There was no let up for investors in equity markets at the end of last week. Despite the US economy posting a lift of 3.5%Q/Q ann. in real GDP in Q3 – with private consumption rising a firm 4.0%Q/Q ann. – another bad day on Wall Street saw the S&P500 lose a further 1.7% to be down close to 4% for the week. The flow through to other asset markets was relatively modest, however, with the 10-year Treasury yield slipping 4bps to 3.08%, credit spreads widening very slightly and risk aversion driving a slightly firmer yen.
Following a much-needed weekend break – and with another big week of corporate reporting and economic data lying ahead – Asian bourses have reopened in very mixed fashion today. After reporting a sharp drop in corporate profit growth over the weekend (more on this below), China’s CSI300 has begun the week down a little more than 3% although the yuan has remained little changed close to CNY6.955/$. At the other end of the spectrum, investors in Australia’s ASX200 clearly saw some value after last week’s declines with healthcare stocks helping the index to a gain of 1.1%.
Most other major regional bourses have seen modest changes – certainly compared to last week’s volatility – although Japan’s TOPIX gave up its initial gains and eventually closed down 0.4%. With the BoJ’s latest policy announcement due on Wednesday, JGB yields nudged higher after Bloomberg reported that some BoJ officials are comfortable with the 10-year yield rising 5bps above the 0.20% upper bound articulated by Governor Kuroda following the Board’s July meeting, but the move proved short-lived. In related news, over the weekend the Asahi newspaper reported that the BoJ would discuss measures to make JGB trading more active, including possibly delaying purchases of long-term JGBs until two business days after the MoF’s auctions and reducing the frequency of mid- and long-term bond purchases.
In Europe, meanwhile, Bunds have opened little changed after another poor showing by the establishment parties in yesterday’s regional election in Hesse. The CDU and the internationalist Greens (the latter of which saw another surge in its share of the vote) will likely retain their ruling coalition government in the state, and so Merkel will live to fight another day as Chancellor. But she will face a challenge to her party leadership in December, and the seriousness of that is currently difficult to predict. Elsewhere, BTPs have made gains (with 10Y yields currently down about 10bps) after S&P on Friday, as expected, left its sovereign rating unchanged at two notches above junk but revised down the outlook on the rating to negative.
Looking ahead, sentiment in global markets will probably continue to take its cue principally from the US, with another busy corporate reporting schedule ahead. But the economics calendar is also congested. This afternoon brings the UK government’s Budget announcement, with recent better-than-expected fiscal data giving scope to the Chancellor to announce some extra public spending and also perhaps modest tax giveaways, conditional of course upon the avoidance of a ‘no deal’ Brexit. Tomorrow brings the first estimate of euro area Q3 GDP data, with flash estimate of October inflation due the following day. Wednesday brings the aforementioned BoJ policy announcement meeting & updated Outlook Report, with the BoE’s MPC announcement due the following day along with its Inflation Report. And Friday brings the US labour market report for October.
A reasonably busy week for data and events in Japan kicked off today with the release of the retail sales report for September. Total retail spending fell 0.2%M/M – an outcome that was of no surprise to the market given the expected impact of two typhoons and the Hokkaido earthquake. Annual growth in spending slowed to 2.1%Y/Y from 2.7%Y/Y previously. With the singular exception of household machines – which saw a rebound in spending after a weak August – spending fell across all store-types in September, including a 1.4%M/M decline in spending on motor vehicles.
Notwithstanding the soft September reading, retail spending rose 1.0%Q/Q in Q3. Unfortunately, the retail figures tend not to be an especially reliable guide to overall consumer spending. The BoJ’s Consumption Activity Index (released 7 November) and the Cabinet Office Synthetic Consumption Index (usually released a few days later) will provide a much better guide. The latter has pointed to a very soft start to Q3, with spending in the July/August period running 0.5% below the Q2 average.
Looking ahead to the remainder of this week’s diary, the monthly household employment survey for September will be released tomorrow and will undoubtedly continue to point to a very tight labour market. On Wednesday natural disasters are also likely to weigh on the September IP report, as well as September housing starts – we expect a modest decline in IP in September that would leave it down about 1½%Q/Q in Q3. The same day, the Cabinet office will release its consumer confidence survey for October.
Of course, that day will also see BoJ announce the outcome of its Board meeting and reveal its latest prognosis for the economy in the updated Outlook Report. With last week’s BoJ Financial System Report concluding that the financial system is still “maintaining stability on the whole”, there seems to be no imperative for the BoJ to adjust its ultra-accommodative monetary policy stance, especially with inflation still tracking well below target. As a result, it seems inevitable that at the meeting the Board will keep unchanged its key policy settings – i.e. the -0.1% rate paid on banks’ excess reserves and the 0% target for 10-year JGB yields.
