Tuesday, 4 August 2015

Story of the Day - US Factory Orders & Japan Cash Earnings

Two things stood out from the day’s data:

  1. The 1.8% mom rise in US June factory orders
  2. The 2.4% yoy fall in June's cash earnings for Japanese workers

US June Factory Orders The 1.8% mom rise in June’s US factory orders allowed some slight improvement to the underlying ratios which influence short-term industrial dynamics, but without really making inroads on the underlying inventory and book/bill problems. With shipments up just 0.5% mom, the book to bill ratio rose 1.3% mom to the best since March - but even so, it remains 2.3% lower than in June 2014, and slightly below a 10yr average which includes, of course, the Great Recession. Meanwhile, inventories rose 0.6% mom (with no change in unfilled orders) whilst shipments rose 0.5%, so there was no improvement in the  inventory/shipment ratio, which returned to the highest since February, and is 1.1SDs above the 10yr average. Neither of these ratios are so bad they demand an urgent re-thinking of economic policy, but equally, whilst they remain unaddressed, they compromise short-term industrial prospects in the US.

Japan June Labour Cash Earnings  The 2.4% yoy fall in June’s labour cash earnings (for companies with more than 5 employees) and the 3.3% yoy fall in average earnings for all employees, makes quite clear that Japanese employers are not in the business of passing on competitive benefits of devaluation to their employees. For the wider measure, June’s payment fell 1.9SDs below what one normally expects in June. And June is an important month, because it is one of the two large bonus months of the year: last year, June accounted for 11.6% of total annual earnings, with only December being more important (representing 14.5% of earnings).  

With increasingly little in the way of monetary policy dynamics to offer immediate extra support, it’s difficult to be optimistic about the short-term trajectory of domestic demand. And that policy lacuna will become more important if the brunt of China’s stockmarket failure is borne by a sharp weakening of the Rmb (which seems a logical expectation).  At that point, Japan’s policymakers will be faced with the possibility that two and a half year’s worth of sharp competitive devaluation against its biggest Asian trading partner/competitor have not brought the benefits to Japan’s domestic economy which they could have expected. 

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