Japan records an unexpected trade deficit in August

Chris Scicluna
Emily Nicol

Wall Street rebounds but China-related worries weigh on much of Asia today
With industrial production in the US growing close to expectations in August and the NY Fed’s manufacturing survey rebounding nicely in September, Wall Street regained its mojo yesterday with industrials and materials stocks adding to a sharp rally in energy stocks thanks to a rebound in the price of crude oil. So the S&P500 advanced 0.85% to more than erase Monday’s loss, leading to a modest weakening in the Treasury market (the yield on the 10Y note increasing less than 2bps to just under 1.30%.

While US equity futures have declined fractionally since the close, the overnight performance would ordinarily have pointed to the likelihood of a positive day ahead in Asia. However, many of the major bourses have been weighed down by significant weakness in Chinese markets, with the Hang Seng down almost 2% today, taking its loss so far this week alone to over 6% and the index to its lowest level since November. Today’s decline reflects a continuation of the worries that have weighed in recent days. Stock in troubled developer China Evergrande slumped further after one its units was forced to temporarily suspend bond trading following a downgrade of its credit rating by a local rating agency. Meanwhile, the likes of Tencent Holdings also fell for a fourth day amidst reports that Chinese regulators are seeking to slow down video game releases to allow time for whether they meet the new stricter rules on content, amongst other things aimed at preventing addiction.

These worries have reverberated around most of the region, with China’s CSI300 down 1.0% and similar losses seen in Taiwan and South Korea. In Japan, the high-flying TOPIX has also declined for a second consecutive day, albeit closing with a relative modest loss of 0.3%. Japan’s domestic news included an unexpected trade deficit in August as exports grew less than expected while buoyant commodity prices pumped up imports (more on this below). In political news, Taro Kono –viewed as mostly likely to be the next PM by three-quarters of respondents to a Bloomberg poll of domestic economists released today – called for debate on how to address the country’s structural fiscal deficit. However, the aforementioned poll also found that the median respondent expects the new PM to announce a ¥30tn supplementary budget. Meanwhile, only one of 47 respondents said that they expected any meaningful change in monetary policy whoever becomes PM (which according to reports, will likely be confirmed officially by a vote in the Diet on 4 October following the LDP election on 29 September). This is consistent with the view of our colleagues in Tokyo and with remarks today by Kono who dismissed changing monetary policy during the pandemic.

In the Antipodes, Australia’s ASX200 has bucked the trend in Asia with a 0.5% advance, led by gains in the energy and industrials sectors. Aussie bond yields have also rebounded, with the 10Y AGCB lifting 4bps to 1.26% even as employment fell a greater-than-expected 146k in August due mostly to the lockdown in New South Wales. Kiwi bond yields also increased after the Q2 GDP growth printed at 2.8%Q/Q – quadruple the growth estimated by the RBNZ last month.

Japan records an unexpected trade deficit in August as commodity prices drive import growth that far exceeds growth in exports
On the data front, the focus in Japan today was the release of merchandise trade figures for August. In seasonally adjusted terms, after being broadly stable last month, Japan’s export receipts increased 0.8%M/M. But given the impact of dwindling base effects – exports had grown almost 9%M/M in August last year – annual growth slowed 26.2%Y/Y from 37.0%Y/Y previously – an outcome that was around 8ppt weaker than the consensus expectation. More meaningfully, the level of exports in August was about 12% above the pre-pandemic level seen back in February 2020. After increasing near 45%Y/Y last month, exports of transport equipment grew just 11.5%Y/Y in August and so contributed less than a tenth to the overall annual growth in exports. Exports of manufactured goods increased 43.6%Y/Y, while exports of machinery and electrical machinery increased 31.8%Y/Y and 17.1%Y/Y respectively, collectively explaining around 55% of the total growth in exports.

