NEWS 20 APR

JPY

Today sees the latest public release of the Nikkei Flash Japan Manufacturing Purchasing
Managers’ Index™ (PMI® ). Published on a monthly basis approximately one week before
final PMI data are released, this makes the PMI the earliest available indicator of
manufacturing sector operating conditions in Japan. The estimate is typically based on
approximately 85%–90% of total PMI survey responses each month and is designed to
provide an accurate indication of final PMI data.

“Japan’s manufacturing sector remained stuck in its rut at the start of Q2, with the factors
which have prohibited any growth such as US-Sino relations, growth fears in China and the
turn in the global trade cycle, all remaining prominent risks. Export orders dipped at a
stronger rate in April, domestic demand for goods was similarly weak and firms cut their
stocks and scaled back production. Yet again, the service sector will need to pick up any
slack to help keep Japan’s economy afloat.”

Under projections issued in January, the BOJ expects core consumer inflation to hit 1.1
percent in the current fiscal year and accelerate to 1.5 percent the following year.

It also predicts the economy will grow 0.9 percent this fiscal year and 1.0 percent the
following year.

TOKYO, April 19 (Reuters) - Yields on long-dated Japanese government bonds rose on

Friday APRIL 19 after the Bank of Japan (BOJ) trimmed the amount of debt it offered to buy
at a regular market operation.

Gains in Tokyo shares, which were up nearly half a percent by early afternoon trade, also
weighed on JGB prices.

The BOJ on Friday offered to purchase 160 billion yen ($1.43 billion) of 10- to 25-year JGBs,
down from 180 billion yen at the previous operation last week.

The central bank also trimmed its purchase of 25- to 40-year JGBs, reducing the amount it
offered to buy to 40 billion yen compared to 50 billion yen previously.

Japan’s top government officials vowed on Friday to stick to a planned sales tax hike in
October, barring a big economic shock, putting an end to speculation that it could be delayed
again. “The sales tax hike to 10 percent is needed the most to secure stable financial
resources to pay for social security for all generations,” Finance Minister Taro Aso told
reporters after a cabinet meeting.

Chief Cabinet Secretary Yoshihide Suga also said the government would proceed with the tax
hike unless a big incident such as the shock collapse of Lehman Brothers in 2008.
 Japan’s core inflation picked up slightly in March from a year earlier, but remained distant
from the Bank of Japan’s ambitious 2 percent target in a sign of rising pressure on the central
bank.

Data on Friday showed a 0.8 percent increase in the nationwide core consumer price index
(CPI), which includes oil products but excludes volatile fresh food costs, compared with a
median market forecast of 0.7 percent. In February, annual core consumer inflation hit 0.7
percent.

At a two-day policy meeting ending April 25, the BOJ is widely expected to maintain its
pledge to guide short-term rates at minus 0.1 percent and long-term yields around zero under
a policy dubbed yield curve control.

The BOJ has notched up its warning against the rising drawbacks of its policy. In a semi-
annual report analyzing the banking system on Wednesday, it said nearly 60 percent of
regional banks could suffer net losses a decade from now if corporate borrowing keeps falling
in line with the current trend.

At the two-day rate review ending on Thursday, April 25, the BOJ is widely expected to
maintain its pledge to guide short-term rates at minus 0.1 percent and long-term yields around
zero under a policy dubbed yield curve control (YCC).

The central bank is also seen sticking to its view that Japan’s economy will emerge from a
soft patch and resume a moderate expansion in the second half of 2019, they said.

Japan's monthly trade surplus with the United States grew nearly 10 percent in March,
according to official data Wednesday likely to be seized upon by Washington in ongoing
trade talks with Tokyo.

Data from the Japanese finance ministry showed that the trade surplus climbed by 9.8 percent
year-on-year to reach 683.6 billion yen ($6.16 billion) last month.

The rise follows a 1.5 percent dip in February and a 5.5 percent increase in January.

U.S. President Donald Trump has frequently complained that Japan has an unfair advantage
in bilateral trade and vowed to fix that.

The trade surplus was chiefly due to a rise in exports of vehicles, machines for construction
and mining, and semiconductor-making equipment, the ministry said. At the same, imports
from the U.S. of liquefied petroleum gas, engines and aircraft declined, the ministry said.

