Japanese firms expect improved conditions over the next six months

Chris Scicluna

Asian equity markets mostly a little weaker today after Friday’s Wall Street losses
The S&P500 continued its five-day losing streak on Friday, with the index declining a further 0.8% to bring its loss for the holiday-shortened week to 1.7%. The day’s US economic news featured a slightly larger than expected increase in the PPI, lifting annual inflation to 8.3%Y/Y in August. This was followed, albeit not immediately, by a steepening of the Treasury curve, with the 10Y bond yield rising by 4bps to 1.34% and so erasing the decline seen the previous day. The increase in bond yields lifted the greenback off its session lows.

US equity futures have re-opened a few tenths higher today. Nonetheless, given Friday’s decline on Wall Street, it has mostly been a soft start to the week in Asia. This is especially so in Hong Kong, with the Hang Seng presently down over 2%, with that market impacted by more headlines concerning moves by Chinese regulators (including reports that officials are seeking to break-up third-party payment platform Alipay). While stocks are also down almost 1% in Singapore, losses have been smaller elsewhere. And in Japan, the TOPIX eked out a rise of 0.1%, with sentiment perhaps supported by a more upbeat MoF Business Outlook Survey and news that the producer goods prices stabilised in August (see more below). In political news, following Friday’s formal confirmation that he will run to be the next LDP President, a new Nikkei/TV Tokyo poll provided encouragement for Taro Kono, who was identified as “the right person” by 27% of respondents, with Shigeru Ishiba – who may not stand – second on 17%. Trailing both of those were the only two declared candidates aside from Kono –Fumio Kishida and Sanae Takaichi, with just 14% and 7% respectively. Meanwhile, in a further personal blow to PM Suga, news of his impending departure saw the LDP party’s support rise 9pts to 48%.

In the Antipodes, ahead of an important week of sentiment and labour market data, together with a speech by RBA Governor Lowe, Australia’s ASX200 largely treaded water today while bond yields were pulled up by Friday’s sell-off in USTs. New South Wales reported a further 1,257 new virus cases while the upward trajectory continued in Victoria with 472 new cases reported. In New Zealand bond yields also increased, even as the PM announced that the strict lockdown in Auckland would continue until at least midnight Tuesday next week, with some restrictions on gathering also to remain in place across the rest of the country.

MoF survey suggests Japanese firms expect improved conditions over the next six months
A key focus in Japan today was the MoF’s Business Outlook Survey, which usually provides a good directional predictor of key indicators in the more widely-followed and comprehensive BoJ Tankan survey (the next instalment of which will be released on 1 October). In summary, encouragingly, the MoF survey was much more consistent with the positive outlook depicted by the most recent Reuters Tankan survey, rather than last week’s relatively downbeat Economy Watchers survey. While domestic economy conditions have clearly been challenging for non-manufacturers over recent months, on balance, large and medium-sized firms expect both domestic and overall conditions to improve over the next six months. As a result, the survey points to a marked lift in sales, profits and capex in FY21 as a whole, although the forecast regarding the latter was not quite as strong as in the prior survey.

Turning to the key figures, in net terms, just over 3% of large firms reported improved business conditions in Q3, with that view more prevalent amongst manufacturers than non-manufacturers (7% vs less than 2% respectively). A further improvement in conditions in international markets clearly provided a buffer against challenging conditions domestically. Indeed, on net just over 1% of large firms reported weaker domestic economic conditions in Q3, reflecting the weaker conditions faced by 4% of non-manufacturers (by contrast, almost 5% of manufacturers saw improved domestic conditions). As always, the experience of medium- and especially small-sized firms – less likely to be exposed to international trade – was significantly worse than that for larger firms. For example, a net 28% of small firms perceived a deterioration in domestic economic conditions in Q3, with a net 18% perceiving a deterioration in overall business conditions.

Given the extreme tightness of the labour market prior to the pandemic, and recent signs of an improvement in the labour market, a net 11% of large firms reported labour shortages in Q3 – up 2ppts from the last survey, with shortages remaining especially notable in the non-manufacturing sector. Looking ahead, on net almost 7% of large firms indicated that they expect business conditions to improve over each of the coming two quarters. A further improvement in global conditions appears to explain a larger part of the improvement in Q4, and so manufacturers had a more upbeat outlook than non-manufacturers for that quarter (10% vs 5% respectively). However, with just over 8% of large firms anticipating an improvement in domestic economic conditions in Q1 next year, overall optimism regarding business conditions in that quarter was slightly greater amongst non-manufacturers than manufacturers (7% vs 6% respectively). Given the positive overall outlook, firms anticipate that labour market conditions will remain relatively tight over the coming two quarters.

