Japan's services sector activity falls more than expected

Chris Scicluna
Emily Nicol

US bond yields move lower again as core PPI pressure eases; Wall St has best day since March as bank earnings and jobless claims impress; Asian markets also firmer today
US mid to long bond yields moved lower for a third consecutive day yesterday, with the 10Y yield closing down about 3bps at 1.51%. Bond investors cheered the PPI report for September, which printed below market expectations, especially at the core level, with sharply lower prices for airfares contributing to a modest 0.2%M/M lift prices for services. Meanwhile, Wall Street had its best day since March, with the S&P500 advancing 1.7%. Besides lower bond yields, equities received support from a bevy of major bank earnings that beat consensus expectations and from news that both initial and continuing jobless claims had declined more than expected to new pandemic lows (initial claims falling below 300k).

Since the close, US equity futures have advanced a further 0.4% but Treasury yields have traded 1-2bps higher. Given the positive backdrop provided by Wall Street it has been a positive session for equity investors across most of Asia. In Japan, despite METI’s survey pointing to a sizeable contraction in service sector activity in August, the TOPIX has advanced a further 1.9% today to its best close in more than two weeks. In China, the CSI300 has gained just 0.3%, with investors now awaiting Monday’s Q3 GDP report. The PBoC conducted its latest 1-year MLF operation at an unchanged rate of 2.95% for a 17th consecutive month, with the liquidity provided matching today’s maturity. However, citing the usual “people familiar with the matter”, Bloomberg reported that the PBoC had late last month asked some banks to accelerate their approval of home loans during the quarter, doubtless concerned that banks would act cautiously in light of perceived contagion risks associated with China Evergrande. Stocks are around 1% firmer in Hong Kong, but have rallied over 2% in Taiwan where tech stocks have benefitted from a bullish forecast for semiconductor chips. Markets have advanced slightly less than 1% in South Korea and just under ½% in Singapore.

In Australia, the ASX200 has rallied 0.7% to a more than two-week high and bond yields have moved slightly higher. Investors took note of news from state officials that fully vaccinated Australians will be able to enter New South Wales from overseas without quarantine from next month, accelerating the plan proposed earlier by PM Morrison (no decision has been made on when the border will reopen to non-resident visitors). Kiwi bonds have substantially underperformed USTs following a rebound in the country’s manufacturing PMI, with the 10Y NZGB rising 5bps to 2.24% and so now yielding the most since February 2019.

Japan’s service sector activity declines sharply in August, reflecting record virus cases and state of emergency restrictions
Following yesterday’s confirmation of a sharp fall in industrial activity in August, today METI confirmed that Japan’s service sector activity had contracted too. Indeed, following an unrevised 0.6%M/M decline in July, the Tertiary Industry Activity Index pointed to further 1.7%M/M drop in service sector activity in August – the largest since May and 0.5ppts worse than the consensus estimate. As a result, despite the weak base, activity was down 0.5%Y/Y and at the lowest level since July last year. Given this result, the level of service sector activity over the first two months of Q3 is tracking about 1% below the average in Q2, with the full quarter likely to be even weaker given that state of emergency conditions remained in place until the end of September. Fortunately, the current quarter should post a decent recovery, as the forward-looking components of the recent Economy Watchers and Reuters Tankan surveys suggest firms are anticipating.

In the detail, unsurprisingly, activity related to non-essential personal services led the weakness in August, slumping 5.8%M/M and so more than 20% lower than its pre-pandemic level. Activity related to essential personal services fell a comparatively modest 1.6%M/M while activity related to business services declined 1.7%M/M. By industry, the largest decline – accounting for about 1ppts of the decline in the overall index – was a 12.2%M/M slump in activity related to living and amusement services. Transport, retail and wholesale trade activity was also markedly weaker, with only a modest offset provide by increased activity in some business-related services, real estate and financial services.

Euro area car registrations dropped in September to lowest level for the month since the series began in 1989; final September HICP reports ahead in the France and Italy today, along with August euro area trade data
On a relatively quiet day for European economic releases, this morning’s euro area car registrations numbers for September were predictably weak. The number of units registered last month stood at just 612k, the lowest outcome for any September since the series began in 1989, to leave them down 24%Y/Y. Admittedly, this still meant that the cumulative number of new cars sold so far this year was almost 6% higher than during the first nine months of 2020, driven by a near-21%YTD/Y increase in Italy, as well as growth in France (8.0%YTD/Y) and Spain (8.8%YTD/Y). But that principally reflected the low base associated with the marked slump at the onset of the pandemic. Indeed, when compared with the first nine months of 2019, aggregate new cars registered so far in 2021 were down by around one quarter. And with the current weakness largely caused by a lack of supply of vehicles due to the ongoing semiconductor shortage, and no let-up in those supply bottlenecks on the horizon (indeed, the Nikkei reported today that Toyota will cut its global auto production next month by 15% from its most recent plan), car sales look set to remain weak for several months to come.

Looking ahead to the rest of the day, following the release of final September inflation readings from Germany and Spain over the past two days, today brings the equivalent releases from France and Italy. The preliminary report indicated a 0.3ppts upward shift in French inflation to 2.7%Y/Y – a near-decade high – while the Italian CPI inflation rate rose 0.5ppts to 3.0%Y/Y, marking the highest since September 2012. Energy prices remained the key driver in every member state. August trade data will also be released for the euro area. Given subdued output and supply bottlenecks, euro area exports seem likely to have weakened after adjusting for price changes.

No major data scheduled in the UK
There are no major economic reports scheduled in the UK today, with next Wednesday’s September inflation reading the next focus for the local market.

In the US, attention will focus mostly on the household sector today
While the focus in the US over the past two days has been inflation, today attention will turn mostly to the household sector. Of particular note is the release of the retail sales report for September. Daiwa America’s Chief Economist Mike Moran expects a decline in auto sales to result in a 0.4%M/M decline in total spending. And with outlays for other goods already well above the pre-pandemic trend, he expects core spending to have been little changed, especially with virus concerns likely halting a six-month string of gains at restaurants and bars. Meanwhile, today will also bring the release of the preliminary findings of the University of Michigan’s survey for October. Mike anticipates only a modest increase in consumer sentiment over the month, with an improving labour market likely partially offset by the spread of new virus cases and the elevated level of inflation. Developments in consumers’ expectation regarding inflation will also be a key focus of the latter report, while import and export price data for September is also due today. Today’s diary also includes the New York Fed’s manufacturing survey for October and news on business inventories for August. The scheduled Fedspeak includes appearances in panel discussions by the St Louis Fed’s Bullard and the New York Fed’s Williams, while Goldman Sachs will complete this week’s major bank reporting.

Kiwi manufacturing PMI rebounds in September as restrictions begin to ease
After plunging almost 23pts to just 39.7 in August – a response to the strict nationwide lockdown imposed during the second half of the month – the BNZ-Business NZ manufacturing PMI rebounded 11.7pts to 51.4 in September as conditions eased to varying degrees across the country. The output index, which had fallen more than 36pts in August, rebounded 22.7pts to an almost-breakeven 49.9, while the new orders index returned to expansionary territory with a 10.2pt increase to 54.3. The employment index, which last month fell only slightly despite the lockdown, edged up 0.2pts to 54.5, consistent with the strength maintained in other hiring indicators. 

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