Morning comment: Japan surveys & RBA

Chris Scicluna
Emily Nicol

Overview:
As predicted by futures markets, Wall Street reacted favourably to news that the US and Canada had agreed the terms of a slightly revised Nafta agreement (henceforth to be known as USMCA). That said, outside of the major industrials (the DJI rising 0.7%), the gains were fairly modest with the S&P500 rising just 0.4% and the Russell 3000 up just 0.15%. Treasury yields and the US dollar were only very slightly firmer too in US time. And having already factored the trade news yesterday, there was little in the way of major regional news to drive Asian markets today. But while mainland Chinese markets remained closed for a week-long holiday, the Hang Seng reopened from yesterday’s holiday and fell sharply – down 2.4% at the time of writing – as investors reacted to the weekend’s disappointing Chinese manufacturing PMI reports. By contrast, despite some underwhelming new surveys (see below), with the yen still soft at close to $/¥114 Japan’s equity markets initially continued on their merry way with the Topix setting a fresh intraday high. But eventually it gave up most of the early gains, eventually closing with a gain of just 0.3%.

The early mood in European time, however, is undeniably negative, with concerns about Italian fiscal policy front and centre. Indeed, BTPs have continued to sell off this morning, e.g. with 10Y yields up more than 10bps at the time of writing to take the spread over Bunds to above 295bps while Italy’s FTSE MIB index opened about 1½% lower. The adverse tone comes alongside further comments from 5-Star Movement leader Di Maio this morning that the government will not budge ‘by a millimeter’ in the face of pressure from the European Commission and Eurogroup, as well as remarks from Lower House Budget Committee Chair Borghi suggesting that single currency membership is part of Italy’s fiscal problems.

Of course, both ruling Italian populist parties will see political capital to be gained from ongoing provocation with Brussels, while the League in particular has little to fear from an eventual breakdown in the coalition and early elections. Moreover, the euro area fiscal policy framework is toothless – the European Commission can ask for a revised Budget, but can’t force Italy to comply, and would have no sanctions to offer before late Spring 2020. Moreover, with Italian parliaments often a source of fiscal slippage beyond that envisaged by government plans, and the softening economic growth outlook likely to add to the deficit over the coming couple of years, we see numerous reasons to remain concerned about the trajectory of Italian policy (and hence, e.g., the outlook for the country’s sovereign ratings) and, while recent market adjustments have already been marked, we certainly do not anticipate a swift resolution of the current turbulence.

Japan:
Today the BoJ released further details from the latest Tankan survey, including information on firms’ inflation expectations. As in previous surveys, this data indicated that firms remain unconvinced that the BoJ will achieve its 2.0% inflation target, even inside a 5-year horizon. For all firms, the average expectation of year-ahead inflation was just 0.8%Y/Y – down 0.1ppt from the June survey – while firms’ average expectation at the 3-year and 5-year-ahead horizon was unchanged at 1.1%Y/Y for a sixth consecutive quarter. And firms’ expectations regarding their own output prices remain even softer. On average, they forecast a 0.8% rise in prices over the coming year and a cumulative 1.3% increase in prices over the next 3 years (in both cases up 0.1ppt from the June survey). Over a 5-year period firms forecast a cumulative increase in their own prices of just 1.5%, which was unrevised from the June survey (large manufacturers remain especially pessimistic, forecasting a 0.1% decline in prices over this period).

Among other new data, the latest Cabinet Office consumer confidence survey pointed to little change in sentiment over the past month. After slipping to a 12-month low last month, the headline index inched up 0.1pt to 43.4 in September – thus remaining only a bit firmer than the long-term average. Within the detail, respondents’ indicated slightly greater willingness to buy durable goods – the index rising 0.4pt to a 3-month high of 42.4 – and the income growth index edged up only 0.1pt to 41.9. But both remained close to the bottom of the range of the past year, suggesting that we should not expect a sudden spurt in spending despite building evidence of firmer wage growth. Meanwhile, the BoJ reported that the value of outstanding bank loans rose 2.99%Y/Y in August from 2.90%Y/Y in July, with growth in corporate bank loans rising to 3.35%Y/Y from 3.18%Y/Y previously – a 10-month high.

Politics-wise, as expected, Prime Minister Abe followed his victory in the LDP leadership with a reshuffle of his Cabinet. Most notably, he left in place his most senior lieutenants – Deputy PM and Finance Minister Aso, Chief Cabinet Secretary Suga and Foreign minister Kono. And he also kept intact the remainder of his main economic team, with Economy Minister Motego and Trade and Industry Minister Seko also retained in place.  He did make a change at Defence, where Takeshi Iwaya, a former parliamentary Vice Defence Minister, replaces Itsunori Onodera, and also replaced two of four key ruling LDP executives with close aides, Katsunobu Kato and former Economy Minister Akira Amari, seemingly to prepare the groundwork for constitutional reform, as far as economic policy goes it will be steady as she goes.

Australia:
As expected the latest RBA Board meeting was a non-event with the Bank’s cash rate once again retained at 1.5% – a rate that was set in August 2016. And once again the concluding paragraph of the statement, which summarises the Bank’s stance, was completely unchanged from last month and so, amongst other things, continues to observe that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” As regards the economy, the Bank’s central forecast for GDP growth remains for it to average “a bit above 3%” in 2018 and 2019 and the Bank’s central forecast for inflation remains for it to “be higher in 2019 and 2020 than it is currently”. Elsewhere in the statement there were a number of minor wording changes, but nothing of great consequence. As a result, markets were predictably unmoved after the RBA’s announcement. So, to summarise, given the slow progress that is being made in reducing the unemployment rate and raising inflation, it still seems unlikely that policy tightening will be necessary before the second half of next year at the earliest.

On the data front, the CBA manufacturing PMI rose 0.8pts to a 3-month high of 54.0 in September and the weekly ANZ-Roy Morgan consumer confidence index rose 0.9pts to a 7-week high of 118.1.

US:
US vehicle sales figures for September are due today while Fed Chairman Powell will speak at a NABE conference on the outlook for employment and inflation.

Europe:
In terms of European economic data, it will be a quiet day for top-tier releases with just euro area PPI figures for August due later this morning. But there was some positive news out of Spain’s labour market earlier today. While non-seasonally adjusted data indicated a modest pickup in unemployment in September for the second successive month, seasonally adjusted figures suggested that the number of people employed resumed an upwards trend. Indeed, the increase of 51k people in work last month took total net new job creation over the past year to 526k. So, the total number of people in employment rose to 18.86mn, more than 2½mn higher that the post-crisis trough and the highest for a decade.

In the UK, meanwhile, attention will remain on the Conservative Party Conference. Datawise, today will bring only the construction PMI for September, which, following an upside surprise to yesterday’s manufacturing index, is expected to have remained steady at the end of the third quarter at 52.9 signalling ongoing modest expansion int he sector.

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