Overseas markets provided a mixed background for Asia today, with yesterday’s ECB-inspired weakness in European equity and debt markets countered by a solid rebound in US equities and the Treasury market. As might have been expected, Asian markets largely keyed off developments on Wall St. That said, moves have been generally modest – not surprising with key US CPI and retail spending reports due later today. And Japanese equity markets were the under-performers, with the Topix declining 0.6% to close lower than a week ago off the back of the slightly firmer yen. There was little reaction to the data flow through the session, which was highlighted by a much larger than expected Chinese trade surplus in December, although Japan’s Economy Watchers and bank lending figures were a touch softer (more on all this below). Reports that the negotiators from the CDU, CSU and SPD have reached a breakthrough (but no deal yet) in their ongoing ‘exploratory’ talks on a possible new German coalition government have given a further boost to the euro this morning. An announcement is expected later this morning.
The latest Economy Watchers survey reported a slight decline in business optimism in December from downwardly-revised levels in November. The overall current conditions index declined 0.2pts to 53.9 from a revised 54.1 (previously estimated at 55.1). While this outcome was a little below market expectations, with the exception of November’s reading this was still the highest since March 2014. The modest decline was driven by a 0.4pt fall in the household index to 52.3, while the business index rose 0.4pts to 55.5 – just short of the October high. The more forward-looking overall expectations index declined 0.7pts to 52.7 (November was revised down 0.4pts to 53.4), but other than the past two months this reading has not been beaten since May 2015. In the detail, both the household index (down 0.6pts to 52.0) and the business index (down 0.6pts to 52.4) were a little less buoyant this month, the latter largely due to a further decline in optimism amongst manufacturers. Even so, in common with other sentiment-based indicators, the survey remains very much consistent with continued above-trend growth in the Japanese economy.
Today also saw the release of bank lending data for December. Total bank lending grew 2.5%Y/Y, slowing for a fifth consecutive month after reaching an 8-year high in July. As in previous months the slowdown was led by lending at the major city banks – now up just 1.2%Y/Y, which is the slowest rate of growth recorded since November 2016. To some extent the slowdown may reflect continued growth in large-firm corporate profitability and retained earnings. Growth in lending at regional banks was steady at 3.5%Y/Y and that at shinkin banks was steady at 2.6%Y/Y, suggesting that the potentially adverse side-effects of the BoJ’s yield curve control policy on bank profitability – which pose more of a challenge to such institutions than the mega-banks – are not the cause of the slowdown in lending.
Finally, Japan recorded a seasonally-adjusted current account surplus of ¥1.7bn in November, down from the ¥2.4bn surplus recorded in October. While below market expectations, the surplus was little changed from that recorded a year earlier. The decline was largely due to a weaker services balance (which moved back into a small deficit) and a less positive surplus on primary income. Nevertheless, with one month of data remaining, the current account surplus is on track to reach about ¥22trn (a little more than 4% of GDP) in 2017, which will be the biggest in a decade.
China’s trade surplus unexpectedly rose in December to USD54.7bn (or CNY362bn in local currency terms), the largest since January 2016. In US dollar terms, growth in exports slowed marginally to 10.9%Y/Y, more-or-less in line with market expectations. However, growth in imports slowed sharply to just 4.5%Y/Y from 17.6%Y/Y in November (when measured in local currency terms, growth in both exports and imports is about 3½ppts softer).
Given the considerable strength seen in imports through 2017 – far outpacing exports for the year as a whole – it is unwise to read too much into the slowdown this month. However, this does imply that weaker export growth will be reported elsewhere in Asia during December. For example, Chinese imports from Japan rose just 1.4%Y/Y in local currency terms in December, down from 12.7%Y/Y in November. In yen terms, this implies that Japan’s exports to China rose about 4%Y/Y, down from 15.7%Y/Y previously (the three-month average still stands at 13.5%Y/Y). China’s imports from the EU rose a relatively healthy 12.2%Y/Y. By contrast, China’s imports from the US grew just 2.2%Y/Y. China’s direct trade surplus with the US stood at USD25.6bn in December, with a total surplus of USD276bn billion in 2017 accounting for about two-thirds of China’s surplus with all countries over that period – sure to be a continued source of tension with the Trump administration.
