TOKYO (Reuters) – Japan’s government slightly raised its economic view for a second straight month in July, though authorities conceded that the situation remained severe in light of a renewed spike in coronavirus cases in many parts of the world.
The government described the world’s third-largest economy as “showing signs of picking up” from the COVID-19-induced recession, underscoring cautious optimism among policymakers as more countries have started re-opening their economies following lockdowns to curb the spread of the virus.
Although the global economy has shown some signs of bottoming out recently, analysts say world demand for cars and other durable goods is unlikely to recover strongly given the resurgence of coronavirus cases in major economies.
“The Japanese economy remains in severe situation due to the novel coronavirus, but it is showing signs of picking up recently,” the government said in its economic report for July.
“The pick-up trend in the economy is expected to continue… However, attention should be paid to the risk that domestic and overseas infections would affect economies.” the report added.
Japan’s economy is in the grip of its worst postwar recession as the health crisis takes a heavy toll on business and consumer activity. It is forecast to shrink 5.3% this fiscal year, the biggest contraction in decades, followed by a 3.3% bounce next year, a Reuters poll showed.
With car exports to China, the United States and European Union bottoming out, and with auto production starting to pick up from June, the government raised its view on exports and output.
Shipments were about to stop contracting, and output showed signs of picking up in some industries although it was declining as a whole, the report said.
However, a Cabinet Office official said an exports recovery is unlikely to be very strong.
The government also lifted its view on business sentiment for a second straight month in July to say corporate morale showed the trend towards improvement, a slightly better assessment than the previous month.
(Reporting by Tetsushi Kajimoto; Editing by Shri Navaratnam)
As the economy hits its peak, stock market gains could be harder to come by – CNBC
Diminishing economic returns could mean diminishing stock market returns as the U.S. transitions to a post-pandemic economy.
Wall Street increasingly is talking about peak growth in both the economy and corporate earnings as a stimulus-fueled recovery gives way to more normalized patterns.
Congress and the Federal Reserve have provided trillions in funding and liquidity measures that soon either will dry up or at least begin evaporating, leaving investors to ponder what lies ahead with their portfolios.
The market will have to handle what is likely to be a lasting bout with inflation at a time when the drivers for growth are uncertain.
“It’s a world that we haven’t had to deal with in 40-plus years, and I don’t think you can just take out your regular playbook from the last couple of decades,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Valuations of pretty much everything are extraordinarily high, which means there’s no room for error.”
Boockvar spoke of an environment in which inflation will be higher as growth moves lower, a cycle known as “stagflation,” something the U.S. wrestled with for years from the mid-1970s to early ’80s. Practically no one thinks the current conditions will morph into something that bad, but there are similarities.
Inflation is running at 30-year highs, according to the Fed’s preferred gauge, while growth lately has been solid but a bit disappointing. Second-quarter GDP rose at a 6.5% annualized pace, but that was well below the 8.4% Wall Street estimate. Manufacturing data released Monday showed the sector still expanding, but at a lower-than-expected rate.
The factors are combining in “the classic recipe for a growth scare,” wrote Nick Colas, co-founder of DataTrek Research.
Looking at Apple Mobility and Google data that examines how people are getting around, Colas found that they are providing “a worrisome combination” though it’s too early to tell how things will shape out in the long run.
Still, he warned that investors high on the second quarter’s record-breaking pace of corporate earnings beats may find trouble ahead.
“Excellent Q2 earnings have allowed us to shake off that [growth scare] narrative every time it’s come up in recent weeks,” Colas said. “Now that the bulk of earnings season has passed, however, and seasonal volatility trends assert themselves we may see the growth scare narrative break through more convincingly.”
The trouble with optimism
The factors of higher inflation, slowing growth and waning stimulus occur amid high levels of investor sentiment as the major stock market averages hover around record highs.
In fact, that brimming optimism is flashing warning signs, according to Bank of America.
The firm’s gauge of investor sentiment that measures Wall Street portfolio allocations to stocks is the closest it’s been to a “sell” signal since May 2007, shortly before the market was about to hit record highs that soon would come tumbling down during the financial crisis.
“We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said in a note to clients. Higher allocations to stocks eventually end up pointing to a decline ahead, the gauge has shown.
Subramanian said the indicator’s current level is pointing to price returns in the next 12 months of just 7% compared with the average forecast of 13% since the financial crisis ended in 2009.
To be sure, a slowing economy doesn’t mean negative returns, and the current conditions may be pointing at nothing more than a cooling off for a market that has been on fire since rocketing to its pandemic low in late March 2020. After all, even though fiscal stimulus is slowing, the Fed remains committed to keeping its policy ultra-loose until it sees much more progress on employment.