Japan's overall trade surplus dropped 32.6 percent last month to 528.5 billion yen, against
market expectations of 363.2 billion yen.

Euro
This is both good and bad news. On the monetary front, policy rates remain at zero or
negative and the ECB has accumulated a sizeable €2.6 trillion (22 percent of euro area GDP)
bond portfolio, complicating further large-scale asset purchases. Measured at the EU or euro
area levels, Europe has averaged general government deficits in 2018 below 1 percent of
GDP, with gross debts falling since 2014. Fiscal space is thus available to combat the next
downturn. Lower interest levels in Europe in the foreseeable future give governments the
capacity to carry extra debt, reducing constraints on Europe’s fiscal capacity.

Germany’s private sector sees modest growth in April as resilient services performance
continues to offset manufacturing weakness

Despite improving slightly, growth of Germany’s private sector economy remained subdued
at the start of the second quarter of the year, weighed down by an export-led contraction in
goods production. The service sector, on the other hand, remained resilient, recording strong
growth in both business activity and employment.

The German government is eyeing incentives to boost corporate research and development
after cutting its forecast for 2019 economic growth for the second time in three months,
reflecting a worsening slowdown driven by a recession in manufacturing.

German Economy Minister Peter Altmaier addresses a news conference to present the 2019
spring outlook of the German economy in Berlin, Germany, April 17, 2019.
REUTERS/Fabrizio Bensch

German exporters are struggling with weaker demand from abroad, trade tensions triggered
by U.S. President Donald Trump’s “America First” policies and business uncertainty caused
by Britain’s planned departure from the European Union.

The difficult trade environment means that Germany’s vibrant domestic demand, helped by
record-high employment, inflation-busting pay increases and low borrowing costs, is
expected to be the sole driver of growth this year and next.

To counter the slowdown, Finance Minister Olaf Scholz plans to support corporate research
and development with incentives worth 1.27 billion euros ($1.43 billion) annually from 2020,
a draft law seen by Reuters showed on Wednesday.

Euro area international trade in goods surplus €17.9 bn €2.7 bn deficit for EU28 Euro area
The first estimate for euro area (EA19) exports of goods to the rest of the world in February
2019 was €183.3 billion, an increase of 4.4% compared with February 2018 (€175.6 bn).
Imports from the rest of the world stood at €165.4 bn, a rise of 4.0% compared with February
2018 (€159.0 bn). As a result, the euro area recorded a €17.9 bn surplus in trade in goods
with the rest of the world in February 2019, compared with + €16.5 bn in February 2018.
Intra-euro area trade rose to €160.3 bn in February 2019, up by 3.4% compared with
February 2018.
US

Total and core retail sales have been erratic over the past four months, largely because of the
government shutdown (see chart). However, the 12-month increase is moving back closer to
the five-year growth rate. The gains are consistent with supportive consumer fundamentals
including a tight labor market, accelerating hourly earnings growth, and favorable consumer
confidence.

A top Federal Reserve policymaker on Thursday said he is “getting more confident” in U.S.
economic growth this year but still thinks current interest rates are appropriate.

“I’m getting more confident about solid growth this year,” Dallas Fed President Robert
Kaplan said in an interview with the Wall Street Journal. He described the U.S. central bank’s
current benchmark overnight lending rate of 2.25 percent to 2.50 percent as “appropriate” and
“mildly accommodative.”

Several banks and analysts revised their forecasts for first-quarter U.S. growth higher on
Thursday after data showed retail sales surging in March and the number of Americans filing
applications for unemployment benefits falling to the lowest level in nearly 50 years last
week.

Retail sales in the U.S. jumped by the most since September 2017 and first-time filings for
unemployment benefits dropped to a fresh 49-year low, as a strong labor market gives
American consumers the wherewithal to keep the economy chugging along.

The value of overall sales in March rose 1.6 percent, boosted by gains in motor vehicles and
gasoline stations, after an unrevised 0.2 percent decrease the prior month, according to
Commerce Department figuresreleased Thursday. That exceeded all forecasts in Bloomberg’s
survey calling for a 1 percent gain.

