Morning comment: FOMC, RBA and Japan, euro area & UK data releases

Mantas Vanagas
Emily Nicol

Overview:
As widely expected, at the conclusion of last night’s FOMC meeting, the Fed made no change to either its policy target range or the interest rate paid on excess reserves. And as also expected, the post-meeting statement contained very few changes from that issued previously – simply acknowledging the recent data flow, with a slightly less upbeat assessment of recent business investment and a more positive assessment of the labour market. Even so, the US dollar rallied in the wake of the Fed’s message. But while this weighed initially on the equity market, at the close the S&P500 was down just 0.25% – about where it had been prior to the Fed’s announcement. The yield on 10-year Treasuries drifted up 1bp to a high of 3.24% but then since drifted lower as Asian markets – especially those closely linked to China – began trading with a negative tone.

The weaker sentiment persisted throughout the trading day sending major equity indices notably lower. Hong Kong’s Hang Seng was the worst performer, reporting a loss of nearly 2½%, while the drop in the value of Chinese stocks was also significant – the CSI 300 fell 1.4%. And with the latest Japanese consumption data (see below) reinforcing expectations of a negative Q3 GDP growth reading next week, the Topix fell 0.5%.

Japan:
Today the Cabinet Office released its Synthetic Consumption Index for September, providing the most accurate indicator available of next week’s release of the GDP measure of private consumption for Q3. In contrast to the surprising pickup in activity suggested by this week’s BoJ Consumption Activity Index, the Synthetic Consumption Index reported a 0.2%M/M decline in real spending, albeit following an upwardly-revised 0.3%M/M increase in August. As a result, spending fell 0.3%Q/Q in Q3, following growth of 0.7%Q/Q in Q2 – an outcome that is not surprising, especially in light of the influence of Mother Nature during the quarter. Our colleagues in Tokyo forecast that next Wednesday’s National Accounts will reveal a 0.2%Q/Q contraction in real GDP in Q3 – a forecast clearly supported by today’s data (indeed a slightly larger contraction would not be surprising).

UK:
The data focus in the UK today will be on the first estimate of Q3 GDP. We expect growth to have accelerated slightly from 0.4%Q/Q in Q2 to 0.5%Q/Q, although the risks to that forecast look to be skewed to the upside – indeed, the BoE expects to see a 0.6%Q/Q print. Retail sales increased notably that quarter and new car sales also provided a positive contribution. And while business investment is set to have remained subdued against the backdrop of Brexit-related uncertainty, net trade seems to have provided a positive contribution to growth for the first time in three quarters.

Alongside the GDP data we will receive the usual monthly activity indicators – services, industrial and construction output – for September and trade figures for that month too.

Euro area:
Focus in the euro area today, meanwhile, will likely remain on Italy after a BTP spreads widened yesterday towards the 300bp mark as the European Commission published its latest economic forecast showing that the general government deficit in Italy is set to rise to 2.9% of GDP in 2019, much higher than 2.4% predicted by the Italian government itself. And in marked contrast to the Italian government’s expected decline (to 2.1%) in 2020,  the Commission forecast the deficit to widen to 3.1% of GDP the following year, above the level consistent with EU rules. Of course, this is not overly surprisingly given that the Italian government’s projections were based on overly optimistic growth forecasts. Indeed, the Commission expects Italian GDP growth of 1.2%Y/Y next year, the slowest pace in the euro area. In the usual confrontation manner top Italian government officials quickly denounced the Commission’s numbers with PM Conte saying that there was no reason to question his government’s forecasts and that they will remain the basis for their fiscal plans. The situation has further escalated political tensions between Brussels and Rome, with Italian securities likely to remain under pressure over coming days as they await next Tuesday’s deadline by which Italy has to resubmit their revenue and spending projections.

With respect to today’s euro area data, this morning’s French industrial production release was disappointing. In particular, industrial production fell 1.8%M/M in September, following downwardly revised growth of 0.2%M/M in August. And when excluding a strong showing from construction (3.8%M/M) and utilities (3.8%M/M) the performance was even more disappointing. Indeed, manufacturing output fell more than 2%M/M, thanks in part to a more-than 6%M/M decline in production of consumer durable goods, although production of immediate and capital goods also fell that month. This notwithstanding, consistent with the stronger outturn for overall GDP last quarter, this still left manufacturing production up ½% over the third quarter as a whole, with total IP up 0.7%Q/Q.  Together with equivalent figures from other major euro area member states released so far, today’s data are consistent with a sharp decline in the euro area IP that month, possibly close to 1%M/M.

US:
Ahead of next week’s CPI data release, today we will receive October PPI figures. Higher fuel prices will probably push the energy component up, but food inflation is likely to remain soft. Core prices, meanwhile, will probably continue rising at a steady pace around 0.2%M/M. In addition, the University of Michigan’s consumer sentiment index will be worth watching too. After a decline in October, a further modest decline in November is likely today, albeit the index still remains close to historically high levels.

