Japanese data very much a mixed bag

Chris Scicluna
Emily Nicol

Markets mixed as euro area inflation, hawkish Fed comments and soft Japanese IP data give cause for concern, but Chinese PMIs provide a little relief
After yesterday’s big upside surprise to German inflation, comments from Fed Governor Waller pouring cold water on any hopes of a pause to rate hikes in September, and steps by the EU to ban (most) imports of Russian oil, many of Asia’s financial markets understandably remained edgy today. Indeed, despite confirmation of a further pickup in Japanese retail sales in April, but with industrial production falling more than expected, the Topix dropped ½% on the day. However, some firmer-than-expected Chinese PMIs supported sentiment in some other markets, with China’s CSI300 closing up 1½% and stocks in Hong Kong and Korea firmer too.

In bond markets, the restart of trading in cash USTs after yesterday’s holiday inevitably brought a sell-off, with yields currently between 5-7bps higher across the curve. But following yesterday’s rout, euro area govvies are currently a touch firmer as French inflation data met expectations – albeit rising to a new 37-year high – Dutch inflation fell back, and French GDP and spending numbers were weak too. All eyes will be on the flash euro area inflation numbers later this morning, with a big jump in the headline rate of about ½ppt to 7.9%Y/Y, as well as another rise in the core measure, now likely.

Japanese retail sales maintain recovery in April, labour market tightens, but IP still soft amid supply difficulties
Today’s Japanese data were very much a mixed bag. The latest retail figures broadly aligned with expectations, with the value of sales rising for the second successive month in April, by 0.8%M/M to leave them some 3½% higher than the Q1 average. This reflected a rebound in clothing sales (12.8%M/M), while sales of household appliances also rose (1.8%M/M). But vehicle sales fell (-5.7%), presumably with supply chain disruption continuing to impact output in the sector. Of course, the value of retail sales continues to be flattered by price effects. Indeed, while in nominal terms they were up 2.9%Y/Y (the strongest annual rate for almost a year), we estimate that in real terms they were still down by almost 2½%Y/Y. And if today’s consumer confidence survey is to be believed, household spending will remain subdued for now – indeed, the survey index for households’ willingness to buy durable goods rose just 0.2pt in May to a still well-below-average 27.9, to be trending so far in Q2 almost 10½pts below the Q1 average. Admittedly, the headline consumer confidence index was a touch firmer than expected, rising 1.1pts to 34.1 reflecting a further improvement in households’ expectations for employment over the coming six months.

Certainly, today’s labour market numbers were more encouraging, with the number of employees jumping a further 310k in April, boosted by the lifting of Covid-related restrictions, to be some 240k higher than the pre-pandemic peak. This reflected another month of solid growth in regular employment (520k), while non-regular employment moved broadly sideways to be still well below the pre-pandemic level (-890k). So, the number of jobless people fell for the third consecutive month to 1.76mn, just 90k above the level in February 2020, to leave the unemployment rate edging lower in April to 2.5%, 0.6ppt below the pandemic peak but still 0.3ppt above the pre-pandemic trough. The number of new job offers rose for the second successive month too (2.5%M/M, 12.3%Y/Y), with perhaps unsurprisingly the strongest growth in the hospitality sector (49.6%Y/Y). So the total job-to-applicant ratio rose in April to 1.23x, the highest for two years.

In contrast, April’s IP report underwhelmed as supply bottlenecks continued to restrain production in certain subsectors. In particular, manufacturing production fell a steeper-than-expected 1.3%M/M, to leave the level around ½% lower than the Q1 average. The weakness was driven by the transport sector (production of autos fell 3.6%M/M and aircraft parts declined 19.0%M/M), as well as electronic parts and devices (output of electronic devices was down 22.3%M/M and integrated circuits dropped 11.1%M/M). While manufacturers remained (likely overly) optimistic about production expectations in May and June (forecasting growth of 4.8%M/M and 8.9%M/M), ongoing supply disruptions seem bound to limit any rebound in Japanese manufacturing for the time being.

China’s PMIs beat expectations, consistent with much softer pace of contraction in May
Judging from today’s PMIs, the Chinese economy continued to contract last month, but at a much softer extent than in April or than expected, suggesting that some easing of restrictions, as well as other policy actions, helped contain the damage somewhat from the zero-Covid policy. In particular, the manufacturing output PMI jumped more than 5ppts from April’s two-year low to 49.7, suggesting broadly stable production, with the new orders index also more than 5pts higher at 48.2 and external demand stronger too. Input cost pressures in the sector eased too, with the respective PMI down more than 8pts to a 5-month low (55.8). The non-manufacturing activity PMI was also stronger than expected, rising almost 6pts on the month and more than 2pts above the Bloomberg consensus forecast to 47.8, with the respective picture for new orders similarly less downbeat. Overall, the composite PMI rose almost 6pts to 48.4, less than ½pt below the March level, albeit still below the range from March 2020 through to last month.

