Morning comment: China & NZ prices, Japan visitors

Chris Scicluna
Emily Nicol

Overview:
Wall Street entered the last hour of trading yesterday with the S&P500 modestly in the black. However, the market fell away to close down 0.6% after it was reported that Saudi Arabia would soon say that missing Washington Post journalist, Jamal Khashoggi, had died in a botched interrogation (according to the report, Saudi Arabia would also claim that the interrogation was not authorized by the government). Even with equities ending in the red – driven in particular by technology stocks – there was little change in the Treasury market, but the increased risk aversion boosted the yen.

After the market close, however, President Trump said that King Salman bin Abdulaziz had offered a denial of government involvement that “could not have been stronger” while Secretary of State Michael Pompeo has been dispatched to Saudi Arabia. The President’s measured response seems to have helped Asian markets to avoid following the late direction set by Wall Street, with the major bourses recording a mix of largely unremarkable gains and losses. Japan’s Topix rose ¾% as the yen reversed yesterday’s gains. But, while China’s inflation figures broadly met relatively subdued expectations (details below), China’s major benchmark indices made modest losses (the CSI300 is down about ¾%) while the Hang Seng is down about ½%. Elsewhere, the Kiwi dollar and associated rates were a touch higher after a significant upside surprise to NZ inflation (also below).

Meanwhile, after Theresa May yesterday offered little new on her Brexit plans – highlighting again the challenge of appeasing her critics in Parliament from all sides of the chamber while maintaining an open Irish border – sterling is only a touch firmer this morning, close to levels seen at the end of last week, ahead of a meeting of her cabinet today that might similarly offer little new in terms of constructive policy initiatives. Meanwhile, BTPs are slightly outperforming even though Italy’s cabinet reaffirmed its imprudent fiscal plans last night. And with the market mood generally more positive, euro area equities opened moderately higher, while UST yields have nudged up too (10Y UST yields currently up to 3.7%).

China:
The main focus in China today was on the inflation reports for September. The headline CPI rose 0.7%M/M, lifting annual inflation by 0.2ppts to 2.5%Y/Y – an outcome that was in line with market expectations. Non-food inflation eased 0.2ppts to a 3-month low of 2.2%Y/Y, with inflation in the services sector declining 0.5ppts to 2.1%Y/Y – the least since August 2016. However, higher prices for vegetables contributed to a sharp lift in food price inflation to 3.6%Y/Y from 1.7%Y/Y previously. Excluding food and energy, annual inflation eased 0.3ppts to 1.7%Y/Y – the lowest reading for two years.

Meanwhile, looking back down the production pipeline, the headline PPI increased 0.6%M/M in August but annual inflation still declined 0.5ppt to 3.6%Y/Y. Of particular note, annual inflation in the manufacturing sector eased 0.6ppt to 2.9%Y/Y – the lowest since November 2016. Consumer goods prices rose just 0.1%M/M and 0.8%Y/Y, with prices for consumer durables up a steady 0.2%Y/Y. Add to that the ongoing weakening trend of the yuan (down about 7% over the past six months), and China looks once again to be providing a disinflationary impulse to the other major economies.

Japan:
In Japan, today saw the release of the latest foreign visitors figures. And, perhaps unsurprisingly given the damage caused by Typhoon Jebi and the Hokkaido earthquake in September, the data showed that the number of visitors that month (2.16mn) was down compared with a year earlier (-5%) for the first time since February 2012.  The drop largely reflected fewer visitors from Korea (-14%Y/Y) and China (-4%Y/Y) as the shutdown at airports both in the Kansai area and Hokkaido reportedly impacted. But while the number of visitors over the third quarter as a whole stood at a still healthy 7.6mn, up 1.7% compared with Q317, the average spend per visitor was lower than a year earlier (-6%Y/Y). And so, total spending by foreign visitors was also down in Q318, by 4%Y/Y following double-digit growth in the previous five quarters, suggesting that this component will provide a modest drag on GDP growth in Q3 for the first time in seven years.

UK:
Having yesterday dampened expectations for tomorrow’s EU summit, reporting no progress on proposals to resolve issues related to the Irish border backstops, Theresa May will today try to maintain the support of her cabinet when it meets this morning after eight members reportedly met last night to conspire against her. A possible May proposal for a ‘break clause’ that either the UK or EU might use should they so wish to end British membership of the Customs Union at some point after the end of the transition period seems unlikely to be a runner with the European side – after all, that would suggest that the backstop is no real backstop after all.  And the sense now is that there will be no breakthrough in the negotiations for a while, with no deal reached between the EU and UK side probably before December at the earliest, and no votes in the UK Parliament – which are likely to be too close to call – before the New Year.

