Japanese IP remains weak in July, but employment rises

Chris Scicluna
Emily Nicol

Wall Street ekes out new high; Asian markets firmer with China the exception
Propelled by gains in the consumer discretionary and technology sectors, Wall Street continued to break records yesterday with the S&P500 advancing 0.4% and the Nasdaq climbing 0.9% to new all-time highs. With Jay Powell’s dovish remarks on Friday still front of mind, equity investors paid little attention to an unexpected decline in pending home sales in July – now almost 10% lower than a year earlier – or an 18pt slump in the Dallas Fed manufacturing index to a seven-month low. However, bond investors marked the yield on the 10Y note down 2bps to close at 1.28%. An exceptionally quiet day in the FX market saw little change in the major currency pares following Friday’s post-Powell sell-off in the greenback. 

As we write, US equity futures are around three-tenths firmer, which has added additional support to Asian markets. However, Chinese markets weakened following news of a shock 5.8pt plunge in China’s official non-manufacturing PMI in August – a decline that suggests that China’s virus outbreak and associated curbs on activity were much greater than the market had appreciated (more on the PMI below). The CSI300 is presently down 0.2%, but the Hang Seng is now up on the day after being considerably weaker earlier in the session. And Japan’s Nikkei has outperformed with a 1.1% gain, with the country reporting a smaller than expected decline in IP in July, an unexpected steep increase in employment in July and the best housing starts report since June 2019 (more on this below).

In the Antipodes, Australian stocks have also lifted with the ASX200 rising 0.7% despite further signs of no more than a modest lift in GDP in Q2 and news of a fourth consecutive decline in dwelling approvals in July. However, AGCB yields have nudged lower, with new virus cases in New South Wales falling only slightly to 1,164 over the past day. A further 73 new cases in Victoria dashed any hope that the states lockdown will end on Thursday, but tomorrow the state premier will announce vaccination and case number thresholds for a future easing of restrictions. Canberra has extended its lockdown for a further fortnight. In New Zealand, bond yields again edged higher, following news that new virus cases had fallen below 50 for the first time in six days, and with Kiwi businesses reporting an expectation that inflation would exceed the top of the RBNZ’s target range – the first time this has happened since 2011.

Japan’s IP declines 1.5%M/M in July, but firms forecast output to grow slightly in Q3
A key focus of today’s usual end-of-month dump of Japanese economic data was the industrial production report for July. Guided by last month’s forecast by firms of a pullback in production – further discounted given the tendency of firms to be too optimistic – the consensus expectation amongst analysts was for a 2.5%M/M decline in output this month. As it turns out, output fell just 1.5%M/M which, given base effects associated with last year’s first wave slump in activity, still delivered annual growth of 11.6%Y/Y. However, more meaningfully, despite growth in export demand over the period, output in June was 0.6% below the pre-pandemic level prevailing in February 2020. Shipments fell by a smaller 0.6%M/M in July and thanks to base effects were up 10.8%Y/Y. As a result, inventories declined 0.6%M/M and so were down 4.3%Y/Y. The monthly decline in inventories owed mostly to a decline in ICT and transport equipment, whereas the full year decline owes to ICT and electronic parts and devices (recent developments in the latter pointing to a slight easing of the global semiconductor shortage). Inventories of autos also rebounded sharply and thanks to base effects were up more than 50%Y/Y.

Turning to the industry detail, much of the decline in production in July was due to lower output of durable consumer goods. Continuing the recent volatility for this sector, output fell 5.4%M/M in July and yet was still up 3.8%Y/Y. Of particular note, production of autos declined 6.7%M/M, but nonetheless remained up 9.1%Y/Y. Production of non-durable consumer goods, less impacted by pandemic-related restrictions, fell just 0.1%M/M in July and was down 2.8%Y/Y. Total production of capital goods declined 1.1%M/M in July following a 7.6%M/M lift in June. Thanks to base effects associated with the pandemic and the pull-forward of investment spending ahead of the October 2019 consumption tax hike, output of these goods increased a flattering 20.6%Y/Y. Excluding transportation equipment, production of capital goods declined a similar 0.6%M/M, driven by a 4.7%M/M decline in output of electrical machinery and a 3.0%M/M decline in output of ICT equipment. Finally, production of construction goods declined 1.7%M/M in July but still increased 3.6%Y/Y.

