Morning comment: Japan labour market & France GDP

Chris Scicluna
Emily Nicol
Mantas Vanagas

Despite a poor start to the week in China, it initially seemed that the weekend break had calmed nerves on Wall Street with the S&P500 rising almost 2% in early trade yesterday. Unfortunately, that proved not to be the case, with the market sliding to be down over 2% just ahead of the close, before a very late rebound pared the loss to 0.7%. Once again there was clear evidence of rotation out of growth stocks towards more defensive options. Sentiment was likely impacted by news reports that that US is readying additional tariffs on the remainder of its imports from China, to be announced in December should President Trump receive an unsatisfactory response from President Xi when the two are scheduled to meet next month. Treasury yields were little changed despite the further losses on Wall Street, but US credit spreads widened slightly.

Given that background, one might reasonably have expected Asian equity markets to be bathed in red today. But since the New York close, US equity futures have rallied somewhat, reacting rather optimistically to comments made by President Trump. During a late Monday interview, Trump told Fox News viewers that “I think we will make a great deal with China, and it has to be great because they’ve drained our country”. And while Trump also added that he didn’t think China was ready to make a deal yet, the mere mention of a possible deal seems to have comforted investors with solid gains recorded across many key Asian bourses. In China, where a weaker yuan took USD/CNY within a whisker of breaching 7.0 for the first time in a decade, the CSI300 rebounded 1.1% following yesterday’s opening 3.1% loss for the week. And with renewed risk appetite lifting $/¥ to ¥112.8, its highest level in more than a week, Japan’s TOPIX more than erased Monday’s modest loss with a gain of 1.4% gain. Hong Kong’s Hang Seng and Singapore’s Straits Times both recorded declines, however.

Looking ahead, today will bring the first estimates of euro area GDP in Q3 and German inflation in October, while the latest Italian bond auctions will be watched to gauge sentiment after yesterday’s narrowing of spreads, and the steady flow of corporate reports continues with Facebook perhaps the standout. 

Ahead of tomorrow’s BoJ policy announcement and Outlook Report, today’s household employment survey confirmed that Japan’s labour market remains exceptionally tight. Indeed, following a sturdy 260k lift in August, employment rose an estimated 30k in September which, given base effects, was sufficient to lift annual growth by 0.2ppt to 1.8%Y/Y. And with the labour force declining by an estimated 40k the unemployment rate nudged down 0.1ppt to 2.3%, leaving it just above the 26-year low recorded back in May. The tightness of the labour market was demonstrated further by the effective job offer-to-applicant ratio, which rose 0.01pt to a fresh four-decade high of 1.64x. The number of new job offers rose 1.7%M/M in September but the number of new job applicants fell 4.9%M/M, causing the effective new jobs-to-applicants ratio to rise to a new all-time record high of 2.50x. Of course none of this will have come as any surprise to the BoJ’s policymakers, who will hope that such tight conditions will lead to a continuation of this year’s modestly improved growth in labour incomes (the Monthly Labour Survey for September will be released next week).

Euro area:
A busy day for euro area economic data has got underway with the first estimate of Q3 GDP from France. Broadly as expected, this showed a rebound from the strike-hit second quarter, with growth picking up 0.2ppt to 0.4%Q/Q. The expansion was led principally by domestic demand, with household consumption up 0.5%Q/Q having slipped slightly the previous quarter, and fixed investment growth relatively steady at 0.8%Q/Q. With imports slowing (up just 0.3%Q/Q, 0.4ppt weaker than in Q2) and exports accelerating (up 0.7%Q/Q, 0.6ppt stronger than in Q2), net trade added 0.1ppt to GDP growth. In contrast, inventories contributed negatively to GDP growth, subtracting 0.2 ppt having added the same amount in Q2.

Later this morning, we’ll get the first estimates of euro area and Italian GDP in Q3. With recent economic data from Germany having been soft, we anticipate a slowdown of 0.1ppt in euro area growth from Q1 and Q2 to 0.3%Q/Q, which would represent the softest rate since Q214. Meanwhile, we expect growth in Italy to remain unchanged at 0.2%Q/Q.

Today also brings the first indications of inflation in October. This morning’s Spanish figures aligned with expectations, with the headline CPI rate on the EU measure unchanged at 2.3%Y/Y, the top of the range of the past year. And the German figures, due later today, are likely to show a step up, not least due to base effects, with a rise of 0.2ppt to a six-year high of 2.4%Y/Y expected. (The equivalent euro area release is due tomorrow.)

Finally data-wise, the European Commission’s October economic sentiment survey – which typically provides the best guide to activity in the euro area – is also due today. Consistent with the latest PMIs, which suggested a further notable loss of economic momentum, and despite a slight improvement in consumer sentiment, another drop in the Commission’s headline euro area economic sentiment indicator seems on the cards.

In the markets, meanwhile, yesterday’s improvement in sentiment towards BTPs will be tested as the Italian government sells 5Y and 10Y bonds and 7Y floaters.

The UK dataflow continues today with the CBI Distributive Trades survey, which should give the first insight into activity on the UK High Street this month. Retail sales grew very rapidly over the summer, and while we saw some moderation in September, the increase in Q3 as a whole of 1.2%Q/Q was still strong. Today’s survey, however, seems likely to be consistent with a further gradual slowdown.

The most notable new data in the US today will be the Conference Boarder Consumer Confidence survey. Not least given recent equity market turbulence, the headline index seems likely to ease from 138.4, the eighteen-year high reached last month, to around 136. The S&P Case-Shiller house price index is also out.

After declining 8.1% in M/M in August – not quite as much as estimated initially – the total number of dwelling approvals rebounded 3.3%M/M in September. While this rebound was close to market expectations, deeper historical revisions meant that the number of approvals was still down a greater-than-expected 14.1%Y/Y. As is usually the case, the main source of recent volatility has been the ‘other dwellings’ category (i.e. apartments), which rebounded 10.7%M/M in September but was still down 21.4%Y/Y. The number of house approvals fell 2.1%M/M – a third consecutive decline – and was down 7.1%Y/Y. Given increases in average construction costs, the value of all residential approvals declined a slightly less-pronounced 8.9%Y/Y in September. Meanwhile, after growing strongly last year, non-residential approvals continued their recent much weaker run, with the value of approvals declining to a 20-month low in September and down 33.7%Y/Y. As a result, the value of all building approvals issued fell 19.4%Y/Y in September, with approvals through Q3 down 8.7%Y/Y.

In other news, after last week slumping 7.2pts to its low for this year, the weekly ANZ-Roy Morgan consumer confidence index rebounded a modest 2.3pts to 114.6 this week – close to the average reading over the past 5 years. A rebound in year-ahead expectations for the economy was the key driver of the improved overall result. But despite that improved assessment, sentiment regarding the making of major household purchases declined to a three-year low.


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