While Brexit will continue to dominate the headlines, however, the first of a run of top-tier UK economic data due this week kicks off today with the latest labour market report. With employment growth expected to have remained around zero in the three months to August, the unemployment rate is also expected to have moved sideways at 4.0%, the joint-lowest rate for 43½ years. Most notably for the BoE perhaps, average regular wage growth is expected to remain at the joint-highest rate since mid-2015 (2.9%3M/Y, a rate considered a little too high for comfort by at least some MPC members).

Euro area:
Euro area trade numbers for August are due this morning, and are expected to report an increase in the surplus to a four-month high close to €15bn. However, that is likely to reflect weak imports more than any notable improvement in exports. Indeed, all the signs are that export growth remained weak, with that subdued trade performance a key reason why economic growth in the euro area this year has been well down on the rates achieved in 2017. Separately, an insight into investor sentiment towards the region’s largest member state also comes today with the German ZEW survey for October.

US:
Today’s US data docket brings the August JOLTS report, September IP report and October NAHB housing index. Most notably, an increase circa 0.3%M/M is expected in IP, with manufacturing, mining and energy components all likely to be up.

Australia:
The release of the minutes from this month’s RBA Board meeting once again provided no surprises, consistent with the post meeting press statement which had suggested no change in the RBA’s long-held policy stance. The concluding ‘Considerations for Monetary Policy’ section repeated the Board’s earlier assessment that based on the forecasts and associated risks, “the current stance of monetary policy would continue to support economic growth and allow for further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target.” And looking further ahead, it was also again stated that “members continued to agree that the next move in the cash rate would more likely be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.” Perhaps the only point of interest was a reference to a discussion of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It was noted that while regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the Commission's findings, it was possible that banks could tighten lending conditions further given the issues raised in the report. As a result, the minutes state that “…it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported.”

On the data front, the ANZ-Roy Morgan weekly consumer confidence index rose 2.2pts to 119.5, marking the highest reading since July but roughly in line with the average reading over the past year.

New Zealand:
The main focus in New Zealand today was the CPI report for Q3, which provided a significant upside surprise – especially compared with the RBNZ’s last published forecast. The headline CPI rose 0.9%Q/Q, lifting annual inflation to a one-year high of 1.9%Y/Y from 1.5%Y/Y previously – very close to the midpoint of the RBNZ’s 1-3% target range. This outcome was 0.2ppt above market expectations and 0.5ppt above the forecast made by the RBNZ in the August Monetary Policy Statement.

Within the details, non-tradables prices rose 0.8%Q/Q, lifting annual inflation by 0.1ppts to 2.6%Y/Y. Housing and utility prices rose 1.1%Q/Q, boosted by a seasonal 5.1%Q/Q lift in local authority rates (levies used to fund local services). Tradables prices rose 0.9%Q/Q – helped by a 5.5%Q/Q lift in the price of petrol – but were still up just 0.8%Y/Y. Various measures suggest that core inflation is also close to the target midpoint. The 10% trimmed mean rose 0.8%Q/Q – the most since Q117 – although the trimmed mean of annual movements was stable at 1.8%Y/Y. The weighted median rose 0.5%Q/Q and 2.2%Y/Y. Importantly, the RBNZ’s favoured model-based estimate of core inflation – the so-called “sectoral factor model” – did not advance on last quarter’s 7-year high of 1.7%Y/Y. The sectoral factor model estimate of core inflation in the non-tradables sector was steady at an upwardly-revised 2.8%Y/Y. Finally, the RBNZ alternate “factor model” estimate of core inflation edged up to a fresh 7-year high of 1.9%Y/Y.

With the RBNZ having also underestimated economic growth of late – Q2 GDP growth printing double the Bank’s expectations – today’s outcome reduces the risk that the RBNZ might decide to ease monetary policy to speed the return of inflation to the midpoint of its 1-3% target. But while Kiwi interest rates and the NZ dollar moved a little higher after today’s report, investors evidently believe that that the RBNZ will retain its stridently dovish stance given ongoing worries about potential downside risks to inflation from weak business confidence.

 

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