Japan’s real household spending fell in August

Chris Scicluna

US equities and bond yields rise as Senate passes debt-ceiling bill; equities generally firmer today in Asia, especially Japan, as attention now turns to today’s US payrolls report
Together with Janet Yellen, investors breathed a sigh of relief on Thursday, with the S&P500 rallying a further 0.8% ahead of a Senate vote to raise the US statutory debt ceiling by $480bn – just enough to give the Treasury room to meet its obligations until early December. That vote has now taken place, with the bill passed by Democrat votes after Republican senators supplied enough votes to close the preceding debate (the House will now take up and vote on the bill, probably just as soon as it returns early next week). So with risk sentiment improving and initial jobless claims falling more than expected to a four-week low, Treasury yields resumed their upward trend with the 10Y UST rising 5bps to 1.57% – the highest close since 16 June.

Since the close, UST yields have nudged a basis point or so higher, causing US equity futures to pare earlier modest gains. Against that background it has mostly been a positive day in Asia. In Japan, the TOPIX has rallied 1.2%, thus finally ending a nine-session losing streak. Investors have shrugged off consumer spending and labour market data for August that was impacted negatively by now discontinued state of emergency restrictions amidst record virus cases, especially with the Economy Watchers survey reporting a large rebound sentiment in September and considerable optimism about prospects into year-end (more on Japan’s data below). In Mainland China, markets have re-opened following the Golden Week holiday. The CSI300 presently up just over 1%, with the Caixin services PMI for September confirming the big rebound indicated in last week’s official PMI survey. After rebounding more than 3% yesterday, the Hang Seng is presently little changed. Markets are also slightly weaker in South Korea, but are a little firmer in Singapore. In the Antipodes, Australia’s ASX200 has firmed almost 1% despite a 6bp lift in the 10Y ACGB bond yield to a near four-month high of 1.64%, with Sydneysiders doubtless looking forward to the easing of pandemic restrictions that will begin on Monday.

Japan’s real household spending falls 3.9%M/M in August; labour survey points to a 2.3%M/M fall in hours worked in August, but increased bonus earnings lift wages
Today’s Japanese economic diary kicked off with further indicators of consumer spending and labour market performance for August, which unsurprisingly were soft amidst the record virus cases and pandemic restrictions that prevailed during the month. The MIC’s monthly survey pointed to a 3.9%M/M decline in real household spending in two-or-more person households. This marked the fourth consecutive decline, with spending now down almost 11% since reaching a pandemic peak in April. So despite relatively favourable base effects, spending in August fell 3.0%Y/Y – almost 2ppts weaker than the consensus expectation. The MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, declined only a slightly smaller 3.2%%M/M and was down 2.9%Y/Y. As a result, on this measure spending over the first two months of Q3 is running more than 4% below the average through Q2. However, it is worth recalling that this survey generally does a much worse job of closely tracking the national accounts measure of private consumption than the likes of yesterday’s BoJ Consumption Activity Index, with the latter indicating a decline in spending of slightly less than 1%. The MIC’s survey also reported a 4.2%Y/Y increase in workers’ real household disposable income in August. While this was clearly boosted by base effects, as we noted yesterday, with state of emergency restrictions being eased at the end of last month, as virus cases fell sharply amidst a lift in vaccinations, Japanese retailers and service providers can probably look forward to a solid rebound in spending in the current quarter.

Turning to the labour market, today the MHLW released the preliminary Monthly Labour Survey for August. Perhaps of greatest interest, the survey reported that total hours worked (per employee) declined a seasonally-adjusted 2.3%M/M – this following a 0.6%M/M decline in July – with overtime hours declining by an even larger 3.4%M/M. However, with hours worked declining by even more in August last year, annual growth picked up to 0.7%Y/Y from -0.1%Y/Y previously. Meanwhile, with Japanese employers continuing to hoard hard-to-get labour, regular employment was unchanged in August and so up 1.3%Y/Y, with full-time employment increasing 0.7%Y/Y and part-time employment rebounding 2.3%Y/Y after declining in the early months of the pandemic.