Looking ahead, according to METI’s survey, firms forecast a 3.4%M/M rebound in output in August, which is double the growth that firms had forecast last month. Given that firms are usually too optimistic the in formulating their forecast – although not so in July – METI estimates a much weaker bias-corrected 0.1%M/M increase in output for the month (with the usual ±1.8ppt range at the 90% confidence level). At this stage, firms forecast a 1.0%M/M increase in output in September, and so METI retained its overall assessment that “production is picking up”. However, this monthly profile would suggest only modest growth of about 0.5%Q/Q in Q3.

Japan’s unemployment rate declines unexpectedly in July as employment lifts strongly; consumer confidence declines modestly in August
Turning to the rest of today’s Japanese data, notwithstanding the reinstatement of pandemic restrictions in the Tokyo area – since followed by other prefectures – pent-up demand for labour lead to a sizeable 420k lift in employment in July. This follows a 210k rebound in June after a cumulative 520k decline over the preceding three months. Given base effects associated with last year’s pandemic-driven slump in activity, this meant that employment was up 0.9%Y/Y. That growth owed more than fully to a rebound in employment in the wholesale and retail trade sector. Moreover, all of that growth was due to a 1.9%Y/Y rebound in female employment following a 1.8%Y/Y decline a year earlier. By contrast, male employment was unchanged from its year-earlier level following a 0.6%Y/Y decline a year earlier. The level of total employment in July was still 350k (0.7%) lower than in February 2020, however.

Given the strong lift in employment, the unemployment rate declined by an unexpected 0.1ppt to a three-month low of 2.8%. All of the reduction in unemployment was accounted for by a decline in the female unemployment rate to just 2.4%, whereas the male unemployment rate was steady at 3.1%. The decline in the unemployment rate occurred despite a 310k lift in the size of the labour force, with the labour force participation rate increasing 0.1ppts to 62.5% – the highest level since the series peak in October 2019. Meanwhile, the MHLW reported that the effective jobs-to-applicant ratio increased an unexpected 0.02ppts to 1.15 in July – the highest reading since May last year. Given the lift in employment during the month, the total number of job applicants fell 0.5%M/M – even with the number of new applicants increasing 3.5%M/M – but thanks to base effects was still up 2.5%Y/Y. The number of outstanding job offers increased 1.5%M/M in July, notwithstanding a 1.1%M/M decline in new job offers. The number of job offers was up 8.3%Y/Y thanks to base effects, but remained almost 12% lower than in February 2020.

The rise in Japan’s virus cases to record levels has had only a small negative impact on consumer sentiment (less so, PM Suga’s cabinet approval rating). After reaching a new high for the year last month, the Cabinet Office consumer confidence index declined just 0.8pts to 36.7 in August, which remains well above the pandemic low of just 21.3 and only a couple of points weaker than the average in the year leading up to the pandemic. In the detail, respondents were more positive about employment and incomes but curiously less willing to buy durable goods. Notwithstanding the July employment report, the decline in sentiment was driven by a more pessimistic assessment of the outlook for employment, while respondents were also less upbeat about their overall livelihood. 

Japan’s housing starts rise 6.9%M/M in July to a 25-month high; construction orders soften in July but still trending higher
Completing today’s Japanese data, MILT reported housing starts and construction orders for July. Housing starts leapt 6.9%M/M in July to the highest reading since June 2019. As a result, starts were up 9.9%Y/Y, which was almost double the consensus estimate. Orders at Japan’s 50 largest construction companies declined 3.4%Y/Y in July, with a 6.4%Y/Y increase in private domestic orders offset by a 13.1%Y/Y decline in public sector orders. However, removing the substantial month-to-month volatility, over the past three months, total orders increased over 13%Y/Y, with both private and public orders posting solid rates of growth.