Meanwhile, after declining modestly in July for the first time in eight months, import values lifted by a robust 4.6%M/M in August. As a result, annual growth in imports picked up to 44.7%Y/Y from 28.5%Y/Y in July – an outcome that was nearly 5ppts above the consensus estimate. More than a third of that annual growth was due to a more than doubling of imports of mineral fuels, which was partly due to higher volumes but mostly due to higher prices (petroleum imports increased almost 116%, with volumes up nearly 23%Y/Y). Large contributions to growth were also made by a near 77%Y/Y rebound in imports of other raw materials – especially iron ore – and a 61%Y/Y rebound in imports of chemicals (including medical products), with growth also exaggerated by higher commodity prices. Imports of electrical machinery increased 23.9%Y/Y, while exports of other machinery increased just 18.9%Y/Y, combined explaining only around a seventh of the overall growth in imports over the period. With exports disappointing and imports exceeding expectations, Japan reported an unadjusted trade deficit of surplus of ¥635bn, compared with market expectations of close to a zero balance. The seasonally-adjusted deficit of ¥272bn was the largest since June last year.

As usual 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. Sadly, the BoJ’s estimates cast real exports in a weaker light, with volumes assessed to have declined 3.7%M/M in August to the lowest level since March. Given base effects, real exports were up 13.9%Y/Y, but were just 4% higher than in February 2020. More importantly for early Q3 GDP calculations, real exports over the first two months of this quarter are almost unchanged from the average monthly level in Q2. Meanwhile, the BoJ estimates that real imports increased 2.3%M/M in August, raising annual growth to 11.1%Y/Y. Even so, given a 2.7%M/M decline in July, real imports over the first two months of this quarter are running 1.6% below the average monthly level in Q2. However, if exports and imports remain at their August levels, net merchandise exports will be little changed over the quarter as a whole.

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 13.2%Y/Y, which was down from 19.5%Y/Y in July and follows a 20.1%Y/Y decline a year earlier. Exports to the EU increased 30.9%Y/Y, which was also slower than the 39.9%Y/Y growth reported in July and similarly insufficient to erase the previous year’s 27.5%Y/Y decline. Exports to Asia grew 11.1%Y/Y, dragged down by a mere 5.9%Y/Y increase in exports to China. However, exports to China had increased 7.7%Y/Y in August last year, whereas exports to Asia overall had declined 7.3%Y/Y.

Euro area new car registrations predictably weak, but export uptrend should have resumed
On a relatively quiet day for euro area economic releases, this morning’s new car registrations data were predictably downbeat. Tallying with the national figures from the largest member states, aggregate registrations in the region fell 21.8%Y/Y in August following a decline of 25.0%Y/Y in July, and were also down 35% compared with August 2019. And at just 507k units, the outturn last month was the lowest for any August since the series began in 1989. So, while sales volumes in the first eight months of the year (5.8mn) were up by 10.5%YTD/Y – reflecting not least the exceptionally low base at the onset of the pandemic – they were still down by 25.5% compared with the equivalent period in 2019. Of course, while some of this weakness likely reflects more moderate domestic demand as the delta variant spread across Europe, it also reflects ongoing supply constraints in the sector. So, as and when these ease, we should see a more pronounced recovery in autos sales and production. Despite ongoing supply bottlenecks impacting the manufacturing sector, July’s trade data – due later this morning – are expected to report that exports resumed an upwards trend at the start of the third quarter in line with the pickup in manufacturing production reported yesterday.

Retail sales the focus in the US today – softer auto sales expected to weigh
Following yesterday’s IP figures and NY Fed manufacturing survey, today the Philadelphia Fed’s manufacturing survey will cast further light on the factory sector. However, the greater focus will be on the consumer, with today also bringing the release of the retail sales report for August. Daiwa America’s Mike Moran expects a reduction in auto sales to deliver a 0.5%M/M decline in headline retail spending, while lower activity in the hospitality sector will probably also see ex-auto sales print marginally negative. Meanwhile, today’s diary also brings news on business inventories in July and the weekly jobless claims report.

Australian employment falls 146k in August due to virus outbreak, but unemployment rate unexpectedly falls to a near 13-year low as labour force participation falls
As far as data were concerned, the domestic focus in Australia today was on the labour market, with the ABS’s Labour Force survey casting light on the impact of the continued lockdown in New South Wales, new lockdowns in Victoria, Queensland and the ACT, and changes in restrictions in other parts of the country. The survey revealed a 146.3k decline in employment, which was more than 80k decline expected by the consensus but well within the very wide range of estimates captured by the survey. This equates to 1.1%M/M decline in employment, with a 4.2%M/M decline in New South Wales dominating the outcome. Employment actually increased 0.8%M/M in Victoria and 0.9%M/M in Western Australia, but fell 1.1%M/M in Queensland and 0.3%M/M in South Australia.

