Japan's composite PMI weakens to a one-year low

Emily Nicol

Markets re-open in a positive mood following Friday’s gains on Wall Street; Yellen reported to favour reappointing Fed Chair Powell, whose speech to Jackson Hole will be the focus this week
Wall Street pared much of its midweek decline on Friday, with the S&P500 advancing 0.8% amidst broad-based gains on a day devoid of significant economic data. While the Dallas Fed’s Kaplan indicated that he was open to altering his relatively hawkish view on QE tapering if delta-variant cases impede the economic recovery, the lift in sentiment saw Treasury yields reverse most of the prior day’s losses with the 10Y yield closing the week at just under 1.26%, while the greenback was little changed. The more positive tone in US markets has continued today with equity futures reopening several tenths higher and Treasury yields nudging higher too. This may reflect a Bloomberg report, citing people familiar with the matter, which claims that Treasury Secretary Yellen favours reappointing the relatively dovish Fed Chair Powell, whose current term expires in February. Of course, Powell will outline his view of how the economy might evolve during a second term when he addresses the (now online) Jackson Hole Symposium at the end of the week (more on this below).

Against this backdrop, coming off the back of a very soft end to the week on Friday, bourses in the Asia-Pacific region have generally rebounded strongly today, notwithstanding some softer data and associated worrying virus news. In Japan, follow two days of decline, the TOPIX has rebounded 1.8%, shrugging off a decline in the composite PMI output index to a one-year low in August (more details on this below). Unfortunately for PM Suga, the worsening pandemic outbreak in Japan – with over 22,000 new cases reported on Sunday – is doing his re-election hopes no favours, with his LDP candidate losing the weekend’s Yokohama City mayoral election and an ANN survey showing that his government’s approval rating had fallen to less than 26%. Stocks have also firmed similarly in Hong Kong and by more than 1% in China, with both markets recovering from material losses last week. Mainland China reported no local coronavirus cases today, suggesting that mass testing and lockdowns may have stamped out the recent outbreak, at least for now. South Korea’s KOSPI, which had traded lower in ten of the previous eleven sessions, has increased 1%, but stocks are little changed in Singapore.

In the Antipodes, given the positive backdrop, Australia’s ASX200 – which last week fell every day – has made modest gains today, even following weaker flash August PMI readings. AGCB bond yields also edged higher in line with the move in USTs, even with New South Wales reporting more than 800 new cases for a third consecutive day (the number of new cases in Victoria increased to a new high of 71, while 16 new cases were recorded in Canberra). Meanwhile, in New Zealand the delta outbreak has increased by a further 35 cases today, bringing the total to 107 cases. This has prompted the Government to announce that strict maximum level 4 lockdown conditions will continue until at least the end of the month in Auckland and until at least Friday across the remainder of the country.

Japan’s composite PMI sinks to one-year low as service sector weakness deepens; nationwide department store sales rise 4.2%Y/Y in July
In contrast to the surprisingly positive picture suggested by last week’s Reuters Tankan survey, today’s flash PMI reports for August pointed to a slowdown in activity, led mainly by a predictable weakening in the service sector amidst expanding restrictions on activity. Of particular note, the composite PMI output index fell 2.9pts to a one-year low of 45.9. While there has been a recent tendency for the flash PMI readings to be revised higher when the final estimates are released, with there being little prospect of Japan easing restrictions in the near term, today’s outcome suggests that the surprising lift in activity in Q2 may not be replicated in Q3.

In the detail, the headline services index – the business activity index – fell 3.9pts to 43.5, which marks the lowest level since the extreme decline to 26.5 in May last year. The new orders index declined a similar 4.1pts to reach a corresponding 15-month of 44.4, while the outstanding business index fell 3.7pts to a seven-month low of 45.6. The business expectations index fell 3.5pts to an 11-month low of 53.5 yet, curiously, the employment index increased 1.1pts to 50.9. On the pricing front, while the input prices index was steady at 53.8, the output prices index declined 2.1pts to a 13-month low of 48.4.