Separately, data just released reported a sharper-than-expected slowdown in new credit at the end of the year, suggesting perhaps that the authorities’ efforts to reduce leverage progressed towards year-end. In particular, the broadest measure, aggregate financing, fell about CNY0.5trn to CNY1.1trn, while new yuan loans came in at CNY584bn, little more than half the expected level.
The release yesterday of the ECB’s policy-meeting account, which gave more than a hint of a change in monetary policy guidance early this year, gave markets something to get excited about yesterday, with the euro leaping more than 1 cent against the dollar to above $1.205, and Bunds and equities weakening. Assuming the economic data over the near term are broadly satisfactory – and don’t forget that, since that policy meeting, December’s preliminary inflation data have come in weaker than most observers expected with euro area core CPI still less than 1%Y/Y – the new guidance, presumably, will include a signal on what is likely to happen to the asset purchase programme once the current phase has been completed at the end of Q3, and perhaps also a clearer guide to how interest rates are likely to be adjusted from next year on. However, we certainly haven’t changed our view on the outlook for ECB asset purchases or rates.
Notably, yesterday’s account made clear that there will be no change in the likely sequencing of policy changes, i.e. the ECB will continue to make clear that any rate hikes are expected to come only after the net asset purchases have been reduced to zero. And so, while the revised guidance might well signal more clearly the likelihood of an end to net purchases by the end of the year, it is also likely to make clear that rates are likely to be raised only very gradually thereafter. We continue to expect a gradual tapering from October, with December representing the final month of net buying. And we expect the first hike in the deposit rate to come mid-2019, and subsequent hikes few and far between thereafter.
In Germany, the preliminary coalition talks between Merkel’s centre-right CDU, her CSU sister party, and the centre-left SPD continue ahead of today’s self-imposed deadline. But after roughly 24 hours of negotiations, reports suggest a breakthrough, with an announcement of an outline agreement expected later this morning. Of course, given that the party had previously rejected the possibility of collaborating with Merkel in another grand coalition, whatever is agreed today will still require the approval by SPD delegates at a special party convention on 21 January, before formal coalition negotiations can be launched. Nevertheless, today could well represent a welcome step forward to re-establishing effective government at the heart of the euro area.
Meanwhile, it’s a relatively quiet end to the week for economic data from the euro area. Among various second-tier data due, the final estimate of Spanish inflation in December is expected to align with the flash estimate, for which the EU-harmonised measures both came in at 1.3%Y/Y, down 0.5ppt on the month. However, this morning’s equivalent French figures saw a slight downwards revision of 0.1ppt from the flash, thus remaining unchanged from November at 1.2%Y/Y (although to two decimal places this was still just a whisker away from being unrevised). Elsewhere, Italian industrial production data for November are expected to show another month of expansion close to the 0.5%M/M rate of October.
Today’s most notable data will come from the US, where December CPI and retail sales figures are due. Headline CPI might be weighed by gasoline prices, and so we expect a rise of just 0.1%M/M. However, core CPI is expected to be a touch firmer, up 0.2%M/M. Those figures would see the annual pace of CPI inflation inch slightly lower having risen to 2.2%Y/Y in November while the annual core rate would remain at 1.7%Y/Y. Meanwhile, although the festive shopping period appears to have been relatively positive, the strength might have been disproportionately concentrated in November, and so we expect to see retail sales growth slow to 0.3%M/M and 0.2%M/M ex-autos and gasoline from 0.8%M/M on both measures the previous month.
The number of dwelling consents issued rebounded 10.8%M/M in November – driven by a recovery in the volatile apartment sector – to be 13.6%Y/Y. Single home consents fell 1.3%M/M and were up just 1.5%Y/Y. The total value of residential consents issued in November rose 11.5%Y/Y. And with the value of non-residential consents rising an even stronger 33.6%Y/Y, the total value of all construction consents issued in November rose 17.1%Y/Y. This suggests that the construction sector will remain an important contributor to economic growth in the near-term at least.