China’s official PMIs soften amidst rise in virus cases in August, with the non-manufacturing PMI plunging to an 18-month low
The focus in China today was on the results of the official manufacturing and non-manufacturing PMIs for August. Unfortunately, as expected, the news was again weaker from both the manufacturing and non-manufacturing sectors, reflecting the impact of recent virus outbreaks and associated restrictions on activity in parts of China and elsewhere in Asia. However, the decline in the non-manufacturing sector far surpassed expectations, pointing to a recent contraction in activity amidst measures to stamp out local virus cases (which so far appear to have been somewhat successful). This does not bode well for China’s August activity indicators, which will be released in about a fortnight, and perhaps explains why China’s policymakers appear more willing to add stimulus of late despite early concerns about stoking financial bubbles. 

Starting with the relatively good news, the closely-watched manufacturing PMI declined just 0.3pts to 50.1 in August. However, this outcome was still 0.1pts below the consensus expectation and the weakest result since February last year, when the PMI had plunged to 35.7. The entire decline this month owed to developments at large firms, for which the PMI fell 1.4pts to 50.3. By contrast, the PMIs for medium- and small-sized firms increased 1.2pts and 0.4pts to 51.2 and 48.2 respectively. In the detail, the output index fell just 0.1pts to 50.9, but the new orders index fell 1.3pts to an 18-month low of 49.6. Perhaps reflecting disruptions caused by the rise in virus cases elsewhere in Asia, the new export orders index fell a further 1.0pts to a 14-month low of 46.7. Supplier delivery times lengthened, pointing to continued bottlenecks affecting production. The survey also pointed to slightly lower inflation pressure, with the input prices index declining 1.6pts to 61.3 and the output prices index declining 0.4pts to 53.4 – both considerably below the average levels prevailing during the first half of this year.

Turning to the particularly bad news, conditions darkened materially in the non-manufacturing sector with the headline PMI plunging 5.8pts to a contractionary 47.5. This is the worst reading since February last year, when the index hit a record low of just 29.6. The new orders index fell an even larger 7.5pts to an 18-month low of 42.2 and the business activity expectations index fell 3.3pt to a 17-month low of 57.4 (now below the average reading over the past decade). Unsurprisingly, the weakening seen in activity has weighed on the pricing indicators, with the input prices index falling 2.0pts to 51.5 and the output prices falling 2.0pts to an 11-month low of 49.3.

Euro area inflation to jump further to a 9-year high; German labour market data also due
Focus in the euro area today will principally be on the euro area’s flash CPI estimates for August. These are bound to show that the headline inflation rate took a further sizeable step up this month, probably by 0.5ppt to 2.7%Y/Y, which would be the highest since March 2012. This will principally reflect pandemic-related base effects, including those related to the timing of summer sales and Germany’s VAT cut. So, having fallen to just 0.7%Y/Y in July, core inflation will also have jumped in August, to around 1.4%Y/Y, which would be the strongest for six years.

Certainly, the upwards impulse from Germany was evident in yesterday’s figures, which as expected saw the headline HICP rate rise 0.3ppt to 3.4%Y/Y, matching the peak rate hit in mid-2008, while the national measure saw headline CPI rise 0.1ppt to 3.9%Y/Y, the highest since 1992. Within the detail on the national measure, energy inflation maintained an upwards trend, rising 1ppt to 12.6%Y/Y, the firmest for thirteen years. Having taken a step up in July on the back of base effects, non-energy goods inflation was up a more modest 0.1ppt to 4.3%Y/Y, nevertheless still a series high, while services inflation (excluding rents) was up 0.4ppt to 3.2%Y/Y, the highest since September 2007.

