Morning comment: German IP, Japanese wages & Aussie housing in focus

Chris Scicluna
Mantas Vanagas

After US and European equities achieved further gains on Monday, the positive tone continued into Asia today. Returning from yesterday’s national holiday, the Nikkei rose 0.6% while JGB yields edged higher and the yen rose after the BoJ unexpectedly reduced its purchases of longer-term bonds its latest operation. Specifically, purchases of 10-to-25-year JGBs were reduced by ¥10bn to ¥190bn and purchases of 25-year-plus JGBs were also reduced by ¥10bn, to ¥80bn. This tweak may well represent a continuation of last year’s trend, which saw the BoJ increase its JGB holdings by less than ¥60tn, significantly below its stated guideline of ¥80tn – an intermediate point of reference to achieving the principal target of keeping 10-year JGB yields around zero per cent. And certainly, we don’t think today’s move increases the likelihood that the 10-year yield target will be increased any time soon. Looking elsewhere, Australian bond yields and the Aussie dollar edged higher on the back of a stronger-than-expected November building survey (see below). And the euro area dataflow remained very upbeat with some particularly strong German IP and trade already released this morning.

This week’s schedule of local economic reports kicked off today with the preliminary Monthly Labour Survey of employers for November. This report indicated that total labour cash earnings (per person) rose 0.9%Y/Y in November, up from 0.2%Y/Y in October. This outcome was a little above market expectations, although it’s worth remembering that these preliminary estimates can be subject to substantial revision (as was the case last month, with a preliminary reading of 0.6%Y/Y subsequently revised down by 0.4ppts). Earnings rose a robust 6.9%Y/Y in finance and insurance and 1.5%Y/Y in manufacturing.

At the aggregate level, the pick-up in earnings growth owed in part to a 7.5%Y/Y rise in special earnings (i.e. bonuses), which had been up just 0.2%Y/Y in October. However, growth in contracted earnings also picked up 0.3ppts to 0.6%Y/Y. The latter was mostly due to faster growth in non-scheduled earnings (i.e. overtime), which rose to 2.6%Y/Y from -0.1%Y/Y in October, largely due, it seems, to an increase in over-time hours worked. Growth in scheduled earnings (i.e. ordinary time) edged up just 0.1ppt to a still-tepid 0.4%Y/Y. After allowing for inflation, real total cash earnings rose 0.1%Y/Y in November – the first positive reading for 2017 but hardly a rate to get excited about. Preliminary detail suggests that scheduled earnings for full-time workers rose just 0.1%Y/Y while average hourly earnings for part-time workers rose 1.5%Y/Y, the slowest growth recorded in fifteen months. Overall, we expect wage growth to remain well within the recent range for a few months yet, with the key uncertainty being how firms respond to the government’s enhanced tax incentives to deliver stronger earnings growth in the coming spring pay round. While we might well expect higher headline settlements than recent years, wage growth seems highly likely to remain well below rates required to deliver the BoJ’s 2% inflation target on a sustained basis.

Among other detail in the Labour Survey, the number of hours worked across all industries rose 0.4%Y/Y in November, down from 0.8%Y/Y in October. The number of regular employees rose 2.6%Y/Y in November, also down slightly from the previous month, with strong growth continuing to be seen in education (6.4%Y/Y), hospitality (6.1%Y/Y) and construction (4.6%Y/Y). Growth in full-time employees rose to a strong 3.1%Y/Y whereas growth in part-time employees slowed to 1.7%Y/Y, suggesting a favourable shift in firms’ behaviour in response to the tightness of the labour market. These figures, however, are also subject to revision and we expect the growth attributed to full-time employment to be revised lower, albeit to remain at a relatively elevated level by historical standards.

