Morning comment: US CPI, UK Spring Statement, Japan & Aussie data

Chris Scicluna
Mantas Vanagas

Having rallied at the end of last week, Wall Street was little changed yesterday (the S&P500 closing down 0.1%) as investors awaited today’s important US CPI report for direction. With 10Y UST yields holding close to 2.88%, Asian investors also mostly displayed a similar ‘wait and see’ mood, with regional equity markets showing no clear trend. However, overlooking some weak services activity data, Japan’s Topix closed up more than 0.5% on the day as the yen depreciated back close to ¥107/$, seemingly weighed by the Moritimo scandal currently engulfing Finance Minister Aso. In contrast, Australia’s ASX200 was an underperformer, falling 0.4% despite a very upbeat NAB business survey (detail below).

While there were no show-stoppers from today’s domestic data diary, the new releases – the Tertiary Industry Activity Index for January and producer goods prices for February – both had a softer-than-expected tone.

Indeed, tertiary sector activity – which accounts for more than 70% of overall activity – fell a very disappointing 0.6%M/M in January, which was well below market expectations. While annual growth in the as-reported raw series rose 0.3ppt to 1.6%Y/Y, we note that annual growth in the seasonally-adjusted series slowed 0.4ppts to 1.2%Y/Y. The decline in January was mostly driven by the index of business services, which fell 0.8%M/M, whereas the index of personal services fell just 0.1%M/M. By far the largest negative contribution came from a 4.1%M/M decline in wholesale trade (indeed this alone subtracted 0.6ppts from the headline index). Smaller negative contributions from retail trade and the medical/health/welfare sector were offset by positive contributions from elsewhere (notably the living/amusement-related and IT sectors). Given the poor January outcome, the Tertiary Industry Index now sits 0.2% below its Q4 average. And next week’s All Industry Activity Index for January is bound to be soft as well (perhaps showing a drop upwards of 1½%M/M), given a likely weather-affected retrenchment in the construction sector as well as the steep 6.6%M/M initially-estimated decline in manufacturing activity (the latter to be confirmed in Friday’s final IP report).

In other news, the headline PPI index was unchanged in February, which was a slightly weaker-than-expected outcome after eight consecutive months of increase. As a result, annual growth slowed for the third month, down 0.2ppt to a seven-month low of 2.5%Y/Y. Within the detail, a 0.5%M/M decline in prices in the petroleum/coal sector marked a sharp departure from the experience of recent months. Along with a further 0.8%M/M decline in the price for non-ferrous metals, this helped to drive a 0.1%M/M decline in prices in the manufacturing sector. However, agricultural sector prices rose modestly after falling sharply in January, and prices in the minerals and utilities sectors edged higher too. Thanks to events in forex markets, import prices measured in yen terms fell for the second successive month, albeit by just 0.1%M/M, so that annual growth slowed further to 4.4%Y/Y, the lowest since January 2017, from 5.0%Y/Y. Finally we note that Japan’s Manpower employment index was unchanged this quarter, continuing to suggest an exceptionally tight labour market, with a net 24% of firms still desperately seeking staff.

All eyes today will be on the US CPI report for February. In line with the Bloomberg consensus, Daiwa America’s chief economist Mike Moran expects to see both headline and core CPI rise 0.2%M/M. That would see the annual headline rate rise 0.1ppt to 2.2%Y/Y, but the annual core rate remain unchanged at 1.8%Y/Y, in line with the average of the past year.  Mike notes that while gasoline prices rose slightly in February, the seasonal adjustment process will probably translate that change into a slight decrease. In addition, while he doesn’t expect to see a repeat of the 0.3%M/M jump in core prices in January, which might have partly reflected a degree of residual seasonality, the increase will probably exceed the 0.1% rate registered in several months last year. The February NFIB small business sentiment survey is also due today, and seems set to remain close to the top of the range on the series.

Euro area:
A quiet day for euro area economic data has already brought the most notable new release in the shape of the French payrolls report for Q4. Total payrolls rose 0.3%Q/Q, in line with the average of the past six quarters, to leave them up 1.1%Y/Y, again in line with the recent trend. Within the detail, an acceleration in the private sector (up 0.4%Q/Q and 1.5%Y/Y) more than offset a second successive quarterly drop in the public sector (down 0.2%Q/Q and also down 0.2%Y/Y), to reflect Macron policy initiatives (labour market reforms and public sector cuts) as well as the impact of firmer economic expansion. Indeed, job growth was evident across the private sector, albeit strongest in construction (up 1.0%Q/Q and 2.3%Y/Y) and services (0.5%Q/Q and 1.9%Y/Y). And while economic growth looks to have moderated somewhat, surveys such as that produced by INSEE (which suggested that the employment climate remained the most favourable in February since 2011) point to continued firm payroll growth in Q1.

Today brings the Chancellor’s Spring Statement, the first such announcement since the main Budget was moved to the autumn. There will be no changes to policy, principally just an update to the OBR’s fiscal and economic forecasts. The most recent monthly public borrowing figures confirmed that PSNB for the financial year to date is running at its lowest level since the financial crisis, thanks to a boost in tax receipts. Accordingly, the deficit could undershoot the official 2017/18 forecast of £49.9bn by as much as £10bn. Meanwhile, having downgraded its GDP growth expectations at the time of November’s Budget, the performance of productivity growth and GDP since then suggests the OBR might nudge that outlook a touch higher this time around. Finally, following December’s draft agreement on withdrawal terms, the OBR report will also contain estimates of the impact of the UK’s Brexit “divorce” payments.

Australia’s NAB business survey depicted an extremely strong picture in February. The closely-watched business conditions index rose to 20.8 from 18.5 previously, which marks a new all-time high for the monthly survey (which stretches back to 1997). Firms were more upbeat about trading, profitability and orders. Most impressive of all was a 10pt lift in the employment index to 16.4 and an 8pt rise in the capex index to 18.0, in both cases also marking record highs for these series. Despite the activity indicators being so upbeat, the survey continued to suggest that firms’ output prices are rising at a very subdued pace (just 0.4% over the past quarter). However, the survey did indicate some additional upward pressure on labour costs.

The other Aussie data overnight were not so upbeat. Ahead of tomorrow’s monthly Westpac index, the weekly ANZ-Roy Morgan index of consumer sentiment last week fell 3.0pts to 116.0, the second-lowest reading seen this year. Meanwhile, the number of new housing loans fell 1.1%M/M in January, close to market expectations, to be down 1.9%Y/Y. Excluding loans for refinancing, the number of new loans fell an even greater 1.8%M/M. In value terms, total lending rose 0.7%M/M with investor finance rebounding 1.1%M/M following a 2.9%M/M decline last month.

New Zealand:
The only event of any note in New Zealand today was a speech by soon-to-retire Acting RBNZ Governor Grant Spencer, setting out his views on macro-prudential policy. With the RBNZ’s macro-prudential policy up for review as part of the new Government’s wider review of the Reserve Bank Act, Spencer argued that “A more systematic approach to policy adjustments, and the integration of a clear governance structure into the Reserve Bank Act, including potentially a new decision-making Financial Policy Committee, should assist in putting macro-prudential policy on a sound footing for the future.” To the extent that macro-prudential policy will remain a feature of the landscape, perhaps within a framework akin to that of the BoE, this provides a further reason why New Zealand’s interest rates are likely to remain lower than typically seen in the past (the most compelling reason is the high level of debt that is now carried by households).

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