French inflation up as expected to highest since mid-80s; Dutch inflation drops 1ppt; but euro area inflation likely to rise ½ppt to 7.9%Y/Y with core inflation likely up too
This morning’s flash euro area inflation estimates for May are likely to leave ECB policymakers sweating ahead of next week’s Governing Council meeting. Following yesterday’s upside surprises from Germany and Spain, this morning’s French figures reported a further increase in inflation in May to the highest since 1985, albeit still some way below the rates in most other member states. In particular, the EU-harmonised HICP measure rose 0.4ppt to 5.8%Y/Y, with the national CPI rate also up 0.4ppt to 5.2%Y/Y. As in Germany and Spain, the higher price of crude oil played a role in pushing petrol prices higher, with energy inflation on the national measure up 1.5ppts to 28.0%Y/Y despite government interventions, while food inflation was also stronger, up 0.4ppt to 4.2%Y/Y (admittedly less than half the equivalent rate in Germany). But French inflation of services (up 0.2ppt to 3.2%Y/Y) and manufactured goods (up 0.3ppt to 2.9%Y/Y) meant that core pressures increased too.

The news on the inflation front wasn’t all bad this morning, as Dutch inflation on the national measure dropped 1ppt in May to a still-extreme 10.2%Y/Y. As a result, we expect the euro area headline HICP rate to rise a further 0.5ppt to a fresh series high of 7.9%Y/Y, due not least to higher food inflation and still elevated energy prices. We also expect the core HICP measure to rise 0.1ppt to a new series high of 3.6%Y/Y.

French GDP now contracted in Q1, and spending on goods dropped again in April
Beyond the inflation figures, today’s other French data were also disappointing. French GDP in Q1 was revised down from the flash estimate, and so is now estimated to have contracted 0.2%Q/Q to be just 0.3% above the pre-pandemic level. The principal cause of the contraction was household consumption, which is now estimated to have dropped 1.5%Q/Q to the lowest level in three quarters. And this morning’s spending data for April suggested that household consumption was weak again at the start of Q2 – expenditure on goods fell for the fifth successive month and by 0.4%M/M to be down 2.1%3M/3M. Updated Italian Q1 GDP figures are also due later this morning after the initial estimate reported a contraction of 0.2%Q/Q to leave economic output still 0.4% below the pre-pandemic level. This morning will also bring German unemployment claims figures for May, which should point to a steady labour market despite subdued economic activity and extreme cost pressures.

Lloyds business survey signals improvement in manufacturing and construction but consumer-facing firms see ongoing challenges
Contrasting markedly with the UK’s weak flash PMIs, the Lloyds Bank business barometer today signalled an improvement in business conditions in May, with the headline balance rising 5ppts to 38%, a three-month high and a pickup in both the current and future expectations balances. But while firms in the manufacturing and construction sectors were more upbeat, today’s survey suggested that confidence among retailers had deteriorated to be the least favourable since March 2021 when non-essential shops were still closed due to pandemic restrictions. And with the share of firms planning to raise prices still at a substantial 57% (down 1ppt from April), consumer-facing firms are likely to see conditions remain challenging for the foreseeable future as household disposable incomes continue to be squeezed by high inflation. The BoE bank lending figures for April due alter this morning are expected to confirm that demand for consumer credit remained strong at the start of the second quarter as disposable incomes continued to be squeezed by high inflation. And despite the recent uptick in interest rates, mortgage lending will likely have remained buoyed by the robust housing market.

US focus on house prices and consumer confidence
After yesterday’s national holiday, today brings several US data releases, albeit largely of second-tier importance. While last week’s figures reported a steep drop in new home sales in April, today’s house price data will likely confirm further firm growth in house prices, e.g. with the S&P CoreLogic Case Shiller 20-city rate expected to rise close to 2%M/M to be up roughly 20%Y/Y. In addition, as suggested by the University of Michigan survey, our colleagues at Daiwa America expects the Conference Board survey to report a notable drop (perhaps close to 5%) in its headline consumer confidence index. The Chicago PMI and Dallas Fed manufacturing surveys are also due today. And President Biden will meet with Fed Chair Powell and Treasury Secretary Yellen.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.