The US trade deficit narrowed to $49.4bn in February, the best reading since June 2018. This
is $1.752bn less than January, with imports growing just 0.2%MoM as exports increased
1.1%, led by a 4.3% jump in auto exports. This comes after an $8.8bn decline in the US trade
deficit in January resulting primarily from a 3% MoM drop in imports.

CAD

"We saw modest gains in the month of March," said Ahu Yildirmaz, vice president and co-
head of the ADP Research Institute. "Leading job growth was manufacturing, which posted
the strongest gains in a year. Construction and professional services rebounded while natural
resources and mining, trade, information and financial services continued to struggle."

Canada's imports declined 1.6% in February, led by lower imports of gold. Exports were
down 1.3% on lower exports of non-energy products. As a result, Canada's merchandise trade
deficit with the world narrowed slightly, from $3.1 billion in January to $2.9 billion in
February.

Given the late reporting of crude oil transactions, statistics on these exports must be estimated
in the current month's release, and can be subject to large revisions during times of high
volatility in energy prices. Recent months have been marked by significant swings in
Canadian benchmark crude oil prices, creating challenging conditions for the estimation of
export prices.

Owing to a $1.2 billion upward revision to crude oil exports for the January reference month,
the trade deficit, originally published as $4.2 billion last month, was adjusted to $3.1 billion
in the current month's release. Comparable revisions to crude oil export statistics were also
observed when benchmark prices fell sharply in 2015. January total imports were revised
down by $116 million in the current month's release.

GBP

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased
by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth
throughout the first three months of the year.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month rate
was 1.8% in March 2019, unchanged from February 2019.
Figure 1 compares the 12-month inflation rates for CPIH and the Consumer Prices Index
(CPI), along with the rate for the owner occupiers’ housing costs (OOH) component of CPIH.
Given that OOH accounts for around 17% of CPIH, it is the main driver for differences
between the CPIH and CPI inflation rates.

Aud

Commenting on the Commonwealth Bank Flash PMI data, CBA Senior Economist, Gareth
Aird said: “A soft result. But an improvement nonetheless that takes the PMI readings into
expansionary territory.” Mr Aird added: “The economy clearly softened over the second half
of 2018. And the PMIs suggest that the weakness carried over into early 2019. But the
modest rebound in the services PMI is encouraging. There is scope for the PMIs to push
higher over coming months if the personal income tax relief announced in the 2019/20
Budget translates into a lift in consumer demand. The main concern for us in the data was the
employment sub-components of both the manufacturing and services PMIs. Both readings
moved lower and sit in contractionary territory. The next few monthly updates will confirm if
the dip is transitory or not.”

April saw a marginal increase in business activity at Australian companies, the first
expansion in three months. Latest data continued to signal a lack of demand as new orders
were broadly unchanged for the second month running. Meanwhile, shortages of new work
led to a first reduction in staffing levels in the three-year survey history. Rates of inflation
softened, with input prices rising at the slowest pace in the series history while output charge
inflation hit a ten-month low.

Momentum in the economy has decelerated in the near term, but still compares well with
'AAA' peers. Fitch forecasts GDP growth will slow to 2.0% in 2019 from 2.8% in 2018,
before rebounding to 2.5% in 2020. The slowdown is due in part to spillovers from a
weakening housing market on dwelling investment and household consumption. Sluggish
wage growth and high household debt levels have also weighed on consumption. A sizeable
pipeline of public infrastructure spending and recently proposed tax cuts should help support
growth. A sharper contraction than Fitch forecasts in the housing market and a significant
weakening in the Chinese economy pose downside risks to the economic outlook. Australia
has high export exposure to China - roughly 30% of total goods exports - making the
economy particularly sensitive to developments in China's economy.

Monetary policy is likely to remain accommodative to support economic growth and

employment. The unemployment rate has continued to trend downward to 4.9% in February
2019, despite weakening GDP growth. Fitch expects slowing growth to begin to weigh on the
labour market, pushing the unemployment rate up to 5.3% over 2019 and leading the Reserve
Bank of Australia (RBA) to cut its policy rate by 25bp to 1.25%. Inflation is forecast to
remain low and stable just below the RBA's target band of 2.0%-3.0%.