Morning comment: Euro area & UK inflation, Fed minutes

Chris Scicluna
Mantas Vanagas

Some stronger-than-expected corporate reporting and a lack of any obvious geopolitical risk escalation saw investors yesterday in a mood to reverse some of the recent correction in equity markets. Indeed, the S&P500 closed with a 2.1% gain – the most since March – with technology stocks having a particularly strong day not least thanks to Netflix. The improved risk environment was reflected in credit markets and in a slightly weaker yen, but the US Treasury market was again little changed (10Y UST yields close to 3.17%) despite comments from President Trump that the Fed was his “biggest threat” and “is raising rates too fast”. 

With their being no local data flow of note, investors in Asian markets mostly took their lead from Wall Street and rallied most of the major regional bourses today. That said, the movements were less emphatic than those on Wall Street. In Japan, the TOPIX rose 1.5%, initially helped by the yen’s move as risk aversion trades lost favour. But equity markets in China made more modest gains (the CSI300 is up about ½%) with investors perhaps a little wary ahead of Friday’s Q3 GDP report and newswire reports dwelling on the potential repercussions of this year’s sharp decline in stock prices (e.g., a Bloomberg News story cited concerns about potential forced selling of equities that have been pledged as collateral for loans).  (Hong Kong markets were closed). 

Looking ahead, today brings UK and final euro area inflation figures, EU summit discussions on Brexit, and the release of the minutes of the Fed’s September policy meeting.

Euro area:
Today’s the busiest day of the week for euro area economic data with perhaps most notable being the final euro area inflation figures for September. These are expected to confirm the flash estimates, which showed headline CPI rising 0.1ppt to 2.1%Y/Y and core CPI declining 0.1ppt to 0.9%Y/Y. Given the preliminary estimate’s proximity to the rounding range, however, an upwards revision of 0.1ppt to the core rate is possible. Also due are construction output data for August, which are likely to be weaker than of late, with a drop on the month highly likely given the retreat of more than 1½%M/M reported already in Germany.

This morning’s car registration numbers reported a massive 24%Y/Y drop in new car sales in the euro area in September. The figures are not, however, alarming, representing payback after the surge of more than 30%Y/Y in the previous month, when car manufacturers had offered particularly attractive deals in order to shift inventory ahead of the introduction of new ‘WLTP’ (Worldwide Harmonised Light Vehicle Test Procedure) emission-testing standards. Indeed, looking through this distortion, on a year-to-date basis growth was much stronger, at 4.0%YTD/Y, a rate broadly in line with the pace of growth in the first half of the year. However, admittedly, compared to 2017 growth in new car registrations has moderated, tallying with the slowdown in the overall household consumption growth in the euro area this year.

At one stage, this evening’s Brexit discussions at the European Council meeting were meant to have provided the opportunity for a breakthrough. However, the weekend’s breakdown in negotiations was followed by Monday’s statement in the House of Commons by PM Theresa May, when she reported the stalemate over the Irish border backstops that naturally arises from her negotiating red lines, and also heard relentless criticism of her proposals from all sides of the chamber, highlighting the difficulties that she faces in reaching a deal with the EU that might eventually be ratified by the UK Parliament.

So, while news reports this morning suggest that Number 10 has been talking up progress reached in the talks on other matters, and hinting that the EU side might have something new to offer on the backstops too, May is simply unable to bring anything substantially new to the table today in terms of practical proposals for addressing the key challenge of the Irish border and the related issue of open-ended, post-transition UK participation in the customs union. So, the probability of meaningful progress this evening appears slim. Indeed, significant progress over the coming few weeks might seem unlikely too. As such, perhaps most notable this evening will be what the other EU leaders decide to do regarding the summit that had previously been pencilled in for mid-November. Will the rendez-vous remain in the diary for hope of progress over the next few weeks? Will it simply be forgotten about, with leaders cutting May some slack and hoping for better luck at the December summit? Or, to ramp up the pressure on May, will it turn into a summit to prepare for a no-deal Brexit?

Data-wise in the UK, after yesterday’s stronger wage data, attention today turns to inflation, with the September figures due for release. Having risen to 2.7%Y/Y in August, the headline CPI rate is set to ease slightly – our expectations are for a 2.5%Y/Y print. The core rate should also moderate 0.1ppt to 2.0%Y/Y as inflation in both goods and services categories partly reverse the increases of the previous month. Non-core components should also see a small decline, although the fall in energy inflation will most likely be temporary. The ONS House Price Index is also due for release, while BoE Deputy Governors Cunliffe and Broadbent are scheduled to speak publicly

In the US, September housing starts and permits figures are due. But more attention will likely be focused on the minutes of the September FOMC meeting, when the FFR range was hiked again and the updated dot-plots continued to signal the likelihood of further tightening by the end of the year, throughout next year and into 2020 to above the longer-run equilibrium level. It remains to be seen quite how much extra information the minutes will provide on top of what was continued in the FOMC’s updated projections and Chair Powell’s post-meeting press conference, although investors will obviously watch for new hints that the Committee is prepared to pause in its tightening cycle should global demand weaken or financial market volatility intensify. 

While there were no economic reports today, RBA Deputy Governor Guy Debelle gave a speech on the state of the Australian labour market – a key focus for the Bank given its dual inflation and full employment mandate. Debelle noted that employment has grown strongly over the past year, with the participation rate now close to its highest level on record and the unemployment rate falling to a six-year low – outcomes all consistent with the above-trend GDP growth. Despite these improvements, Debelle reaffirmed the Bank’s view that there is still spare capacity in the labour market. In particular, he argued that unemployment is higher than is desirable and that a number of workers would like to work more hours than are currently on offer – factors that, in the RBA’s view,  account for a large part of the low wages growth in recent years.

With the Aussie September Labour Force report due for release tomorrow, Debelle also provided a timely reminder that it is important to not get hung up on one month's data (the standard error on the change in employment each month is around ±30K). Interestingly, Debelle played down the slowing seen in the ANZ job advertising series in recent months, which contrasts with the strength seen in other hiring indicators such as the NAB Business Survey. Specifically, he noted that the ANZ job advertising data capture the main online recruitment websites, but they are not picking up newer recruitment sites or the use of social media sites, such as LinkedIn – shortfalls that mean that the usefulness of this series may be declining.

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