Morning comment: Japan consumption, ECB account, US CPI & UK house prices

Emily Nicol

Overview:
With the corporate reporting season soon to start in earnest – a possible source of unfavourable commentary on how trade policy uncertainty and tariffs are impacting the outlook for earnings – sentiment in equity markets turned decidedly negative on Wednesday. Indeed, the S&P500 closed on its session lows with a loss of 3.3%, marking the worst sell-off since February. The decline was led by the technology sector, with the tech-laden Nasdaq closing down an even greater 4.1%. However, substantial losses were seen across the market with consumer discretionary stocks down 3.7% and industrials down 3.5%. Risk-off behaviour was also seen in the commodity space, with both crude oil and copper recording solid declines, and in wider spreads on corporate bonds. However, remarkably, US Treasury yields ended the day little changed from Tuesday, with the 10-year note closing at 3.19% after touching an intraday high of 3.24%.

Since the New York close, however, 10Y yields slipped back as President Trump stepped up his criticism of the Fed and post-close US equity futures fell. Ahead of a campaign rally Trump told reporters that the Fed “has gone crazy”. Later in the day, reacting to the stock market’s decline, Trump told Fox News that his tariffs on China were not hurting the economy but rather the problem was the Fed. According to Trump “The Fed is going wild. They’re raising interest rates and it’s ridiculous”.

With that background, unsurprisingly, it has been a very rough session for investors in Asian equity markets with all major markets down at least 2½% and most down considerably more. In Japan, risk aversion drove a rally in the yen to a 3-week high of $/¥112, contributing to a 3½% decline in the TOPIX. In China, the CSI300 slumped 5½% to be down 23% for the year to date. Even larger losses were seen in Taiwan 6.3%, while benchmark indices fell 4.4% in South Korea, 4% in Hong Kong, 2.7% in Singapore and 2.7% in Australia.

Japan:
Today the Cabinet Office released its Synthetic Consumption Index for August, providing the most accurate indicator available of how the GDP measure of private consumption is progressing during Q3. The index pointed to a disappointingly flat August, following a weather-impacted 0.6%M/M decline in July (the latter not quite as weak as the 0.8%M/M decline reported initially). As a result, average spending over the July/August period is running 0.5% below the average through Q2. Given that a typhoon and earthquake have likely weighed on spending in September, today’s result means that private consumption has almost certainly declined in Q3 – payback for the surprisingly robust 0.7%Q/Q gain registered in Q2.

In other news, the BoJ reported that the headline PPI rose 0.3%M/M in September, leaving annual producer price inflation steady at 3.0%Y/Y – 0.1ppt above market expectations. Within the detail, prices also rose 0.3%M/M in the manufacturing sector, in large part due to a 2.3%M/M rise in prices for petroleum and coal. Prices for chemicals and metal products rose 0.3%M/M. Agriculture sector prices fell 0.6%M/M, but prices in the utility and scrap/waste sectors rose. Measured in yen terms, import prices rose 0.7%M/M in September and were up 10.9%Y/Y. Prices for energy products rose 1.6%M/M and 37.7%Y/Y, while prices for chemicals rose 1.0%M/M and 9.8%Y/Y. Meanwhile, the BoJ also reported that growth in total bank lending increase 0.1ppt to 2.3%Y/Y in September, marking the fastest growth since January. Growth in lending at the major city banks picked up to 0.4ppts to 1.1%Y/Y. Growth in lending at regional banks declined 0.1ppts to 3.4%Y/Y while growth at shinkin banks was steady at 2.2%Y/Y.

Euro area:
The most noteworthy release today will be the publication of the ECB’s account from the 13 September Governing Council meeting, when the reduction in the rate of net asset purchases from the start of October was confirmed and the staff forecasts for GDP growth and core inflation were nudged lower. The account might just provide further insight into the monetary policy debate, including prospects for possible shifts in reinvestment policy, but the post-meeting press conference was largely uneventful.

Data-wise, this morning also brought final inflation numbers for September from France and Spain. As expected, the French figures confirmed the flash estimate which showed the EU harmonised rate unexpectedly falling 0.1ppt to 2.5%Y/Y. And today’s release also confirmed our expectations that core CPI weakened last month, falling 0.2ppt to just 0.7%Y/Y, the softest rate since December 2017. In contrast, the Spanish figures posted a modest upwards revision to the flash estimate of headline EU harominsed CPI, by 0.1ppt to 2.3%Y/Y, to leave it up 0.1ppt from August. But this principally reflected higher energy price inflation, with core CPI (on the national measure) unchanged on the month at just 0.8%Y/Y.

In the markets, Italy is scheduled to sell bonds with various maturities, with the Lower House is scheduled to discuss and vote on the government’s fiscal outline this afternoon.

UK:
As negotiations between EU and UK regarding the withdrawal deal reportedly remain ongoing, there was further evidence that the housing market continues to lose momentum. Indeed, the RICS headline price indicator eased from 1% to -2% signalling that prices continued to move broadly sideways in September. The figure, however, masked very significant regional variation – for example, the prices indicator for London, South East and East England remained firmly in negative territory, while Scotland, Northern Ireland and the West Midlands continued to report sizeable increases. Perhaps reflecting higher interest rates, today’s survey also suggested that new buyer enquiries continued to decline (the relevant index fell to a six-month low of -10), while supply remained weak too. So perhaps unsurprisingly, survey respondents were more pessimistic about the outlook for prices over the coming three months – indeed, the relevant survey indicator was at its lowest since the EU referendum in June 2016. Moreover, their optimism about the outlook over the coming twelve months maintained its downward trend, with the index at its lowest since 2012.

This morning will also see the release of the BoE’s latest Credit Conditions Survey.

US:
In the US, aside from the usual weekly jobless claims figures, the data focus tomorrow will be the latest CPI figures for September. Consumer prices are expected to have risen 0.2%M/M last month, to leave the year-on-year rate moderating 0.3ppt to 2.4%Y/Y.

Australia:
A quiet day for economic data in Australia saw the Melbourne Institute of Applied Economic and Social Research report that consumer inflation expectations were steady at 4.0% for a third consecutive month in October.

New Zealand:
The REINZ housing report for September reveal a 3.0%Y/Y decline in the number of home sales, compared with a 3.1%Y/Y increase in August. Indeed, the number of sales was the least for a September month since 2011. Even so, the REINZ house price index, which adjusts for the impact of compositional shifts in sales, rose 4.0%Y/Y, down only marginally from 4.1%Y/Y last month. While prices rose just 0.4%Y/Y in the previously-overheated Auckland market, they recorded an average increase of 7.4%Y/Y elsewhere in the country.

In other news, food prices fell 0.1%M/M in September and were up just 0.1%Y/Y. The driver was an 8.7%M/M decline in the price of vegetables, with prices rising across the other main subgroups. Despite the soft September reading, prices still rose 0.7%Q/Q in Q3. The full CPI for Q3 will be released next Tuesday.

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