Japanese consumer spending indicators mixed

Chris Scicluna

Equity markets firmer again in Japan and China today, with China’s trade data assuaging last week’s PMI worries
With US markets closed yesterday for the Labor Day holiday, markets in the Asia-Pacific region had to find their own direction today. In Japan, this simply meant a continuation of the equity market rally that has now stretched seven consecutive sessions. Indeed, with the TOPIX advancing a further 1.1% today, its climb since the recent 20 August low is now almost 10%. The local data flow was mixed, with the Monthly Labour Survey reporting a larger than expected lift in labour earnings in July, but indicators of consumer spending during that month were mixed. Of course, much of the focus in Japan remained on the race to replace PM Suga. On that score, former Defence Minister Shigeru Ishiba appeared to rule out his entry in a TV interview yesterday night, with his comments suggesting that he believed he would be unable to garner more support than the popular Taro Kono. Meanwhile, while declared candidate Fumio Kishida has called for a significant lift in fiscal stimulus, Finance Minister Aso told reporters today that Japan needed to balance the drive for economic recovery with fiscal discipline, else risk investor doubts about the sustainability of Japan’s finances that might trigger a sharply weaker yen and high inflation. Indeed, optimistically, Aso added that it would be good if the new PM could boost revenue and restrain spending.

Turning elsewhere, after gaining almost 2% yesterday, the CSI300 has advanced a further 1.4% today with China’s export and import growth in August easily surpassing consensus expectations, and thus quelling some of the worries prompted by last week’s PMI reports. Stocks have made further solid gains in Hong Kong, but bourses elsewhere in Asia have been somewhat mixed today with moderate losses seen in South Korea and Taiwan and little change in Singapore. Stocks were also little changed in Australia, where the RBA surprised the majority of local economists by sticking with its decision to taper its assets purchases this month. However, the potential disappointment for bond investors was mitigated by the Board’s decision to commit to the weekly new purchase rate of $4bn until mid-February – three months longer than previously. As a result, while the yield on 10Y USTs has nudged up to 1.34% in Asian trading, the 10Y AGCB is little changed today. And while the Aussie dollar initially rallied as the taper-continuance news hit the headlines, it has fallen to pre-RBA levels since. Meanwhile, the Kiwi 10Y bond yield inched closer to 2% with another low day for new virus cases consolidating opinion that the RBNZ will begin its tightening cycle next month after pulling its planned August hike at the last minute.

Japanese consumer spending indicators mixed in July
While state of emergency conditions began to be restored across much of Japan in July, today’s consumer spending indicators painted a somewhat mixed picture of activity during the month. The BoJ’s Consumption Activity Index, which is second only to the Cabinet Office’s synthetic consumption index as the most reliable indicator of the national accounts based measure of private consumption, pointed to a further 0.5%M/M lift in real spending in July following an upwardly revised 3.0%M/M increase in June. In the detail, spending on durable goods declined a further 1.8%M/M following a 4.7%M/M decline in May. However, after declining over the previous two months, spending on non-durable goods increased 4.7%M/M. Spending on services, which had fallen 5.5%M/M in May, followed a 2.7%M/M lift in June with a further 3.3%M/M increase in July. However, spending on durable goods fell 3.4%M/M and spending on non-durable goods fell 1.6%M/M. Given today’s result, spending in July is sitting 1.3% above the average through Q2. That said, unusually the BoJ’s measure significantly understated growth in spending in Q2, at least as current represented in the national accounts. As a result, we are treating this finding cautiously, especially as August spending will doubtless have been impacted more materially by the delta virus outbreak.

Another take on consumer spending data came from the MIC’s monthly survey of household spending and incomes for July – data that generally does a much worse job of closely tracking the national accounts measure of private consumption. According to the survey, real household spending in two-or-more person households declined a further 0.9%M/M in July. This marks the third consecutive decline since April, with the cumulative decline in spending now standing a little over 6%. Of course, given favourable base effects associated with the onset of the pandemic, spending in July still increased 0.7%Y/Y but this was much weaker than the 2.4%Y/Y lift that the consensus had expected. The MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, declined an even larger 1.4%M/M in July and so was down 0.5%Y/Y. This measure now sits more than 2.5% below its Q2 average, although in contrast to the BoJ’s measure it significantly overstated the lift in consumer spending in that quarter. Finally, the survey also reported a 3.7%Y/Y decline in workers’ real household disposable income in July – a result that reflects the absence of government support payments that had boosted incomes by over 11%Y/Y in July last year.