According to the preliminary estimates – which can be heavily revised – total labour cash earnings (per employee) increased 0.7%Y/Y – up 0.1ppts from last month and slightly firmer than the consensus estimate. Contracted earnings increased 0.6%Y/Y – 0.4ppts slower than the previous month – with the pullback in hours worked moderating the rebound in overtime earnings growth to 6.5%Y/Y from 11.6%Y/Y in July. Regular earnings increased just 0.2%Y/Y for a third consecutive month. However, bonus earnings increased 2.0%Y/Y following a 0.3%Y/Y decline in July, thus leading to the fractional lift in overall growth in earnings. After accounting for inflation, real wages increased 0.2%Y/Y, which was 0.1ppts less than in July.

Japan’s Economy Watchers survey rebounds in September as virus cases fall and restrictions ease, with conditions expected to improve markedly further by year-end
Today also brought the release of the Cabinet Office’s Economy Watchers Survey for September, providing a more timely indication of economic activity. Sentiment had weakened sharply in August, as a large part of the country re-entered full state-of-emergency conditions to combat record virus cases that had peaked at over 25,000 per day. However, with daily cases having since declined to around 1,000, helped by good progress in the vaccination programme, the latest survey points to a marked rebound respondents’ perception of current business conditions, and an expectation of further significant improvement over coming months. In particular, the headline current conditions DI increased 7.4pts to 42.1 – still a little below the long-term average for this series and 6.3pts below that recorded in July. However, significant comfort can be found in the overall expectations DI, which surged 12.9pts to 56.6 – the highest reading since November 2013 and an outcome that suggests that respondents expect conditions to improve markedly over the coming few months, with the economy no longer hampered by government restrictions on activity.

In the detail, not surprisingly, the largest driver of the improvement in current conditions was a much less downbeat account from those respondents interacting with the household sector. The survey’s household sector index increased 9.6pts to 40.9, with solid improvement seen across the retail, food and general service industries. The corporate sector index, which had displayed greater resilience during the latest virus outbreak, increased a smaller 2.0pts to 42.6, led by improved responses from the non-manufacturing sector. Looking ahead, the sharp improvement in the outlook index was also led by the household sector, with the overall index jumping 13.8pts to 57.1. Indeed, optimism regarding an improvement in business conditions in the food and general services industries has increased to levels not seen in the almost 20-year history of these series. The corporate sector outlook index increased 8.5pts to an eight-year high of 54.0, led by a 10.8pt increase in the non-manufacturing index – now sitting slightly above its manufacturing counterpart for the first time since last October.

In today’s other Japanese economic news, given the ongoing support provided by banks and the government to the corporate sector, Tokyo Shoko reported just 505 corporate bankruptcies in September – up slightly from August but down 10.6%Y/Y – an outcome that would have been judged as very unlikely at the onset of the pandemic. Finally, balance of payments data revealed an adjusted current account surplus of ¥1.04trn in August, down from ¥1.41trn in July. The further narrowing – which lower the surplus to a 15-month low – both to a slightly larger deficit on the goods and services balance and a smaller surplus on the primary income balance.

China’s Caixin services PMI rebounds 6.7pts to 53.4 in September; composite PMI output index back in expansionary territory for September
Consistent with the official PMI survey last week, today’s Caixin services PMI pointed to a sharp rebound in activity in September as a local virus outbreak was brought under control and curbs on activity were eased. The headline business services index increased 6.7pts to 53.4 – more than 4pts above the consensus estimate – thus recovering just over 80% of the ground lost in August. In the detail, the new orders index rebounded 3.5pts to 53.1 and the future activity index – which had declined only modestly last month – increased 0.6pts to 62.6. The rebound in activity carried through into the survey’s pricing indicators, with the input prices index rising 0.9pts to 53.0 and the output prices index rising 2.4pts to 51.7.

In combination with the rebound in the manufacturing PMI output index reported last week, today’s recovery in activity in the service sector meant that the composite PMI output index increased 4.2pts to an expansionary 51.4. As a result, the index averaged 50.6 during Q3, down from 53.0 in Q2 and the weakest quarter since Q120 (42.0).