Elsewhere in the survey, respondents also provided their third estimate of expected growth in sales, profits and capex for FY21. Led by a predicted 6.9%Y/Y increase in the manufacturing sector, business sales are now forecast to increase 3.5%Y/Y – up 0.7ppts from the previous survey. As a result, ordinary profits are forecast to increase 11.2%Y/Y, which is up from the 6.8%Y/Y rebound predicted previously. Unsurprisingly, forecast profit growth was much higher for manufacturers than non-manufacturers (18.7%Y/Y vs 8.7%Y/Y respectively). Slightly disappointingly, despite the improved outlook for profits, firms slightly pared their forecast rebound in spending on plant and equipment and software to 6.6%Y/Y – down 0.8ppts from the prior survey – although the 10.6%Y/Y increase forecast in the manufacturing sector was only fractionally weaker than before.

Japan’s goods PPI steady in August, dropping annual inflation slightly to 5.5%Y/Y
Today’s other Japanese news concerned development in producer goods prices in August, which surprised to the downside for the first time since February. Indeed, after last month posting the largest monthly increase since 2008 (excluding changes in the consumption tax), the headline index was unchanged in August and so the annual PPI inflation rate nudged down 0.1ppt to 5.5%Y/Y. The PPI for manufactured goods was also steady, lowering annual inflation by 0.3ppts to 5.6%Y/Y. Lumber prices increased a further 5.2%M/M and so are now up over 40%Y/Y. However, the price of energy products fell 1.0%M/M – the first decline since November last year – which lowered the annual increase for these items to 31.5%Y/Y from almost 39%Y/Y previously. Prices for chemicals were also approximately stable following months of solid increases and the 0.9%M/M lift in the price of iron and steel was the smallest since March. As in previous months, price increase were dominated by imported products, which increased 1.8%M/M in August – albeit the smallest increase since last November – so over 29%Y/Y. Prices for domestic products were unchanged in August but still up 5.5%Y/Y, with the annual lift in prices by dominated by raw and intermediate materials. Final consumer goods prices fell 0.2%M/M in August – including 0.3%M/M for domestically produced goods – and so annual inflation for these items declined 0.4ppts to 3.0%Y/Y. Of course, goods prices at the CPI level are inflating at nowhere near that rate, with retailers either unable or unwilling to pass on the rise in input costs, at least at present.

Trade, services, capex and sentiment indicators still to come in Japan this week
There are a number of economic reports ahead in Japan over the remainder of the week. Tomorrow will bring the final release of IP data for July, with the preliminary report indicating a 1.5%M/M decline in output that was smaller than the consensus had anticipated. Wednesday’s Tertiary Industry Index will deliver news on service sector activity for July, which will likely report modest growth following a strong rebound in June. Also on Wednesday, the machinery orders report for July will cast light on whether the capex recovery has continued and the Reuters Tankan for September will provide a further indication of business sentiment. The last key release of the week is Thursday’s merchandise trade report for August, with base effects likely to drive a decline in annual growth in expects (exports grew almost 6%M/M in August last year) and also to an increase in annual growth in imports (imports fell almost 2%M/M in August last year).

China’s credit growth firms in August but weaker than a year earlier; domestic activity indicators the key focus this week
There were no economic reports of note in China today. However, it is worth noting that late on Friday the PBoC released credit and money growth data for August, which reported a lift in credit creation. After increasing just CNY1.06trn in July, aggregate financing grew CNY2.96trn in August – a little above the consensus expectation. However, this was still slower than the CNY3.59trn reported in August last year, and so annual growth in the total stock of aggregate financing declined 0.4ppts to 10.3%Y/Y – the slowest growth since December 2018. Bank lending grew at a slower pace of CNY1.22trn, which was also slightly less than market expectations and slightly lower than in August last year, so annual growth in the stock of bank loans edged down to 12.2%Y/Y. However, perhaps signalling fiscal intentions, government bond financing picked up substantially to CNY0.97trn from just CNY0.18trn in July. With regard to the monetary aggregates, growth in M1 eased a further 0.7ppt to a lower than expected 4.2%Y/Y, while growth in M2 also eased an unexpected 0.1ppt to 8.2%Y/Y – perhaps a bit slower than the PBoC would like to see given its target for nominal GDP growth.

