markets firmer today following a strong rebound on Wall Street
With US housing starts unexpectedly rebounding to a three-month high in June, the pandemic-induced worries expressed on Wall Street at the beginning of the week appeared to evaporate yesterday. Indeed, the S&P500 had rebounded 1.5% by the close, thus almost fully erasing the previous day’s loss, led by gains in industrials and financials. The rebound in sentiment was much less evident in the bond market, however, with the yield on the 10Y UST closing just 3bps higher at 1.22% – still 7bps below Friday’s close (and trading as low as 1.13% before Wall Street opened). The improved mood was nevertheless reflected in a slightly weaker yen but the greenback still made modest gains against most currencies, with the Aussie dollar touching new lows for the year.

Since the close, US equity futures are little changed but UST yields have nudged a couple of bps lower. Against that background, following widespread losses yesterday, some – but not all – bourses in the Asia-Pacific region have rebounded today. In Japan, which is now on holiday for the remainder of the week, the TOPIX closed with a gain of 0.8% gain – its first advance in six days – as both exports and imports proved firmer than consensus expectations in June. While markets are similarly firmer in Mainland China, they are again weaker in Hong Kong, Taiwan and South Korea – the latter despite better-than-expected export data, as rising coronavirus case numbers cast doubt on prospects for growth over coming months. Stocks are steady in Singapore, which had closed for a holiday yesterday.

In the Antipodes, the ASX100 has increased 0.8% to a three-day high despite news of a larger-than-expected pullback in Aussie retail sales in June amidst that month’s pandemic-induced disruptions to activity. Of course, worse is likely to be seen this month given the widening lockdown across the country. Indeed, with the daily tally of new virus cases in New South Wales increasing to 110, AGCBs have outperformed USTs, causing the 10Y spread to return to rarely seen negative territory. By contrast, in New Zealand the 10Y NZGB increased 4bps to 1.66% as the RBNZ concluded the final purchases under its now halted QE programme.

Japanese merchandise exports and imports advance in June; net goods exports appear little changed in Q2 offering little offset to the drop in domestic demand
According to the MoF, after a pause in growth in May, Japan’s merchandise export receipts grew 2.4%M/M in June. So combined with base effects – exports in June last year were only 5% above the prior month’s pandemic low-point – this left annual growth at a very flattering 48.6%Y/Y. This outcome was just a touch weaker than last month’s growth of 49.6%Y/Y but still somewhat firmer than the consensus expectation. More meaningfully, the level of exports in June was 11% higher than the pre-pandemic level in February 2020. Not surprisingly, generally the strongest annual growth rates continued to be recorded by those industries that had fared worst a year earlier, with exports of motor vehicles more than doubling and so accounting for around a quarter of the total rebound in exports over the period. Exports of manufactured goods increased 56.7%Y/Y, while exports of machinery and electrical machinery increased 42.0%Y/Y and 39.9%Y/Y respectively.

Meanwhile, after growing just 1.0%M/M in May, import values increased by 4.0%M/M in June. This marked the seventh consecutive increase and left imports up 32.7%Y/Y – an outcome that was also firmer than the consensus estimate. Almost half of that growth continues to owe to an 86.1%Y/Y rebound in imports of mineral fuels and a 69.8%Y/Y rebound in imports of raw materials, exaggerated by recent shifts in global market prices. Other significant positive contributions came from import rebounds of 146%Y/Y in transport equipment, 28.1%Y/Y in electrical machinery and 35.1%Y/Y in manufactured goods. With the positive surprise in imports exceeding that for exports, a modest seasonally-adjusted trade deficit of ¥90bn was recorded in June. This compared with the consensus estimate of a tiny surplus and the ¥20bn surplus now reported for May (revised down slightly).

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 increased 0.5%M/M in June indicating that most of the nominal growth during the month was due to rising global prices and a weaker yen. Given base effects, real exports were up 32.1%Y/Y but up just 6.5% compared with February 2020. More importantly for GDP calculations, real exports grew 3.5%Q/Q in Q2 following growth of just 1.8%Q/Q in Q1. However, the BoJ estimates that real imports increased a steeper 1.9%M/M in June, lifting annual growth to 8.0%Y/Y. Moreover, this means that real imports grew 3.8%Q/Q in Q2, marginally outstripping growth in exports. As a result, it appears that net exports will likely not provide any offset to the pandemic-driven decline in domestic demand in Q2 (the preliminary national accounts will be released on 16 August).

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 exports to the US grew 79.5%Y/Y (this following a 47.0%Y/Y decline a year earlier) while exports to the EU increased just 25.9%Y/Y (thus failing to recover a 33%Y/Y decline over the preceding year). Exports to Asia grew 26.1%Y/Y, with exports to China up 23.7%Y/Y – the latter now more than 20% above the average level during the months leading up to the pandemic.

UK public borrowing continues to run below OBR forecast in June
UK public sector net borrowing broadly aligned with market expectations in June, coming in at £22.8bn (excluding banking groups), a touch higher than borrowing in May (which at £20.6bn was downwardly revised by £3.7bn from the initial estimate). While it was down £5.5bn from a year earlier, net borrowing was still almost £20bn higher than June 2019 and, inevitably, the second highest June reading since the series began. Most notably, however, net borrowing again came in some way below the OBR’s most recent forecast, by £3.7bn.

The drop in net borrowing from a year earlier reflected the firm economic recovery, which has helped give a boost to government revenues. Indeed, central government receipts were up £9.5bn (21.7%) in June from a year earlier, with VAT contributions accounting for a little more than one-quarter of the increase and a further £3.2bn accounted for by higher PAYE income tax and social contributions. The contribution from stamp duty (£0.7bn) was also double that from a year ago. Despite a notable drop in contributions to the job retention scheme (down £5.9bn) as employees continued to return to work, there was a modest increase in central government spending in June. This was due partly to increased spending on procurement (£1.7bn) as the NHS track and trace and vaccine programmes remained in place. But it was mainly due to a spike in interest payments (£6bn) on central government debt – the highest monthly payment since the series began in 1997 – due to the impact of higher inflation on index-linked gilts.

Overall, in the first three months of the financial year, central government expenditure was estimated to have fallen by £24.1bn compared with the same period in 2020. And with receipts up by £24.8bn, public sector net borrowing in the financial year to date stood at £69.5bn, a whopping £49.8bn (41.7%) lower than during the same period in 2020 and almost £19bn less than forecast by the OBR in March. Despite the recent improvement and potential for short-term fiscal giveaways that this better-than-expected performance implies, as noted yesterday by the Institute for Fiscal Studies (IFS), there would seem little to no room for permanent fiscal giveaways if the Chancellor is to meet his target of a current budget balance by 2025-26.

Australian retail sales fall sharply in June as lockdowns weigh; still up solidly in Q2
According to preliminary data provided by the ABS – based on responses from businesses accounting for around 80% of total turnover – Australia’s retail sales declined 1.8%M/M in June. This drop was much larger than the consensus had expected and left sales up just 2.9%Y/Y. By state, Victoria (-3.5%M/M), New South Wales (-2.0%M/M) and Queensland (1.5%M/M) led the falls, impacted to varying degrees by the stay-at-home orders in place for part of the month. According to the ABS, those stay-at-home orders boosted food retailing by 1.5%M/M, whereas sales declined across all other industries (unsurprisingly, especially at apparel stores and at cafes, restaurants and takeaways).

Despite the decline in sales in June, the preliminary data indicate a 1.3%Q/Q increase in the value of sales during Q2 following a 0.1%Q/Q decline in Q1. Volume estimates will be released by the ABS on 4 August, alongside the final retail sales figures for June.

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