BoJ reports a lift in trimmed mean inflation

Emily Nicol

Wall Street advances solidly to near record high Monday; Asian bourses extend recovery today as Powell’s Jackson Hole speech continues to be awaited
Wall Street began the week on a positive note yesterday with a 0.9% advance in the S&P500 causing it to close within a fraction of its all-time high, led by gains in energy and technology stocks. The economic data were mixed, with an eight-month low for the services PMI detracting for ongoing strength in the manufacturing sector and an unexpected lift in existing home sales in July. However, investors perhaps viewed these data as further reducing the likelihood that Jay Powell will give a hawkish speech to the Jackson Hole symposium on Friday, even with the FDA granting full approval to the Pfizer/BioNTech vaccine. The improved tone in equity markets was also shared by commodities, with both crude oil and metals firming, while reduced risk aversion undermined demand for the greenback. However, the Treasury market erased some earlier losses to leave the 10Y note essentially unchanged at 1.25%.

The positive tone has continued today in Asia, especially with US equity futures also edging a couple of tenths higher (the 10Y note has also lifted a couple of basis points). As we write Japan’s TOPIX is up around 1% even with the Asahi newspaper reporting that Hokkaido and three other prefectures will soon be added to the state of emergency. Stocks are also up around 1% in Mainland China and 1.5% in South Korea, while the strong performance of technology stocks – including a bounce in Tencent Holdings – has helped drive even stronger gains in Hong Kong. In Australia, both New South Wales and Victoria reported slightly fewer new virus cases than on Monday, but the ASX200 has gained only modestly. AGCB yields have nudged a little higher, however. Bond yields have also increased modestly in New Zealand, where the Q2 retail sales report pointed to very strong momentum in consumer spending prior to the recent virus outbreak.

BoJ underlying inflation measures point to fractionally positive inflation trend
In a quiet day for Japanese economic news and following last week’s national CPI report, today the BoJ released its analytical measures of underlying inflation. Unlike the regular measures of core inflation, these are less-impacted by extreme relative price shifts such as the steep decline in mobile phone call charges that occurred in April – a decline that was exacerbated by the move to 2020 base expenditure weights with the release of the July CPI report.

The trimmed mean inflation rate, which the BoJ’s research suggests is best correlated with the state of the economy, edged up just over 0.1ppt to 0.16%Y/Y in July. This marks the highest reading since February 2020, but remains some way below the 0.5%Y/Y that had been averaged through 2019 (excluding the impact of the consumption tax hike). This compares favourably with the Bank’s preferred exclusion-based measure of core inflation (CPI excluding fresh food and energy), which stood at -0.6%Y/Y in July. The weighted median and the modal increase in prices were both steady at 0.1%Y/Y in July, so also suggesting that the underlying inflation trend was indeed fractionally positive.

German Q2 GDP revised a touch higher
There was a very modest upwards revision to the second estimate of Germany’s Q2 GDP, with growth estimated to have risen 1.6%Q/Q (compared with 1.5%Q/Q previously). While this left output up 9.4%Y/Y, it failed to fully reverse the decline seen in Q1 (-2.0%Q/Q). And so, output was still 3.3% lower than the pre-pandemic level in Q419.

Today’s release brought the first official expenditure breakdown. With the gradual easing of lockdown restrictions and the savings ratio have slipped back slightly, this showed that household consumption unsurprisingly increased a solid 3.2%Q/Q in Q2 to fully account for GDP growth. But this followed a decline of more than 5%Q/Q in Q1 and a more than 2½%Q/Q drop in Q4, to leave the level still some 8% below the pre-pandemic level. Government expenditure also provided support (up 1.8%Q/Q to account for 0.4ppt of growth), while fixed investment broadly offset the 0.7% drop in Q1. While exports rose for the fourth consecutive quarter, the pace of growth slowed notably to just 0.5%Q/Q. And with imports up a solid 2.1%Q/Q, net trade was a drag (0.6ppt) on growth for the second successive quarter.

Looking at gross value added, today’s report showed that services activity saw the strongest rates of growth, with public service providers including education and healthcare up 3.8%Q/Q and trade, transport and hospitality up 1.1%Q/Q. Meanwhile, output in the construction sector grew a negligible 0.1%Q/Q, perhaps reflecting ongoing supply constraints in the sector. This was undoubtedly a key factor of the ongoing weakness in the manufacturing sector, with output down a further 1.3%Q/Q in Q2.

The Bundesbank’s latest monthly report yesterday acknowledged that Germany’s economy – which is the only one of the larger member states to have output still below the level in Q420 – had underperformed its expectations during the first half of the year. And with the spread of the delta variant, slowing vaccinations and a moderation in business sentiment, it recognised that growth in 2021 could be weaker than it had previously expected. This notwithstanding, the Bundesbank still expects output to return to its pre-pandemic level by the autumn at the latest.

A quiet day ahead in the US with July new home sales the main focus
Following on from yesterday’s slightly firmer than expected existing home sales report – one that pointed to a modest lift in sales in July for a second consecutive month – today’s sparse US economic diary brings news on new home sales for July. The Richmond Fed’s manufacturing survey for August is also due, and will likely continue to depict very positive conditions in the sector.

Aussie weekly consumer confidence index nudges higher
After declining to a nine-month low earlier this month, the ANZ-Roy Morgan consumer confidence index nudged higher for a second consecutive week, notwithstanding the ongoing virus outbreak and associated restrictions. The headline index increased a modest 0.5% to 101.6, with respondents more positive about recent developments in their financial situation even as they became much less positive about prospects for the economy over the year ahead. Indeed, the latter index fell 6.9% to a new nine-month low of just 78.5 – well below average reading – even as respondents’ views on the five-year outlook improved modestly.

Kiwi retail sales volumes surge 3.3%Q/Q in Q2, driven by strong housing market and regional tourism
Today’s Kiwi retail sales report illustrated why the RBNZ was poised to begin tightening monetary policy settings before last week’s discovery of a delta-variant virus outbreak. Having already jumped an upwardly-revised 2.8%Q/Q in Q1, the volume of retail spending surged a further 3.3%Q/Q in Q2, easily beating an already upbeat consensus estimate. A key contributor to this growth was a 4.8%Q/Q increase in spending on furniture and housewares, which is consistent with the general buoyancy seen in the housing market. In addition, the opening of a quarantine-free travel bubble with Australia – now suspended – surely contributed to an 11.4%Q/Q increase in spending on accommodation and a 5.6%Q/Q increase in spending at restaurants, takeaways and cafes. Reflecting the normalisation of spending patterns, at least before the current virus outbreak, spending at online stores declined for a third consecutive quarter.

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