While we will celebrate our birthday on Wednesday, Canada does on Sunday (151 years) and on that day they will also put tariffs on about $15b of US goods in response to our steel and aluminum tariffs on them. Some of the items hit are also steel and aluminum and orange juice, coffee, toilet paper, circuit breaker panels, washing machines, motorboats, whiskey mustard and beer kegs. The Canadian consumer and American business (and its workers) will get hurt. I’ll state the obvious again, unless we get resolution soon, with better deals and lower tariffs everywhere, global growth will go down and inflation will go up.
In the more up to date inflation metric in Japan, that of just Tokyo in June (whole country data follows next month), was higher than expected. CPI ex food was up .7% y/o/y, up from .5% in May and one tenth more than expected. The rate ex both food and energy was higher by .4% y/o/y, twice the level of May and also one tenth more than forecasted. That doesn’t sound like much but it is the 2nd highest print since June 2016. Because it wasn’t data on the whole country, JGB yields aren’t moving but Tokyo is usually a precursor for the national data.
Japan’s labor market got even tighter in May. Their unemployment fell to a microscopic 2.2% from 2.5% and the estimate was for no change. Go back to the summer of 1992 to see something similar. The job openings to applicant ratio rose to 1.60 from 1.59. In January 1974 it was only higher. How can wages not accelerate higher in this environment? Japanese workers are still skeptical. In today’s consumer confidence figure, the Income Growth component fell to the lowest level since August 2017. This said, regular base pay has been trending up.
Mario Draghi finally got to his 2% inflation target as June CPI was up 2% y/o/y as expected, up from 1.9% in May. This matches the fastest inflation since December 2012. Higher energy prices were the main factor as they jumped by 8% y/o/y. CPI ex food and energy was up by 1.2% which is steady with the trend. Their core CPI which also takes out alcohol and tobacco was up by 1%, also on trend. Services inflation was higher by 1.3% vs 1.6% in May and 1% in April. Bottom line, nothing here will change the ECB plans because the core rate is not accelerating but is still quite stable. The euro is rising but some of that is due to the German migration deal with other countries.
Germany and France both reported unexpected y/o/y declines in May retail sales. German sales were very weak in particular, falling by 1.6% y/o/y vs the estimate of up 1.9%. This is even with a pretty solid labor market but tariff worries are real. In June, unemployment fell by 15k, twice the estimate as the unemployment rate held at 5.2%, the lowest since Checkpoint Charlie fell.
South Korea, an important country to watch in the gauging global trade trends, reported industrial production higher by .9% y/o/y as expected for May. As it is pre tariff implementation, the June and July data will be more relevant.
The yuan broke a 6 day losing streak and that helped to lift Chinese stocks which did bounce back by about 2% to end the quarter. Almost every single market in Asia too rallied. For those with a time horizon longer than a year or two, I am bullish on the emerging markets of Asia. You want the most vibrant regional growth over the next 10 years, this is where you are going to get it.