In other news, the Cabinet Office consumer confidence survey reported a modest 0.2pt decline in headline sentiment to 44.7 in December – still a strong result considering that the previous outcome had been a three-year high. Indeed, within the detail the income-growth index was steady at 43.0, thus maintaining its highest level for more than a decade, to suggest that households are relatively upbeat about the prospects for the coming wage round. Very modest declines were recorded in the other components – including the index measuring respondents’ willingness to buy durable goods (down 0.2pts from November’s three-year high to a still robust 43.8). Overall, sentiment presents no obstacle to consumer spending continuing the improved showing evident in November.

Euro area:
Following yesterday’s very upbeat Commission confidence survey – which saw the headline economic sentiment index rise to its highest since 2000 and the manufacturing index rise to a series high – as well as vigorous euro area retail sales numbers, the positive dataflow continued this morning with Germany’s IP and trade figures for November.As we suspected after unusually weak figures for October, and in line with yesterday’s turnover figures from the sector, today’s German industrial production data for November were very strong, with total output rising by 3.4%M/M, the biggest gain since September 2009, and manufacturing output up by an even-more-impressive 4.3%M/M. This left the level of IP 5.6% higher compared to a year ago, a pace not seen since 2011. And while the three-month rate edged slightly lower, it remained close to 1.0%3M/3M for the fifth consecutive month, suggesting that industrial output is on track to provide another substantive contribution to GDP in Q4.

The latest German trade figures echoed the positive news on industrial output. While import growth was strong, up 2.3%M/M, the value of German exports rose by 4.1%M/M, the most since 2014, to leave the seasonally adjusted trade surplus rising to €22.4bn, the highest level since April 2016. Overall, this morning’s figures tally with recent economic sentiment surveys, including the Ifo, PMIs and Commission indicators, to suggest strongly that Germany was the principal source of euro area economic growth at the end of 2017, with GDP up by 0.8%Q/Q or more.

Later this morning, November euro area unemployment figures are due. Over the preceding twelve months, the headline unemployment rate declined by 1.0ppt, and we expect to see a further decrease in the latest month, to 8.7%, which would be the lowest since the end of 2008. Nevertheless, we think that a significant further drop in joblessness will be required to stimulate any substantive boost to wage growth.

The BRC Retail Sales monitor released overnight brought mixed messages about the strength of consumer spending over the festive period. In nominal terms, sales growth in December remained little changed from the previous month at 1.4%Y/Y on a total basis and 0.6%Y/Y on a like-for-like basis. Against a backdrop of deteriorating consumer sentiment and falling average real incomes, retailers certainly might have done a lot worse than achieve such growth rates, which broadly matched the respective averages over the past year. However, the three-month rate was only 1.1%3M/Y, the slowest since Q1, and the headline figures masked very significant variation across the different sectors. Indeed, judging from this survey, nominal sales growth in the past few months was driven exclusively by the food category, which rose by 4.2%3M/Y. But rapidly rising prices in such more-essential categories, left less money available for other items, and spending on non-food items declined 1.4%3M/Y, the steepest drop on the survey since early 2009. With household budgets set to remain under significant pressure in the short to medium run, we expect this subdued trend on the High Street to be maintained in 2018.

A relatively quiet day in the US brings only the NFIB small business confidence survey and the JOLTS job openings.

Today’s Australian diary featured the building approvals report for November and the ANZ jobs ads count for December. The former revealed an unexpected 11.7%M/M jump in the number of dwelling approvals, leaving annual growth little changed at 17.1%Y/Y. The unexpected growth was driven by the volatile ‘other dwellings’ component (i.e. apartments), which rose 28.7%M/M and 35.8%Y/Y. By contrast, private house approvals fell 2.0%M/M and were up just 2.2%Y/Y. In value terms, total building approvals rose 10.9%M/M and 39.2%Y/Y – in levels terms the second highest reading ever. Residential approvals rose 37%Y/Y and non-residential approvals rose 44%Y/Y. Less striking, however, according to the ANZ, the number of job ads fell 2.3%M/M in December. But this is no cause for concern – the decline likely reflects the usual volatility seen around the Christmas holiday period, with the number of ads still up a very respectable 11.4%Y/Y.

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