As in previous months, the manufacturing PMI continued to display resilience in August, pointing to an ongoing – albeit slightly slower – expansion in activity. The headline manufacturing PMI fell just 0.6pt to 52.4, thus returning to where it had stood in June, with the output index down a similar 0.8pt to 51.1. A greater note of caution was sounded by the new orders index, which fell 1.6pts to a seven-month low of 51.3, and the new export orders index, which fell 1.7pts to a seven-month low of 50.5. Meanwhile, supply bottlenecks appeared to intensify, with the supplier deliveries index declining to a 16-month low of 40.2. As in the service sector, the employment index recorded an against-trend increase of 0.3pt to 51.5. Meanwhile, after hitting a near 13-year high last month, the input prices index fell a sharp 4.5pts to 62.3. However, the output prices index increased 0.5pt to 53.8 – the highest reading since October 2018.

In today’s other news, Japan’s national department store sales increased 4.2%Y/Y in July following a 1.6%Y/Y decline in June. However, growth continues to be exaggerated by base effects, as the level of sales in July this year was still over 19% lower than in July 2019. In the detail, spending on personal accessories increased 7.8%Y/Y in July and spending on sundries increased 10.6%Y/Y (the latter driven by art, jewellery and precious metals). However, sales of household goods fell 3.9%Y/Y, driven by a 19.4%Y/Y decline in spending on home electronics following a comparatively robust reading in July last year.

Inflation data the focus in a quiet week for data in Japan
Looking ahead to the remainder of the week, the Japanese economic diary is very sparse with focus being on inflation. Tomorrow the BoJ will publish its underlying inflation measures for July, with measures such as the trimmed mean and weighted mean much less impacted by the influence of extreme price movements – such as recent changes in mobile phone call charges – than the regularly reported core inflation indicators. The BoJ will report its services PPI for July on Thursday, while the week will conclude with the MIC releasing advancing August CPI data for the Tokyo area.

A very quiet week ahead in China
There were no economic reports in China today and the remainder of this week should be similarly quiet with Friday’s industrial profit report for July the only diary entry of passing note. This will leave investors awaiting direction from the release of the official PMI surveys for August, which is scheduled for a week on Tuesday.

Euro area flash PMIs kick off a survey dominated calendar; ECB account due on Thursday
A week dominated by August sentiment surveys kicks this morning with the flash PMIs from the euro area, Germany and France. These are expected to report that confidence remained high this month, while also hinting that growth momentum has likely passed its peak. The flash euro area services activity PMI is expected to have moved broadly sideways (59.8), while the manufacturing PMI is expected to have edged down from July (62.8) as the sector continues to be impacted by supply bottlenecks. Overall, the euro area composite output PMI is expected to fall 0.6pt to 59.6, from the fifteen-year high reached in July. This afternoon will also bring the Commission’s flash consumer confidence indicator, which is expected to have moved broadly sideways.

Meanwhile, Germany’s ifo survey for August on Wednesday is expected to reveal that firms’ assessment of current conditions remain favourable, although a modest deterioration in expectations for the coming six months will likely see the headline business climate index edge lower for the second successive month. National business confidence releases from France and Italy will be published on Thursday and Friday respectively, while the latest consumer confidence surveys are also due – Germany’s GfK indicator on Thursday, followed by the French and Italian reports on Friday. In terms of hard economic data, tomorrow brings the second estimate of German Q2 GDP data, which will include the expenditure breakdown for the first time. This is expected to reveal that growth of 1.5%Q/Q mainly due to higher household and government consumption expenditure. Euro area bank lending figures for July will be published on Thursday.

Beyond the economic data, Thursday will bring 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 to align it with the findings of its strategic policy review. But the meeting saw the ECB’s forward guidance on asset purchases unchanged. And so the account will be watched closely for any hints that the Governing Council might become more aggressive on its guidance with respect to asset purchases in due course, or an indication into the pace of buying in the final quarter of the year. Thursday will also see ECB Executive Board member Schnabel participate in an economist roundtable on the ECB’s strategy review.

UK flash PMIs set to point to slight moderation in pace of recovery
The UK releases this week will be focused on sentiment surveys for August, including the preliminary PMIs today. These should remain consistent with firm growth this month, albeit with some further levelling off in business optimism. In particular, the composite PMI is expected to fall 0.5pt to 58.7, which would be a five-month low, with supply bottlenecks continuing to weigh on activity in the manufacturing sector in particular. This outlook is expected to align with the CBI’s industrial trends survey – also due on Monday – while orders are expected to have remained elevated. And the impact of ongoing supply shortages – particularly of global semi-conductors – will likely be evident in Thursday’s release of SMMT car production figures for July. Meanwhile, the CBI’s distributive trades survey on Wednesday might point to a further moderation in retail sales growth in the middle of the third quarter.