As to be expected, the decline in employment understates the likely impact on output, with many people forced to work reduced hours because of the lockdowns. Indeed, the total number of hours worked slumped 3.7%M/M in August, with hours worked in New South Wales falling by a further 6.5%M/M following a 7.0%M/M decline in July. Total hours worked in August was still 1.6% higher than a year earlier, but was 2.9% lower than in March 2020. Restrictions have had a disproportionate impact on part-time employment, which declined 78k in August and so was up just 0.6%Y/Y compared with 5.7%Y/Y in July. While full-time employment fell 68k, annual growth slowed on slightly to 4.3%Y/Y from 5.5%Y/Y previously.

The main surprise in today’s numbers concerned he unemployment rate. While the fall in employment was larger than the consensus had expected, the labour force participation rate also fell a larger than expected 0.8ppt to an 11-month low of 65.2%. As a result, rather than increase to 5% as the consensus had expected, the unemployment rate unexpectedly fell 0.1ppt to 4.5% – the lowest level since November 2008. The underemployment rate – which captures workers who would prefer longer hours – increased 1.0ppt to 9.3%, also it is notable that this is still 2.0ppt lower than was the case a year earlier. Given the momentum that was evident in the economy prior to the outbreak, this increase is likely to prove short-lived with the economy likely to rebound over coming months as the country’s accelerated vaccination progress begins to allow an easing of restrictions.

Kiwi GDP jumps 2.8%Q/Q in Q2 – far more than expected – as net exports surge
While the market had anticipated another robust quarter of growth in Q2, the growth revealed belatedly in today’s National Accounts far surpassed expectations. The favoured production-based measure of GDP jumped 2.8%Q/Q, compared with the consensus estimate of 1.1%Q/Q. Activity was also up 17.4%Y/Y – reflecting the impact of the national lockdown at the onset of the pandemic – and, more impressively, was 5.8% higher than in Q120 before the pandemic struck. The production measure pointed to an especially sharp lift in output in the primary sector (5.0%Q/Q), while the output of service industries (2.8%Q/Q) and goods industries (1.3%Q/Q) also grew strongly. The expenditure-based measure of GDP reported similar growth of 2.6%Q/Q. The sharp lift in primary sector production helped drive a sturdy 2.1%Q/Q lift in exports of goods. More impressively, the opening of the Trans-Tasman travel bubble – since suspended – led to a huge 65%Q/Q lift in exports of services, so that total exports grew a whopping 17%Q/Q. So with imports almost unchanged, net exports contributed more than 3ppts to growth during the quarter. By contrast, despite retail sales rising more than 3%Q/Q, overall private consumption declined 1.4%Q/Q, albeit remaining almost 20% higher than a year earlier. This was driven by a reduction in spending on services, which had risen 8% above pre-pandemic levels in the prior quarter. Residential investment grew 1.3%Q/Q (up almost 48%Y/Y), but business investment fell 3.0%Q/Q (still up almost 24%Y/Y). The decline in business investment was driven by a 6.7%Q/Q fall in spending on plant and machinery, which had increased almost 16%Q/Q in Q1. Thanks to a lift in the terms of trade, real gross national disposable income grew 3.2%Q/Q in Q2 and so is now 4% above the pre-pandemic high.

While today’s outcome was much stronger than the consensus had expected, it was even further above the RBNZ’s most recent estimate of 0.7%Q/Q – a result that, all else equal, would doubtless make the RBNZ even keener to beginning tightening policy settings than it was prior to the recent virus outbreak. Of course, the restrictions imposed to control that outbreak – still severely curbing activity for the third of the Kiwi population that lives in the Auckland region – mean that activity in the current quarter will likely slump 5%Q/Q or more. But if the outbreak is brought under control, as presently appears to be happening, and restrictions begin to ease in Auckland from next week, the prospect of a rapid rebound in activity in Q4 will likely encourage the RBNZ to begin the gradual lift in interest rate settings that it had planned to begin last month. In our view, this seems more likely to occur at the Bank’s November meeting, rather than at next month’s meeting, especially as the Tans-Tasman travel bubble is unlikely to restarted until at least the end of this year. However, after today’s data, the market is now pricing over 60bps of tightening across the two meetings.

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