Mixed Signals as Japan, China Announce Economic Data

Asia's two biggest economies are out with new economic data this morning, with the latest read on Japan's economy raising concerns about the strength of its recovery.

Japan's machinery orders tumbled 3.6% in May compared to April, falling well short of a 1.7% increase forecast by economists. The government also downgraded its expectations for machinery orders for the first time in eight months, Barrons reported.

The weaker-than-expected economic data comes amid a five quarter winning streak for Japan's economy, the longest run of consecutive quarters of growth in a decade. Japan's economy grew at an annualized rate of 1% in the first quarter thanks to strong exports and a lift from private consumption.

The Bank of Japan raised its assessment of the world's third largest economy in April, noting that "domestic demand is becoming firmer" and noting the economy would "gain further momentum gradually".

While machinery orders were weak, the Bank of Japan's Tankan survey for June showed manufacturing confidence was at a three-year high when it was released earlier this month.

The mixed messages on growth will give the Bank of Japan's board plenty to think about when they next meet on July 19-20. The big issue for the central bank is inflation given the core consumer price index rose 0.4% year-on-year in May. The BoJ is targeting 2% inflation.

Japan's Inflation

Here's a take on Japan's inflation from Societe Generale:

Stubbornly low inflation is an issue that the major central banks around the world continue to grapple with. In the case of the BoJ, however, the picture is proving particularly challenging with core inflation having slipped back to zero. The BoJ will release its next quarterly outlook in July and consensus is that the FY17 inflation outlook of 1.4% will be lowered.

Nonetheless, the overall pace of Japanese economic growth continues to run above trend potential and last week’s Tankan release delivered encouraging news on future prospects. The main missing link, it seems is sufficient wage growth.

China's Upside Surprises

China's release of inflation data for June showed price pressures in the world's second largest economy remained well-behaved.

The consumer price index rose 1.5% year-on-year, while the producer price index rose 5.5% year-on-year. Both measures fell 0.2% from May. The producer price index is expected to fall in coming months given the weakness in the price of commodities like oil and iron ore.

Here's a take on China's inflation data from ANZ markets economist David Qu:

A prolonged period of low inflation has allowed the People’s Bank of China to remove inflation from its policy agenda in 2017. The authorities will likely maintain relatively accommodative liquidity conditions in the money market and support a reasonable pace of growth in the lending market with longer term liquidity injections. "We expect the PBoC to continue to provide longer-term liquidity via the medium-term lending facility in the coming months."

Instead of inflation, growth should be the focus of market participants. Recent data have indicated that Q2 activity could have been better than the market’s expectation early this year. "We forecast that Q2 GDP will rise by 6.7% y/y, higher than the official target of 6.5% as the manufacturing PMI has been surpassing market expectations in the past two months. As far as growth momentum is concerned, 2017 will likely be a year of upside surprises.

HSBC economist Julia Wang is watching the manufacturing sector at a time when the contribution to growth from infrastructure and property investment is expected to wane over the remainder of the year:

The manufacturing sector has continued to recover in 2017, with private business investment picking up amidst better profit, and higher level of business confidence. Both domestic and external demand look better than in 2016 and should continue to improve gradually in 2H 2017. This should keep overall price level as well as producer margins supported. It will also help to offset the increase in nominal interest rates. With both property and infrastructure investment softening, the manufacturing sector will play an even more important role in supporting the cyclical recovery in 2H 2017.