Japan’s total labour cash earnings increase 1.0%Y/Y in July, above expectations
Today also saw the MHLW release the preliminary Monthly Labour Survey for July, which in common with last week’s household employment survey mostly cast the labour market in a more positive light than analysts had expected. After declining 1.5%Y/Y in July last year, total labour cash earnings (per employee) rebounded 1.0%Y/Y – up from just 0.1%Y/Y last month and 0.6ppts firmer than the consensus estimate (the latter forecast perhaps made cautiously after earnings had disappointed in June). Contracted earnings increased 1.2%Y/Y – the same pace of growth as last month – largely thanks to a 12.2%Y/Y rebound in overtime earnings following a 17.2%Y/Y slump a year earlier. The increase in overtime earnings reflects the recovery in overtime hours worked, which increased by a further 2.7%M/M in July to be up 11.4%Y/Y. Regular earnings increased just 0.4%Y/Y, albeit up 0.2ppts compared with last month. Meanwhile, bonus earnings increased 0.8%Y/Y following a 1.8%Y/Y decline in June. After accounting for inflation, real wages increased 0.7%Y/Y.

Elsewhere in the survey, despite the aforementioned increase in overtime hours, total hours worked declined a seasonally-adjusted 0.4%M/M in July, which in combination with base effects caused annual growth to slow to just 0.1%Y/Y. Perhaps not surprisingly, the small decline in July was driven by the services sector, as hours worked in the manufacturing sector increased 2.3%M/M and 4.5%Y/Y. That said, while regular employment increased 0.2%M/M in July – the first increase since April – employment in the manufacturing sector fell 0.2%M/M and 1.4%Y/Y i.e. growth in manufacturing output appears to have been achieved by working fewer employees for longer hours. By contrast, reflecting demand created by the pandemic, employment in the medical, healthcare and welfare sector increased a robust 2.9%Y/Y, and yet labour cash earnings for this group of employees declined 2.1%Y/Y. Finally, according to the preliminary breakdown – which is often revised substantially – growth in the number of full-time employees slowed 0.2ppts to 1.0%Y/Y in July. Growth in the number of part-time employees was steady at a comparatively robust 2.4%Y/Y, but this following a 1.4%Y/Y decline a year earlier.

Japan’s coincident and leading indexes weaken only slightly in July
In today’s other Japanese news, the Cabinet Office released its preliminary business indicators for July. Following a small upward revision to June, the coincident index declined just 0.1pts to 94.5, and so an “improving” assessment was pronounced for a fifth consecutive month. Meanwhile, the leading index declined 0.5pts to 104.1, but this also merely reversed an upward revision to the June reading to the highest level since February 2014.

China’s export and import growth unexpectedly gathers pace in August
The focus in China today was on the release of its international trade report for August, with investors looking for further insight into the breadth of the slowdown that was indicated by last week’s disappointing PMI reports. In that regard, today’s figures confirmed that the slowdown was likely confined to the domestic demand, especially in the services sector which was most exposed to the impact of the local virus outbreak and associated curbs on activity. Indeed both growth in exports and imports increased in August, which contrasted sharply with market expectations.

Turning to the detail, in dollar terms, exports grew 25.6%Y/Y in August, up from 19.3%Y/Y in July – a result that was more than 8ppts firmer than the consensus expectation (given the strengthening of the yuan over the past year, exports grew 15.7%Y/Y in local currency terms). Moreover, exports in August were almost 37% higher than in August 2019 – clearly a very strong performance considering the impact of the pandemic on the global economy. By destination, exports to the US increased 15.5%Y/Y in August, which was up slightly from the 12-month low of just 13.4%Y/Y reported in July. Exports to the EU grew 29.4%Y/Y, which was up from 17.2%Y/Y last month and the fastest pace since March. Growth in exports to ASEAN countries picked up slightly to 16.6%Y/Y, while growth in exports to Japan increased to 19.5%Y/Y from 12.6%Y/Y in July.

Meanwhile, growth in imports increased to 33.1%Y/Y from 28.1%Y/Y in July – also more than 6ppts above the consensus expectation. The level of imports in July was also just over 31% higher than in August 2019. Robust growth rates continued to owe in large part to the rebound in commodity prices, with imports of crude oil and iron ore both around double that seen a year earlier. By country of origin, imports from the US grew 33.3%Y/Y. Even so, coming off a smaller base than that for exports, China’s bilateral surplus with the US widened to a record high of $37.7bn – an outcome that will not impress the Biden administration. This more than accounted for the widening in China’s overall surplus to $58.3bn from $56.6bn in July. China’s imports from the EU increased 12.4%Y/Y, which was down from 19.8%Y/Y in July. Imports from ASEAN nations grew at a broadly steady pace of 26.6%Y/Y while growth in imports from Japan picked up to 17.6%Y/Y from 12.8%Y/Y in July. Meanwhile, despite the fractious political relationship, imports from Australia more than doubled in August – clearly a reflection of the aforementioned commodity price gains – resulting in a bilateral deficit with Australia of $26.9bn.

