Japanese economy shows firm growth, mixed inflation data from China

Summary:

• Japanese economy grew in Q2 more than expected as private consumption and investment helped offset a negative impact from net exports
• Chinese CPI sped up while PPI declined last month, an unwanted mixture for the PBoC
• Matteo Salvini said there is no longer a majority to support the government, thus snap elections in Italy are getting more likely

Decent expansion

The Japanse economy expanded 0.4% in quarterly terms during the three months through June, well above the expected increase of 0.1%. The previous quarter growth rate was revised meaningfully up to 2.8% from 2.2% in annualized terms. Growth was mainly driven by private consumption as well as gross fixed capital formation adding 1.4 and 1.2 percentage points respectively to quarter-on-quarter annualized growth. It is worth noting that a contribution from private consumption was the highest since the first quarter of 2014. However, it needs to be noted that this growth was probably boosted by a 10-day public holiday and increased purchases of durable goods ahead of a sales tax hike in two months. Robust domestic demand was also reflected a solid increase in imports, however, they included particularly oil and energy. At the same time, exports slid 0.1% in quarterly terms resulting in a 1.2% negative contribution from net exports. On the investment front, GFCF increased 1.5% from the first three months of 2019, almost doubling the pace of growth expected by surveyed economists. Moreover, GDP deflator accelerated to 0.4% from 0.1% in annual terms, exceeding the median estimate of 0.3%. Looking forward, one may expect the third quarter will be equally solid on the back of higher consumer purchases ahead of the sales tax hike. 

Japanese GDP growth in Q2 was mainly driven by household spending and capital investment. Source: Macrobond, XTB

Chinese mixed inflation

Although consumer price index bumped up to 2.8% in annual terms last month, above the expected value of 2.7%, the pace of factory priced dropped to -0.3% from 0% in June, the first annual decline in nearly three years. Such a mixture complicates the PBoC’s efforts to shore up economic growth cutting rates, to revive PPI, would risk moving CPI beyond the desirable 3% threshold. On the other hand, one needs to be cognizant of the fact that another pick-up in CPI was driven by food prices, an exogenous factor being beyond monetary policy influence. In July, fresh fruit prices soared as much as 39.1% in annual terms whereas pork prices, affected by african swine fever, jumped 27% - the two categories added as much as 1.22 percentage points to CPI growth. The fact that domestic-driven inflationary pressures remain subdued is also underscored by the unchanged and limited pace of core CPI at 1.6%. As a result, we think that any rate hikes in China are off the table while rate reductions seem to be more probable given an environment abroad.

Asian trading has been quite calm so far and the biggest winner is the Korean KOSPI (KOSP200) rising 1.1% at the time of writing. Note that the price is rebounding from the important technical support with resistances placed at 256 and 261 points. Source: xStation5

In the other news:

• Matteo Salvini, a League’s leader, said on Thursday that there was no longer a majority for the government; as result snap elections might be held as soon as October (unofficial information)

• German current account surplus stood at 20.6 billion EUR in June, above expected 21.7 billion EUR; exports fell 0.1% while imports rose 0.5% in monthly terms