China:
The main focus in China today was also on October inflation indicators – both CPI and PPI data releases came in exactly in line with market expectations. Headline CPI rose 0.2%M/M, leaving annual inflation at 2.5%Y/Y. After falling last month, non-food inflation rose 0.2ppts to 2.4%Y/Y, although service sector inflation was steady at its prior 25-month low of 2.1%Y/Y. Food price inflation eased to 3.3%Y/Y from 3.6%Y/Y previously. Excluding food and energy, annual inflation edged up 0.1ppts to 1.8%Y/Y.

Turning to the PPI, the headline index rose 0.4%M/M in October, causing annual inflation to decline by 0.3ppts to 3.3%Y/Y. Of particular note, annual inflation in the manufacturing sector eased a further 0.4ppts to a 2-year low of 2.5%Y/Y. Consumer goods prices rose just 0.7%Y/Y, with prices for consumer durables declining 0.1%Y/Y. Combined with the yuan’s weakening trend, this result suggests a disinflationary impulse to most major economies (albeit in the case of the US, more than offset by the imposition of tariffs).

Australia:
Today the RBA released its updated Statement on Monetary Policy (SMP), spelling out in more detail the Bank’s outlook for the economy. In summary, the revisions to the Bank’s forecast were even more modest that had been indicated by the Bank’s post-meeting statement earlier this week. The Bank now expects year-end GDP growth of 3½%Y/Y in 2018, up from 3¼%Y/Y previously. However, the forecast for year-end 2019 and year-end 2020 was unrevised at 3¼%Y/Y and 3%Y/Y respectively (the Bank’s forecasts are presented in quarter-point rounded terms). The unemployment rate is now expected to end this year at 5%, compared with a forecast of 5½% previously. Thereafter, the unemployment rate is expected to remain at 5% through 2019, before declining a little further to 4¾% by the end of 2020 (compared to a forecast of 5% previously). Importantly, these forecasts are based on the technical assumption that interest rates broadly follow market expectations, which the Bank continues to characterise as “no change until at least the end of next year”. The Bank’s forecast also assumes Brent crude at USD72/bbl, the AUD at USD0.73 and the TWI at 63. On these assumptions, underlying inflation (as measured by the trimmed mean and weighed median) is forecast to end 2018 at 1¾%Y/Y – unchanged from that forecast previously. And while underlying inflation is forecast to end 2019 at 2¼%Y/Y – revised up from 2%Y/Y previously – disappointingly, the forecast for end-2020 was unrevised at 2¼%Y/Y.

So in summary, despite a slight lowering of the forecast path of the unemployment rate and the assumption of no monetary policy tightening until at least the end of next year, it remains the case that the RBA forecasts underlying inflation to remain below the midpoint of the 2-3% target throughout the forecast horizon. Moreover, the RBA notes that there is some chance that the recent unusually slow growth in administered prices – as especially evident in the Q3 CPI report – could persist if governments introduce further initiatives to reduce cost-of-living pressures. So while the RBA continues to think that “higher interest rates are likely to be appropriate at some point”, unsurprisingly it remains the case that “…the Board does not see a strong case to adjust the cash rate in the near term.” Market pricing continues to suggest that investors still see a slightly better than 50/50 chance of a rate hike by the end of 2019 although, if anything, the RBA’s forecasts suggest that the Board presently views policy tightening as more likely to begin in 2020.

Finally, with one eye on next week’s Q3 wages data, we note that SMP states that in recent meetings, the Board has paid close attention to trends in wages growth and household spending. According to the RBA “A gradual pick-up in wages growth is expected as the economy continues to improve and is likely to be necessary for inflation to be sustainably within the target range.” According to Bloomberg, the market expects average regular wages to have increased 2.3%Y/Y in Q3, up from 2.1%Y/Y previously. While such an outcome would represent a 3-year high, it would still be 0.6pps below the average recorded over the past decade. 

In other news, the ABS reported that the number of home loan approvals fell 1.0%M/M in September. This outcome, which followed a 2.2%M/M decline in August, was in line with market expectations. Excluding the refinancing of existing dwellings, the number of approvals fell 0.5%M/M.

New Zealand:
The only report issued in New Zealand today was the ANZ Truckometer – a measure of traffic flows that is correlated with economic activity. The heavy traffic index rebounded 4.6%M/M in October following a revised decline of 3.2%M/M in September. Taking a 3-month average, annual growth slowed slightly to 4.3%Y/Y. This suggests that the economy remains in decent shape, albeit with the likelihood that Q3 GDP growth will prove weaker than the surprising 1.0%Q/Q outcome registered in Q2 (in Thursday’s Monetary Policy Statement the RBNZ estimated growth of 0.7%Q/Q).

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