Japan’s services PPI increases due to base effects

Emily Nicol

Wall Street ekes out another new high, but weakness in Chinese markets leads softer tone in Asia today
In many respects, the price action in the US yesterday mirrored that seen the previous day. Once again, the S&P500 managed a 0.2% gain, thus establishing a new record high, with a disappointingly flat core capex orders reading for July offset by an upward revision to orders in June. A further steepening of the yield curve – with the 10Y note closing up a further 5bps at 1.34% – meant that financials led the equity market higher. With commodity prices (especially crude oil) also a little firmer, energy and materials stocks also made gains, which also gave a small lift to the commodity-linked currencies.

The tone in markets has weakened somewhat since the US close, however, with US futures presently a tenth or so weaker. The largest losses are centred on China, with the CSI300 down almost 2% and the Hang Seng down more than 1½% as investors continue to ponder the implications of the country’s regulatory agenda. Stocks are also weaker in South Korea, with the KOSPI falling 0.6%. This follows the BoK’s Board decision to hike its policy rate by 25bps to 0.75% – the first hike by a major central bank in Asia since the pandemic began – when a narrow majority had expected the Bank to hold fire in light of rising delta virus cases. Governor Lee noted that the Board’s decision, which was opposed by just one member, reflected a solid economic recovery, elevated inflation and an accumulation of financial imbalances, and that the timing of further “gradual” reductions in policy accommodation would depend on factors such as the virus, the economy and Fed policy. By comparison, following yesterday’s confirmation that more than 70% of the population will be subject to state of emergency conditions tomorrow, Japan’s TOPIX was little changed on another quite day for local economic data.

In the Antipodes, Australia’s ASX200 has declined 0.5% despite a stronger than expected lift in capex in Q2 and a further solid increase in firms’ intended spending in the 2021-22 financial year – the latter pointing to some resilience in the face of the current virus outbreak, at least when the survey was in the field earlier this month. Of course, unfortunately the outbreak has worsened since, with new virus cases in New South Wales topping 1,000 for the first time today, and new cases in Victoria increasing to 80 from 45 the day before. As a result, while AGCB yields are up a little, the local market has outperformed relative to USTs. Kiwi bonds also outperformed, with a further 68 new virus cases reported today, albeit seemingly mostly linked to existing cases in isolation.

Japan’s services PPI increases 1.1%Y/Y in July, slightly below expectations
Another quiet day for data in Japan brought only the release of the BoJ’s services PPI report for July. In headline terms, the index increased 0.2%M/M, thanks in particular to a large seasonal lift in prices for air passenger transportation and higher prices for hotel stays. Lower prices for TV advertising services, which are especially responsive to changes in pandemic restrictions, provided a partial negative offset. Given base effects, the annual rate of inflation still eased to 1.1%Y/Y from a downwardly revised 1.3%Y/Y in June, which was 0.2ppts below the consensus estimate. That decline was largely accounted for by base effects associated with pandemic driven volatility in television advertising prices, which increased 18.1%Y/Y in July compared with 33.7%Y/Y in June. Office rental charges also helped lower annual PPI inflation in July, but this was offset by higher prices for hotel stays (up 10.8%Y/Y in July, compared with a 4.1%Y/Y decline in June).

German consumers and French businesses marginally less upbeat; ECB account due later today
The recent rise in Covid infections, slowdown in vaccination momentum and pickup in prices has led to increased uncertainty among German consumers. Indeed, today’s GfK survey findings suggest that having risen to their highest in a decade in June, economic expectations slipped back for the second successive month in August as households expect a moderation in the recovery ahead. But while consumers were slightly more upbeat about their income expectations, against the backdrop of rising prices and mandatory mask wearing and social distancing, there was a further decline in their propensity to consumer, with the relevant index some 33pts lower than a year ago. As such, GfK forecast a more notable drop in the headline consumer confidence indicator in September, by 0.8pt to -1.2pts, admittedly still well above the pandemic troughs (-23.1 in May 2020 and -15.5 in February 2021) but also still considerably lower the pre-pandemic reading of close to +10.

The French INSEE’s business survey similarly reported diminished optimism among businesses in August, with the headline business confidence index fell for the second successive month and by 3pt to 110. This was led by firms in the services and retailing sectors – with the respective indices down 3pts to 108 and 5pts to 109 – as a softening in expected future activity and demand was particularly evident in the hospitality sector, while the balance of retailers’ expected sales fell below the long-run average. But the headline indices in both services and retail remain well above their long-run average. Moreover, manufacturers were reportedly their most upbeat since May 2018, reflecting improvements in both past and expected future production, driven by a rebound in the transport equipment sub-sector. And while construction firms assessed past activity to not have been quite as strong in August, they were more optimistic about the coming three months.

