Morning comment: 'Fake news', Japan & Aussie spending, & ECB account

Chris Scicluna
Mantas Vanagas

Overview:
Bond markets remained jittery yesterday as investors reacted to a newswire story suggesting that China’s appetite for US Treasury purchases may be waning (a report which the relevant Chinese authorities subsequently suggested ‘may be fake news’). Later in the session, sentiment was also undermined by another report that indicated increased concern amongst Canadian officials that President Trump will decide to withdraw the US from Nafta. The slight risk-off tone carried through to Asia today with several key bourses posting modest declines, including a 0.3% fall in the Nikkei despite a slightly weaker yen. With US Treasury yields receding from their session highs, bond yields also generally edged lower in Asia with the yield on 10-year JGBs edging back below 7bps. However, Australian bond yields edged higher and the Australian dollar firmed following the release of a much stronger-than-expected retail sales report for November. Looking ahead to the rest of today, with the euro area economic dataflow strong and the hawks on the Governing Council vocal since the start of the year, bond markets will keep an eye on the account of the ECB’s December policy meeting for any hints of a possible shift in the central bank’s forward guidance over coming months.

Japan:
The main domestic economic point of interest in Japan today was the BoJ’s Consumption Activity Index – constructed using both demand and supply side indicators and thus generally providing a more reliable indicator of the national accounts measure of private consumption spending than the household data alone. The headline real index rose 0.5%M/M in November, the same as in October, nudging annual growth up to 1.6%Y/Y from 1.0%Y/Y previously. Most of the growth was accounted for by spending on durable goods, which rebounded 5.8%M/M after declining 3.8%M/M in October. The travel-adjusted real index – which conceptually aligns most closely with the national accounts measure of private consumption, by removing the net spending of tourists – rose 0.6%M/M in November, lifting annual growth to a four-month high of 1.4%Y/Y. On this measure spending in the first two months of Q4 is running 0.1% above the average monthly level seen in Q3, suggesting that private consumption is on track to make a small positive contribution to GDP growth. The Cabinet Office’s synthetic consumption index for November, which of all indicators tends to have the best correlation with private consumption, will cast more light when it is published later this month.

Euro area:
The run of very strong economic sentiment survey results from the euro area continued this morning with the latest Bank of France business climate indices. In particular, tallying with the recent strength of the manufacturing PMIs, the survey index for that sector leapt 4pts in December to 110, well above the long-run average and the best since February 2011. The equivalent index for services rose too, to 103, the highest since May 2011. And the construction index was unchanged at 104, an above-trend level also consistent with growth in the sector. Given the strength of the survey, the Bank of France revised up its expectation for French GDP growth in Q4 by 0.1ppt to 0.6%Q/Q, matching the rates in each of the first three quarters of 2017.

Perhaps most notable today will be the publication of the account of the ECB’s December monetary policy meeting. Judging from Mario Draghi’s post-meeting press conference, the meeting was a relatively inconsequential one, with the principal focus having been the updated economic forecasts. Nevertheless, with the Governing Council hawks having recently been particularly vocal – e.g. with Bundesbank President Weidmann calling for a definite end-date for the ECB’s bond purchase programme and Executive Board member Benoît Cœuré also raising doubts about policymakers’ current language on the policy outlook – the account might shine some further light on the relative strength of support for the existing forward policy guidance, which continues to leave open the possibility of additional asset purchases after September and continues to foresee rates remaining at current levels well past the horizon of the net asset purchases.

Other data scheduled for release this morning include the first full-year estimate of German GDP in 2017 – expected to rise to about 2.4%Y/Y, up 0.5ppt from 2016 – as well as German fiscal numbers for last year, which will likely show a general government surplus of more than 1% of GDP, the largest since the introduction of the euro, to provide a reminder of the likely persistent scarcity of Bund supply over the coming year. In addition, following the strong gain in Germany but dip in France, euro area industrial production figures for November, which are also due this morning, are likely to show growth somewhere between 0.5-1.0%M/M following a rise of 0.2%M/M the previous month, to remain on track for a substantive gain of more than 1.0%Q/Q in Q4. Finally, in the bond markets, Italy will sell 3Y and 7Y BTPs.       

UK:
Later this morning, the BoE will release its Credit Conditions Survey for Q417. The survey released three month ago suggested that lenders were reducing the availability of unsecured credit, most likely in response to BoE concerns that this category of lending might pose risks to bank balance sheets. And although last week’s lending figures reported that growth in this sector eased in November to the slowest in almost two years, it still remained above 9.0%Y/Y. So, today’s survey data might well signal that lenders are taking further measures to curb growth in this sector.

US:
In the US, ahead of tomorrow’s key CPI inflation figures for December, today will bring producer price data for the same month. The December federal budget statement and usual weekly claims numbers are also due. New York Fed President Bill Dudley will speak publicly on the economic outlook. And the Treasury will sell 30Y bonds.

Australia:
The main focus in Australia today was the retail sales report for November, which at face value confirmed that forward momentum has returned following a the slow patch seen through Q3. Total spending rose 1.2%M/M, well above market’s expectation of 0.4%M/M. Following an unrevised 0.5%M/M increase in October, this means that annual growth rose to 2.9%Y/Y from 1.8%Y/Y last month. The November result also means that average monthly spending through Q4 is running 1.1% above that seen in Q3. Growth in November was driven by a 4.5%M/M surge in spending on household goods and a 2.2%M/M lift in spending on ‘other retailing’ – growth that would have been strongly influenced by the release of Apple’s new iPhones and the increasing popularity of ‘Black Friday’ sales in Australia. As a result, while today’s data was pleasing, the market will likely anticipate some payback in retail spending when the December data are released next month. 

New Zealand:
The ANZ jobs index fell 0.3%M/M in December, a second consecutive modest decline in the wake of the General Election. Even so, the index remained up 3.8%Y/Y. Given the disruption caused by the summer holiday period it is unwise to reach strong conclusions about this data at this time of the year. In other news, with election-related uncertainty now resolved, the latest QV data pointed to a modest rebound in the housing market. The QV house price index rose 3.6% in the three months through December lifting annual growth to 6.6%Y/Y (prices in the previously-overheated Auckland market rose just 0.4%Y/Y). Over coming months some further marginal support should be provided by the modest macro-prudential policy easing that was implemented by the RBNZ on 1 January.

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