Looking ahead, all of this week’s key economic data in China falls on Wednesday, with the NBS set to release its key domestic activity indicators for August. With last week’s export data surprising to the upside, but recent PMI data surprising to the downside, understandably analysts have concluded that this week’s data will point to weaker domestic spending momentum due to the impact of the local virus outbreak that began in late July and which led to curbs on some activity in some regions for much of August. As far as the headline figures are concerned, Bloomberg’s survey suggests that the consensus view is that growth in IP will slow a relatively modest 0.6ppt to 5.8%Y/Y, whereas growth in retail sales is expected to have slowed 1.5ppt to 7.0%Y/Y. Growth in non-rural capex is forecast to have slowed 0.9ppt to 9.0%YTD/Y. With upwards momentum having slowed somewhat in July, Wednesday’s news on developments in home prices in August will also be of interest.

IP and final inflation due this week from a lighter euro area data calendar
After last week’s important ECB announcements, the euro area economic calendar is relatively uneventful this week with data releases unlikely to prove market-moving. A very quiet start to the week will bring just the August business sentiment survey from the Bank of France today and final consumer price data from Spain for the same month tomorrow. Wednesday will bring the final inflation data from France and Italy ahead of Friday’s release of the euro area numbers. Like Friday’s final German figures, these should align with the flash estimates, which for the euro area were stronger than had been anticipated – the headline HICP rate rose 0.8ppt to 3.0%Y/Y, the highest since November 2011, while core inflation (excluding energy, food, alcohol and tobacco) rose 0.9ppt to 1.6%Y/Y, the highest since July 2012. Other data due this week include euro area industrial production figures for July on Wednesday. Despite a drop in Spain, production, gains in the other large member states and Ireland should ensure that euro area IP rose about 1.1%M/M in July to more than reverse the declines recorded in May and June. New EU27 new car registrations for August are due on Thursday

A busy week for UK data brings updates on the labour market, inflation and retail sales
Following Friday’s downside surprise to July GDP, this week will bring plenty more top-tier UK economic data including the latest labour market (tomorrow), inflation (Wednesday) and retail sales numbers (Friday). With the government’s Job Retention Scheme still in operation and most pandemic restrictions having been eased, we expect to see a further rise in payrolls and vacancies, which hit a record high of 953K in the three months to July. At the same time, the ILO unemployment rate is expected to edge down 0.1ppt to 4.6% in the three months to July, down from the peak of 5.2% in the three months to December 2020 but up from 4.0% in the three months to February 2020. And with still roughly 2mn more workers either unemployed, on furlough or inactive compared to before the pandemic, the high level of vacancies will suggest a significant skills mismatch in the UK labour market. And with demand for labour not being met by supply in many sectors, and given big base and compositional effects, growth in average labour earnings seems bound to remain strong, with average earnings including bonuses to remain above 8.0%3M/Y, albeit down from close to June’s series high of 8.8%Y/Y. Meanwhile, we expect the UK’s inflation rate to take a notable step up in August – thanks not least to base effects associated with last year’s hospitality subsidies and VAT cut – after unexpectedly falling 0.5ppt to 2.0%Y/Y in July. We forecast an increase of 1.0ppt to 3.0%Y/Y in the headline inflation rate with core inflation rising 1.2ppts, also to 3.0%Y/Y. On Friday, the BoE will publish its inflation attitudes survey, which will give insight into households’ inflation expectations. Meanwhile, retail sales data for August due the same day are expected to reveal that sales failed to reverse the drop of 2.5%M/M in July – total sales are expected to rise 0.7%M/M to be up 2.7%Y/Y.