“With the recovery still underway, investors shouldn’t be frightened by headlines declaring slowed momentum,” said Seema Shah, chief strategist at Principal Global Investors. “Once markets have digested the transition to a more sustainable pace of expansion, decelerating growth is usually associated with weaker, but still positive, equity returns.”
In fact, the past two peaks in earnings cycles have led to double-digit market gains over one-, three- and five-year periods, said Jason Pride, chief investment officer of private wealth at Glenmede.
“Rather than obsessing over near-term growth peaks, investors would be wise to see the bigger picture,” Pride said in his weekly market note.
Still, signs that growth is abating are worrisome.
The bond market in particular is pointing to a substantial slowdown ahead, with the 10-year Treasury note yielding just 1.18% Monday afternoon. The benchmark yield below 1.25% is the bond market “signaling not all is well economically,” wrote Christopher Harvey, senior equity analyst at Wells Fargo.
Boockvar, the Bleakley investment chief, said the current economic environment could cause problems for a market that has relied on investors willing to pay consistently at higher valuation multiples.
“One of the characteristics of the equity market in the 1970s was one of multiple compression,” he said. “A lot had to with the sharp rise in interest rate. But it becomes a more challenging environment with a bout of stagflation, even if it’s stagflation-lite.”
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Delta variant bears down on China just as its economy loses steam – CTV News
The Delta variant poses new risks for the world’s second-biggest economy as it spreads from the coast to China’s inland cities and presents fresh challenges to authorities who have for months managed to avert any widespread outbreak of the coronavirus.
Barely a month after disrupting industry in the southern export hub of Guangdong, cases of the Delta variant were detected in Nanjing, capital of Jiangsu province on the coast. The infections were traced back to a flight from Russia.
Since Nanjing confirmed its first Delta cases on July 20, numerous cities in southern China and a few in the north including Beijing have reported infections. The tally of locally transmitted cases stood at 353 as of Sunday.
It was not immediately clear whether Nanjing was the source of all the infections, as some authorities have yet to disclose the outcome of their virus-tracing efforts.
Jiangsu, the province with the second-largest economic output after Guangdong in 2020, is by far the worst-hit, accounting for about 80 per cent of the confirmed cases.
The emergence of the variant, which is more transmissible than the original strain first detected in the city of Wuhan in late 2019, has seen the return of tough counter-epidemic measures.
Many cities have warned against non-essential travel, required proof of negative tests for those who do travel, and launched mass-testing for the virus.
Policymakers are under pressure to ensure that while populations are protected, economies are not excessively strained.
China’s overall economy is not invulnerable. It grew more slowly than expected in April-June, due to persistently high raw material prices, cautious consumer spending and a subdued real estate market.
“The Delta variant is the biggest test of China’s zero-COVID strategy since the initial outbreak last year,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“But given the country’s track record in dealing with the virus so far, our assumption is that they will quash the outbreak before it gets out of control. Of course, doing so will come at some economic cost.”
Yangzhou, near Nanjing, has been battling rising coronavirus cases since last Wednesday. Many factories and logistics firms in the city of 5 million have been shut as employees joined queues of people to get tested, some up to three times a week.
“We cannot deliver goods because the delivery firm informed us that they’ve suspended their services,” said a manager of a toy factory surnamed Wang.
“In the past few days, many places have been gradually locked down. We were officially told to stop operations today, and all our employees didn’t come to the factory.”
Tourism in some smaller cities could take a hit in August, usually a peak travel season due to the summer school break.
Zhangjiajie, where dramatic stone pillars inspired the Hallelujah Mountains in the 2009 blockbuster “Avatar,” has seen an outbreak, linked to Nanjing, traced to a theatrical performance at a tourist site on July 22.
Zhong Nanshan, a coronavirus expert who helped shape China’s COVID-19 response, told a conference on the weekend that he was not too worried about the ability of big cities, like Nanjing, to tackle the virus with their “excellent” control systems, state media reported.
But there were questions about the ability of smaller places, like Zhangjiajie, with limited resources when suddenly having to test and trace the 2,000 people in the audience for the show as well as their close contacts, he said.
Zhangjiajie, nestled in the mountains of Hunan province, has gone into a semi-lockdown, closed tourist sites and indoor entertainment venues, and told people to avoid unnecessary trips.
“All staff at our hotel must take nucleic acid tests every two days,” said a front desk attendant surnamed Li at the Zhangjiajie Huatian Hotel.
The hotel is not open to the public and its online reservation system is suspended.
A staffer surnamed Yin at Zhangjiajie China International Travel Agency said everyone at her agency had been sent home for a “vacation.”
“We’re waiting for the notice on when we can start working again,” she said.
(Reporting by Ryan Woo and Roxanne Liu; Additional reporting by Beijing Newsroom)
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