Meanwhile, there was an upwards surprise to the Spanish HICP and national headline rates this month, both rising 0.4ppt to 3.3%Y/Y, the strongest since 2012. But the INE statistical office suggested that much of the upwards price pressures were driven by electricity prices. Indeed, on the national measure, core inflation was estimated to have risen just 0.1ppt to 0.7%Y/Y in August. We will shortly see French and Italian inflation releases, which are likely to report a notable jump in clothing inflation due to base effects related to the timing of summer sales. Against this backdrop, ECB Chief Economist will deliver the opening remarks at an OECD event on ‘Will inflation expectations remain anchored’ this afternoon.

This morning will also bring German labour market figures for August, which are expected to report a further notable decline in jobless claims for the fourth consecutive month, to leave the unemployment claims rate down 0.1ppt to 5.6%, the lowest since March 2020, but still 0.6ppt above the pre-pandemic level. Updated Q2 GDP figures from France and Italy and French consumer spending numbers for July will be published shortly. 

UK business barometer suggests improved sentiment; bank lending data to come
With UK financial markets reopening today after yesterday’s public holiday, and the Lloyds business barometer overnight contrasting with last week’s flash PMIs to suggest an improvement in sentiment in August to a four-year high despite reports of more acute skill shortages, today will bring the BoE’s lending data for July. In June, the amount of secured loans rose a whopping £17.9bn, compared with an average £5.3bn in the twelve months leading up to the Covid outbreak, as home buyers rushed to take full advantage of the government’s stamp duty tax holiday. With this having started to taper last month, we expect to see a notable slowdown in mortgage lending. Meanwhile, with restrictions having continued to ease, we might well see a pickup in consumer credit, which in June remained relatively subdued to be still more than 2% lower than a year earlier

Conference Board consumer survey and Chicago PMI the main focus in the US today
As far as economic data is concerned, most interest in the US today will centre on the Conference Board’s consumer confidence and Chicago PMI readings for August. In light of the slump recorded in the University of Michigan’s measure of consumer sentiment, Daiwa America’s Mike Moran expects about a 4pt easing in the Conference Board’s headline index reflecting growing concerns about rising virus cases and high inflation. Ahead of tomorrow’s ISM manufacturing survey, investors will pay attention to the magnitude of a likely decline in the Chicago PMI, especially with yesterday’s Dallas Fed manufacturing survey mimicking the marked softening seen in the earlier New York and Richmond Fed surveys. The S&P/CoreLogic and FHFA house price indexes for June complete today’s data flow.

Final Aussie partial indicators point to only modest growth in GDP in Q2
The countdown to tomorrow’s release of the national accounts for Q2 continued today with the ABS releasing volume data on external trade and government spending. The former report revealed a A$1.5bn widening of the seasonally-adjusted current account surplus to a record A$20.5bn in Q2, with the goods and services surplus widening an even greater A$3.5bn to A$28.9bn. However, the volume data indicated that merchandise exports declined 3.6%Q/Q, with the 6.6%Q/Q increase in values driven solely by higher prices. The volume of imported goods increased 1.8%Q/Q. In the absence of significant revisions, the ABS notes that net exports have made a 1.0ppt negative contribution to GDP growth in Q2 – the fourth consecutive subtraction and in line with the consensus estimate in Bloomberg’s survey of than analysts. In contrast, the ABS reported that the government sector remained a direct source of GDP growth in Q2. Real general government consumption spending increased a further 1.3%Q/Q, which will make a positive contribution of 0.4ppts to GDP growth. In addition, total real public investment spending increased by a strong 7.4%Q/Q, which will contribute a further 0.3ppts to GDP growth.