US data flow resumes this week with the release of key inflation and activity indicators
Following last week’s exceptionally sparse diary, the pace picks up this week as investors begin to look forward to next week’s FOMC meeting – the proximity of which means that this is no Fedspeak scheduled over the week ahead. The diary begins today with the release of federal budget data for August, with Daiwa America’s Mike Moran expecting a surge in revenues to lower the deficit to around $175bn from $200bn a year earlier. With that out of the way, attention will quickly turn to tomorrow’s CPI report for August. Mike expects a 0.4%M/M lift in headline prices and a 0.3%M/M lift in the core – outcomes that would likely lower their respective annual inflation rates by 0.1ppt to 5.3%Y/Y and 4.2%Y/Y respectively. On Wednesday, attention turns to the factory sector with the release of the IP report for August and NY Fed manufacturing survey for September. Regarding the former, Mike expects a 0.7%M/M increase in output, with employment gains pointing to a lift in activity in the manufacturing and mining sectors and above-average temperatures likely lifting output in the utility sector. The Philadelphia Fed’s manufacturing survey will cast more light on the factory sector on Thursday. However, the focus over the final two days of the week will be on the consumer, with Thursday bringing the release of the retail sales report for August and Friday the preliminary findings of the University of Michigan’s consumer survey for September. Mike expects a reduction in auto sales to deliver a 0.5%M/M decline in headline retail nspending, while lower activity in the hospitality sector will probably also see ex-auto sales print marginally negative. Meanwhile, with the previous reading pointing to a sudden slump in consumer sentiment to even lower levels than at the onset the pandemic, consumer sentiment might well have firmed slightly in September.

Sentiment and labour market data the focus in Australia this week; RBA’s Lowe to speak tomorrow
This week’s Australian data flow will provide some further insight into the economic impact of the ongoing virus outbreak affecting New South Wales, Victoria and Canberra. First up, tomorrow will bring the release of the NAB Business Survey for August. While the closely-watched business conditions index has already slumped 23pts from the record high reached in May, it remains above its historic average level and so a further decline would not surprise. The Westpac consumer confidence index for September will follow on Wednesday, and whilst the weekly ANZ-Roy Morgan survey has been broadly stable in recent weeks a further decline in the Westpac index is also possible. On Thursday, the monthly Labour Force report will reveal the impact of the lockdown on the jobs market. Bloomberg’s survey reports a consensus estimate that employment will decline 80k (understandably the range of estimates is wide, spanning a 2k increase to a 300k decline). While this would amount to just a 0.6%M/M decline, the survey will likely report a much larger decline in hours worked. While the labour force participation rate will likely decline sharply, the unemployment rate is still expected to increase to 5.0% from just 4.6% last month. The only other notable economic report this week is the ABS House Price Index for Q2, released tomorrow, which should report a hefty lift in prices in line with more timely monthly indicators. Meanwhile, tomorrow will also see RBA Governor Lowe give his annual address to the Anika Foundation, which is titled “Delta, the Economy and Monetary Policy”. Tomorrow senior RBA personnel will also testify before Parliament’s Standing Committee on Tax and Revenue.

Kiwi general business sentiment remains resilient in September; Q2 GDP, housing and manufacturing PMI data still to come this week
Aside from the local virus outbreak and government decisions regarding restrictions in various parts of the country, the focus in New Zealand today was on the release of the preliminary results of the ANZ Business Outlook survey for September. Importantly, today’s survey more completely captures the impact of the recent lockdown – with restrictions beginning to ease outside of Auckland – than last month’s survey. The survey revealed around a 7ppt rebound in the headline general business confidence index to -6.8, leaving it only slightly weaker than the July reading. The more important Activity Outlook index – which tracks GDP growth – declined just 1ppt to 18.2, which encouragingly is only a little below the long-term average for series. Firms’ investment and employment intentions softened slightly, but remained stronger than average. Meanwhile, after last month moving above the top of the RBNZ’s 1-3% inflation target range for the first time in a decade, firms’ year-ahead inflation expectation nudged down 0.08ppt to 2.97%.

Looking ahead, tomorrow will bring the release of the REINZ housing report for August, with house sales over the second half of the month likely to have been impeded by the lockdown. On Thursday, Statistics New Zealand will belatedly report the National Accounts for Q2. Partial indicators suggest another strong quarter, with Bloomberg’s survey suggesting that analysts expect a 1.1%Q/Q lift in activity (with local-based forecasters generally even more optimistic). This would leave output up more than 16% from last year’s pandemic-depressed level. Given a lift in the terms of trade, real gross domestic income should have grown even more rapidly, underpinning domestic demand. Thursday will also bring the release of the manufacturing PMI for August, which in light of the lockdown is likely to decline markedly from the very high 62.6 reported in July.

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