German export volumes down for fourth month in the past five as production constraints bite
With German manufacturing production having dropped that month to a twelve-month low and at the steepest rate since the first wave of pandemic in April last year, it was no particular surprise that this morning’s trade data also reported a drop in exports in August. The decline in the value of exports of 1.2%M/M more than reversed the growth of 0.6%M/M in July, but left the average for the first two months of Q3 still some 0.9% above the average in Q2. The value of imports, meanwhile, reversed the drop of 3.6%M/M at the start of the quarter but was still trending 0.3% below the Q2 average. Nevertheless, the trade surplus fell almost €5bn to €12.9bn, just a fraction above May’s twelve-month low. Of course, the value of both exports and imports was flattered by price pressures. And adjusting for such shifts, export volumes fell for the fourth month in the past five and by 2.1%M/M, the most since April 2020, to be trending more than 1½% below Q2’s average level. And while the volume of imports was up 2.0%M/M, it was trending about 5% below the Q2 average. So, supply bottlenecks are clearly restraining both sides of the trade balance.

UK jobs survey flags further pickup in wage growth amid supply and demand mismatch
According to the latest KPMG/REC UK Report on Jobs, activity in the labour market remained extremely buoyant in September. In particular, recruitment consultancies reported another strong increase in hiring activity, with permanent staff appointments rising only slightly slower than the series high in August. Temp billings growth slowed to a five-month low but remained elevated by historical standards. Strong demand for both permanent and temporary staff was reflected in a near-series high on the survey’s vacancy measures. And with respondents reporting a further significant decline in staff availability close to series lows, the mismatch of supply and decline manifested itself in ongoing pay growth, which reached the highest on the 24-year series. It remains to be seen whether the ending of the government’s furlough scheme – via which more than one million workers were still being supported last month – will help to ease somewhat the labour and skills shortage from now on.

With debt-ceiling impasse on the back-burner, attention in the US turns to payrolls
Turning to today’s US economic diary, of course the focus will be on the employment report for September, with Fed Chair Powell looking for no more than a “decent” outcome as a prelude to the Fed formally announcing the start of its QE taper at its next meeting on 3 November. Daiwa America’s Chief Economist Mike Moran has pencilled in a 400k lift in non-farm payrolls – slightly below the consensus estimate but an improvement on the 235k advance in August – which he expects will lower the unemployment rate by 0.2ppts to a pandemic low of 5.0%. Aside from the employment report, today’s diary also includes the final wholesale trade report for August.

RBA says Australian financial system resilient but notes risk of excessive borrowing due to low interest rates and house prices
Today the RBA released its semi-annual Financial Stability Review. Predictably, the Bank assessed that Australia’s financial system – and those in other countries – had continued to display resilience in the face of the pandemic, with banks supporting the recovery through loan repayment deferrals and new lending. Notwithstanding the recent lockdowns in the states of New South Wales, Victoria and ACT, it was noted that improved economic conditions have increased earnings for businesses and households, strengthening their balance sheets and borrowers' abilities to repay debt. As a result, banks' loan losses have been much lower than many had expected early in the pandemic, with reduced provisions for future loan losses contributing to higher profits and improved capital positions.

Against that positive background, the RBA argued that there was nonetheless number of risks to ne managed. One key risk is excessive borrowing due to low interest rates and rising house prices. Specifically, the Bank noted that vulnerabilities can increase if housing market strength turns to exuberance with borrowers taking on greater risk given expectations of further price rises and banks potentially easing lending standards. Of course, the Australian Prudential Regulation Authority (APRA) has responded to these vulnerabilities this week by increasing the interest rate buffer that banks must use to assess borrowers’ ability to meet payments on loans, which will reduce slightly the borrowing capacity for new borrowers. Looking outside of Australia, the RBA also argued that financial stability risks are elevated in some emerging market economies, where recovery is not yet complete and where low vaccination rates increase the risk that further lockdowns might be needed. The RBA also highlighted elevated financial system vulnerabilities in China, where in the Bank’s assessment “the numerous policy changes occurring simultaneously raises the probability of unintended, and potentially problematic, consequences.” Finally, with attacks increasing, it was noted that cyber-related risks are a growing risk for financial stability.

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