German IP in July reverses drop in June but remains well down on the pre-pandemic level as autos output grows for first time this year
As foreshadowed by yesterday’s turnover data, following three successive monthly declines, German industrial production returned to growth in July, rising 1.0%M/M to reverse the drop in June. That left IP up 5.7%Y/Y but still down 5.5% from the pre-pandemic level in February 2020. Within the detail, output of capital goods rose 3.2%M/M with production of machinery up 6.9%M/M and motor vehicles rising for the first time this year (up 1.9%M/M). However, that still left autos output down some 23% from the end of 2020 and 28% below the pre-pandemic level. Among other components, production of consumer goods rose 0.9%M/M but – still weighed by supply bottlenecks – output of intermediate goods dropped 0.5%M/M. Beyond manufacturing, energy production fell for a third successive month, dropping 3.2%M/M to the lowest level in a year. But construction rose for the first time since March, up 1.1%M/M albeit still 1.1% below the pre-pandemic level.

Expenditure breakdown of euro area Q2 GDP to show that consumption led rebound, ZEW investor survey likely to show further moderation of optimism in the outlook
This morning will bring updated euro area GDP figures for Q2, which will provide the first expenditure breakdown. The data are expected to confirm growth of 2.0%Q/Q and report that the rebound was driven principally by household expenditure as Covid restrictions were gradually eased throughout the quarter. Fixed investment is also likely to have provided a positive contribution, while net trade remained a modest drag. Today will also bring revised euro area employment numbers for Q2, which should confirm that the increase (0.5%Q/Q, 760k) was underpinned by jobs growth in the services sector. Also due shortly is the September German ZEW survey, which is expected to reveal an improvement in investor perceptions of current economic conditions but a further deterioration in the expectations balance for a fourth successive month.

BRC survey signals UK retail sales slowdown in August
Ahead of today’s UK government announcement of reforms to social care – which will see PM Johnson breach his election pledge not to raise income tax or national insurance contributions – the latest BRC survey signalled a slowdown in retail sales in August. In particular, despite stronger spending on clothes as more workers returned to the office, the survey measure of total sales slowed 3.4ppts to 3.0%Y/Y, the softest since February. And the survey measure of like-for-like sales growth slowed 3.2ppts to 1.5%Y/Y, the weakest since the initial pandemic drop in March last year. Of course, as in other major economies, the moderation in spending on goods in the UK is likely to have been matched by increased spending on services.

RBA leaves cash rate and 3Y bond targets at 0.1% as expected; QE taper to proceed as planned but the Board extends its purchase commitment by three months
The focus in Australia today has been on the outcome of the RBA’s Board meeting, with the market somewhat divided on whether the Bank would respond to the deterioration in the near-term economic outlook as a result of the prolonged virus outbreaks in major states of New South Wales and Victoria.

As was expected, the RBA has left all dimensions of its main monetary policy settings unchanged. This includes the 0.1% cash rate, the 0.1% target for the April ’24 bond and the parameters of the Term Funding Facility. Surprisingly to 10 of the 16 economists surveyed in Bloomberg’s poll, the Bank reaffirmed last month’s decision to begin tapering its asset purchases to $A4bn per week from this month, as the Board had agreed at its July meeting. However, recognising that Australia’s virus has interrupted the recovery, the Board did announce that it had decided to continue this purchase rate until “at least mid-February” – a three extension to the previous commitment to purchase at this rate until at least mid-November. As was the case last month, the post-meeting statement does note that the programme will continue to be reviewed in light of economic conditions and the health situation, and how this impacts the outlook for employment and inflation.

In part, the Bank’s decision to proceed with the taper surely reflects its view that the setback to the economic expansion is expected to be only temporary. In the Bank’s revised central scenario, in which vaccination rates increase further and restrictions are eased, the economy is forecast to resume growth in Q4 and be back around its pre-virus outbreak path in the second half of next year. Of course, following last month’s meeting, Governor Lowe had also expressed the quite reasonable view that deferring the taper would have little impact on economic conditions when it matters most (i.e. in the near term) and that fiscal policy was better placed to deliver the immediate support that impacted households and businesses require – an argument that had suggested a reasonably high hurdle to be cleared before the Board would backtrack on its previous decision.

As far as the longer-term outlook for monetary policy is concerned, there was no change in the Bank’s guidance. The Board reiterated that it will not increase the cash rate until actual inflation is sustainably within the 2-3% target range, which in the Bank’s central scenario will not occur before 2024.

In today’s other Aussie news, the ongoing lockdown in New South Wales, Victoria and Canberra weighed modestly on the ANZ-Roy Morgan consumer confidence index last week, which declined 1.8% to an even 100 – still above the recent low of 98.6 recorded earlier in the current virus outbreak and well above the pandemic low of just 65.3 recorded in March last year. In the detail, respondents were less positive about recent and prospective changes in their financial situation, and about conditions for buying major household items, but were slightly more positive about the longer-term outlook for the economy.

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