All up, given the indicators released over the past two days, tomorrow’s national accounts appear likely to reveal a modest lift in GDP of less than the 0.5%Q/Q that analysts had expected at the beginning of the week, which would be below the estimate made by the RBA in last month’s Statement on Monetary Policy. Growth in nominal GDP and real incomes will be much firmer however, reflecting the impact of sharply rising commodity prices on Australia’s terms of trade. Of course, in light of the ongoing virus outbreak, especially in New South Wales, the RBA’s Board will have much bigger issues to consider when it meets to review policy settings next week, with whatever growth that has occurred in Q2 certain to be unwound at least temporarily in the present quarter.

Australian dwelling approvals decline to 9-month low in July; private sector credit growth increases to 27-month high as businesses seek credit
Turning to the rest of today’s Aussie data, the number of dwelling consents fell a steeper than expected 8.6%M/M in July – the fourth consecutive decline following a steep increase during Q1. While approvals were still up 21.5%Y/Y, the July reading was the lowest since October last year. Of the major states, only Queensland reported higher approvals this month, and this follows a significant slump over the previous two months. Despite the lockdown, the 9.9%M/M decline in approvals in New South Wales was only slightly worse than the national average. Approvals for private houses – which had hit a record high in April – declined a further 5.8%M/M but were still up 28.0%Y/Y. Approvals for multi-unit dwellings fell 12.3%M/M and grew just 12.4%Y/Y. In value terms, approvals for non-residential buildings – which are very volatile – slumped more than 30%M/M in July and so were down 7.2%Y/Y. As a result, the value of approvals for all classes of buildings fell almost 16%M/M and yet remained up almost 16%Y/Y.

Meanwhile, private sector credit grew 0.7%M/M in July – above market expectations – lifting annual growth to a 27-month high of 4.0%Y/Y. As was the case last month, growth was driven by the business sector, likely at least partly reflecting the reopening of credit lines in the face of the current virus outbreak. After increasing 1.6%M/M last month, business credit increased a further 1.1%M/M in July, lifting annual growth to 2.4%Y/Y from just 0.6%Y/Y previously. Housing-related credit grew 0.6%M/M, which was less than last month but still sufficient to lift annual growth to a more than three-year high of 5.8%Y/Y. That growth owed mostly to a further 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. Likely reflecting the impact of lockdowns during the month, other personal loans declined 1.0%M/M – the most since September last year – and so were down 5.9%Y/Y.

Finally, despite the ongoing lockdown in New South Wales, Victoria and Canberra, the ANZ-Roy Morgan consumer confidence index edged up 0.2% last week to a four-week high of 101.8 – still around 10pts below where the index had stood prior to the Sydney lockdown. Respondents were significantly more positive about the near-term economic outlook, yet less positive about recent changes in their financial situation and about the longer-term outlook for the economy.

Kiwi business sentiment eases slightly in August, albeit surveyed mostly pre-lockdown; dwelling approvals increase to new record high in July
The key focus in New Zealand today was the ANZ’s Business Outlook survey for August. The ANZ note that only around 25% of responses were received after the beginning of the recent virus outbreak and associated national lockdown, although it appears that pre-lockdown responses were already a little softer – this possibly reflecting concern about developments in Australia. Unsurprisingly, the headline general business confidence index bore the brunt, declining more than 10pts to a 10-month low of -14.2. Somewhat encouraging, the activity expectations index – which has the best correlation with GDP growth – fell a smaller 7pts to a still decent 19.2, with even smaller declines in firms’ employment and investment intentions, which remain well above long-term average levels. On the pricing front, firms’ one-year ahead expectation of annual inflation increased by a substantial 0.35ppts to 3.05% – the first time in a decade that this expectation has been above the RBNZ’s 1-3% target range. 

In other news, Statistics New Zealand reported that the number of new dwelling approvals increased by a further 2.1%M/M in July. This marks a new record high, with approvals also up more than 24%Y/Y in response to the tremendous growth in existing house prices over the past year.  The value of non-residential building approvals also increased over 14%Y/Y, and so that the total value of all construction approvals grew just over 21%Y/Y. So while construction activity is presently being curtailed by strict lockdown conditions in the Auckland region, the near-term outlook for this sector still appears very bright.

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