The ECB’s bank lending data for July are also due for release this morning.

Focus later today also be on the publication of the account of the ECB’s policy meeting of 21-22 July when the Governing Council strengthened its forward guidance on interest rates. But the ECB left its forward guidance on asset purchases unchanged at this meeting. So, while ECB Economist Lane in an interview yesterday suggested that the Governing Council would use “the autumn to work through a lot of issues relating to what 2022 should look like”, the account will be watched closely for any hints of what that might include, or an indication into the pace of asset purchase buying in the final quarter of the year. Also potentially of interest, ECB Executive Board member Schnabel is due to participate in an economist roundtable on the ECB’s strategy review.

UK car manufacturing falls sharply, recording the lowest number of units produced in a July since 1956.

Today’s SMMT car production figures further emphasised the challenges facing UK manufacturers against the backdrop of both key materials – in particular semi-conductors – and labour shortages. Indeed, these showed that the number of units produced in July was down 37.6%Y/Y to just 53.4k, the lowest outturn in the month of July since 1956 and more than 50% below the average level produced that month in the decade up to the pandemic. The weakness last month was likely exacerbated by the decision by some plants to alter their summer shutdown timings to manage the staff absences caused by the so-called ‘pingdemic’. While this should have eased this month as the self-isolation rules changed, there are no signs that the global supply bottlenecks were abating. As such, full-year production seems bound to remain well below pre-pandemic levels this year at least – indeed, while the number of cars rolling off the production lines so far this year were up by 18% compared with the same period in 2020, they were still almost 30% lower than in 2019. far

Q2 GDP revisions ahead in the US today, but unlikely to change the picture
As investors continue to await tomorrow’s speech by Fed Chair Powell to the Jackson Hole symposium, the focus with respect to today’s US economic diary is likely to be on the second release of GDP statistics for Q2. That said, as usual revisions to the first estimate are likely to be minor, leaving growth close to preliminary estimate of 6.5%AR. Aside from the GDP figures, the Kansas City Fed’s manufacturing survey for August and the weekly jobless claims report are the only other diary entries of note.

Aussie capex spending lifts strongly in Q2; capex intentions for this 2021-22 also rise strongly, showing no impact from the virus outbreak (not yet at least)
Following yesterday’s release of somewhat disappointing construction data, today’s Q2 CAPEX survey offered somewhat more positive news about spending on equipment, plant and machinery. The volume of overall business capex increased 4.4%Q/Q in Q2, exceeding the consensus estimate of a 2.6%Q/Q gain. So even with the previous quarter’s growth revised down slightly to 6.0%Q/Q, annual growth increased to 11.5%Y/Y from just 0.3%Y/Y in Q1. While base effects associated with the pandemic exaggerate growth, the volume of spending in Q2 was still the highest since Q319. In the detail, the CAPEX survey reported a 4.6%Q/Q lift in spending on buildings and structures – much more positive than yesterday’s more comprehensive construction work survey, with the latter used in compiling the national accounts. More importantly, the survey’s measure of spending on equipment, plant and machinery grew 4.3%Q/Q to the highest level since Q412, which also lifted annual growth to 17.3%Y/Y.

Of greater interest given the current virus outbreak was the section of the survey measuring firms’ future planned spending. Notwithstanding the virus outbreak, the third estimate for total capex spending in the coming financial year (ending 30 June 2022) was A$125.7bn – a sizable 12.5% upwards revision from the second estimate made three months ago and 17.5% higher than the comparable estimate made a year earlier. This revision is about in line with that typically seen at this time of year when the economy is expanding, and is the highest third estimate since 2015. So at least when this survey was in the field earlier this month, the virus outbreak showed no obvious signs of weighing on firms’ medium-term economic outlook and thus capex plans, which continue to be supported by the government’s temporary pandemic support policy of allowing full expensing for tax purposes.

This robust result owed mostly to a huge 20.2% upward revision to expected spending on equipment, plant and machinery, with the third estimate now 27.1% higher than the same estimate last year and so the highest third estimate since 2013 – growth that probably partly reflects increasing labour shortages brought about by the economy’s strong recovery and border closure. By comparison, planned investment on buildings and structures was revised up by a smaller 7.6% and was 11.5% higher than the same estimate a year earlier. Most of the revision to planned capex stems from the non-mining sector. Indeed, planned capex in this sector was revised up 15.4% from the second estimate and now sits 24.8% above the comparable estimate a year earlier. More meaningfully given the influence of very favourable base effects, this estimate is just 2.9% above the comparable estimate made two years ago, but this is still a record high for the series. 

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