Fed Chair Powell’s speech to virtual Jackson Hole symposium the key focus this week; a number of key economic reports due too
Without a doubt, the key focus for investors in the US – and elsewhere – this week will be Fed Chair Powell’s speech on the economic outlook to the Kansas City Fed’s Jackson Hole symposium, scheduled for Friday morning. That said, given rising uncertainty created by the increasing number of delta-variant virus cases, we think that the likelihood of Powell announcing definitive new guidance regarding the Fed’s policy intentions, especially as regards the QE taper, is now relatively low. Indeed, indicative of the changing environment, on Friday a rise in local virus cases forced organizers to move the event online, with Powell already announcing a day earlier that he would deliver his comments by webcast.

Ahead of the symposium, this week’s economic diary kicks off today with data on existing home sales for July, while the flash PMIs for August will also be of interest ahead of the release of the much more widely followed ISM surveys. Data on July new home sales will follow tomorrow, while on Wednesday the advance durable goods orders report for July will be of interest to see whether the uptrend in capex orders has been maintained. Thursday will bring the second release of GDP statistics for Q2, although as usual revisions to the first estimate – which pegged growth at 6.5%AR – are likely to be minor. The week will conclude on Friday with further clues on activity in the current quarter, including the July readings on personal spending, incomes, goods trade and retail and wholesale inventories. In addition, the personal spending report should also reveal a smaller increase in the core PCE deflator in July, although the consensus estimate of 0.3%M/M would likely still nudge annual inflation up 0.1ppts to 3.6%Y/Y (it was close to rounding up last month).

Australia’s composite PMI sinks further in August as lockdowns weigh; building and capex data to cast more light on Q2 GDP, while Friday’s retail sales report will highlight lockdown impact
The only economic news in Australia today were the flash Markit PMIs for August, which continued to point to a pandemic-induced contraction of activity in the current quarter. Indeed, after last month slumping 11.5pts in July due to a plunge in service sector activity, the composite PMI output index fell a further 1.7pts this month to a 15-month low of 43.5. In the detail, unsurprisingly, the service sector weakened further – clearly impacted by the lockdowns in New South Wales and Victoria. The headline services PMI – the business activity index – fell a further 0.9pt to a 15-month low of 43.3, even as the new orders index increased a meek 1.5pts to 43.1. The ongoing halt to activity also took its toll on the employment index, which fell 2.0pts to a 10-month low of 48.9. Perhaps more interesting, this month the virus outbreak has had a larger impact on the manufacturing sector, with the headline manufacturing PMI declining a steep 5.2pts to a 14-month low of 51.7. The output index slumped an even steeper 7.8pts to a 15-month low of 44.5, with the new orders index declining a similar 7.7pts to 46.8. Perhaps a little surprisingly, the new export orders index increased 1.5pts to 50.7, but the employment index still fell 2.7pts to a six-month low of 52.6. On the pricing front, in the services sector the output prices index increased 1.8pts to 54.9, whereas the equivalent index in the manufacturing sector slumped 5.4pts to a 14-month low of 49.1.

Looking ahead to the remainder of this week, following tomorrow’s weekly consumer sentiment report, Wednesday’s Construction Work Done report is likely to point to another hefty lift in activity in Q2, while Thursday’s Q2 CAPEX survey will likely suggest the same for plant and equipment spending. The latter survey will also outline firms’ capex intentions for this financial year and next. Base effects will mean that this year’s intentions will doubtless point to flattering Y/Y growth, but recent lockdowns mean that the usual lift in intentions seen since the Q2 survey will likely prove smaller than is typically the case. On Friday’s this week’s data flow concludes with the retail sales report for July – now published a few days earlier than in the past, but with some of the detail still to follow in a later release. With Sydney having endured a full month of lockdown and Melbourne moving back into lockdown after restrictions were eased in June, unsurprisingly Bloomberg’s survey reports that the consensus expects a sharp 2.5%M/M drop in spending in July.

Retail spending, consumer confidence and trade data ahead in New Zealand this week
The Kiwi dataflow kicks off tomorrow with the Q2 retail sales report, which consistent with other spending indicators is likely to point to another large increase in spending following a 2.5%Q/Q lift in volumes in Q1. The merchandise trade report for July will follow on Wednesday, while Friday’s ANZ consumer confidence reading for August will have predated the current virus outbreak and so likely depict a much higher level of sentiment than would be the case if the survey was in the field today.

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