Meanwhile, with the latest Regional Economic Report suggesting that the BoJ still views the economic outlook as favourable, our colleagues in Tokyo expect only minor tweaks to the Bank’s GDP and inflation forecasts in the Outlook Report. While growth appears weak in Q3, the strong base provided by the lift in Q2 means that the BoJ may lower its GDP growth forecast for FY18 by just 0.1ppt to 1.4%Y/Y (our colleagues think a forecast of 1.2%Y/Y would be more realistic). They also expect the median growth forecasts for FY19 and FY20 to be unchanged at 0.8%Y/Y, broadly in line with estimated growth potential. In terms of inflation, the median forecast of core CPI (exc. fresh food) might be lowered by 0.1ppt in both FY18 and FY19 to 1.0%Y/Y and 1.4%Y/Y respectively (net of any impact from the consumption tax), but the FY20 forecast might be reaffirmed at 1.6%Y/Y. The balance of risks to the inflation outlook, however, will almost certainly again be viewed as skewed to the downside.
The week’s economic diary will conclude with the final manufacturing PMI results for October on Thursday. A downward revision to the encouraging preliminary results would not be surprising in light of recent financial market developments. In the bond market, the MoF will auction 10-year JGBs on Thursday.
Today should be a relatively quiet day for economic news from the euro area. But it’s set to be a busy remainder of the week, with the most notable release perhaps the first estimates of GDP growth in Q3, with the euro area, French and Italian figures due tomorrow and the Spanish figures due Wednesday. Recent economic data from Germany – new car registrations, IP and construction output – have come in on the soft side and so we anticipate a notable (albeit likely temporary) slowdown there from growth of 0.5%Q/Q in the second quarter. In contrast, French growth will likely show an improvement from the 0.2%Q/Q rate of Q2, while growth in Italy (0.2%Q/Q) and Spain (0.6%Q/Q) looks set to be unchanged from Q2. As a result, we expect that GDP growth in the euro area as a whole will have slowed by 0.1ppt to 0.3%Q/Q.
Also of significance this week will be the preliminary euro area inflation figures for October, also due on Wednesday. We might see a small uptick in the core rate, up 0.1ppt to 1.0%Y/Y. But while energy and food prices are set to continue rising, with base effects likely to keep their annual rates of growth little changed, the headline inflation rate should move sideways at 2.1%Y/Y.
Among other top-tier releases due in the coming week, euro area unemployment data, similarly out on Wednesday, appear set to show that the euro area unemployment rate was unchanged in September at 8.1%. Meanwhile, after a downside surprise to the latest PMIs, the coming week’s European Commission Economic sentiment survey, due tomorrow, will be watched for further evidence of a deterioration in business sentiment at the start of Q4. The headline economic sentiment indicator has been on a downward trajectory since the end of last year and a further weakening seems to be on the cards this time despite the slight improvement in consumer confidence. The week will end on Friday with the release of the final manufacturing PMIs. In the bond markets, Italy will issue BTPs tomorrow.
Today brings the Budget announcement for FY19/20. The public finances have recently been performing better than expected – with some estimates suggestive of a windfall of up to £13bn compared to previous expectations for this year – and so, while the government has already committed to raising the NHS budget by £20bn a year, Chancellor Hammond looks set to promise extra spending in certain other areas consistent with putting some (probably fairly insubstantive) flesh on the bones of Theresa May’s announcement of the “end of austerity” at the recent Tory Party conference. While, of course, May did not provide any specifics of what that might actually mean, the IFS estimated that taking the commitment even in the narrowest possible sense, i.e. assuming departmental spending would remain constant in real terms (as opposed to constant as a share of GDP), would require an additional £19bn of public funding, suggesting that Hammond’s room for manoeuvre is still limited if he is serious about meeting his fiscal objective of eliminating the deficit entirely by the mid-2020’s. Reports suggest, among other things, increased funds for the welfare budget to patch up the failing Universal Credit reform, more money for public investment, and small business tax relief. But any largesse will be dependent on the UK avoiding a ‘no deal’ Brexit at end-March.
The focus in the second half of the week will shift from fiscal to monetary policy with the BoE due to announce its latest policy decision and publish its updated Inflation Report on Thursday. Having at its August meeting raised Bank Rate to 0.75% and signalled the likelihood of further gradual tightening ahead, the MPC seems unlikely to make any further changes to policy this time around, or indeed any time before the nature of Brexit becomes significantly clearer.
With the latest indicators having provided a somewhat mixed picture, the main focus will be on policy makers’ views on the economy, with their assessment of Brexit risks also of interest. Employment growth has lost some steam in recent months, with the three-month rate falling to around zero. But consumer spending, as suggested by elevated retail sales data, has remained strong. We forecast that GDP growth will have risen in Q3 to 0.5%Q/Q, which would be the strongest pace in seven quarters and 0.1ppt higher than the BoE expected in August. So, the MPC might nudge up its projection for GDP for 2018, although the outlook for 2019 and 2020 will likely be little changed. With regard to inflation, the CPI figures in September surprised on the downside, but the number for Q3 as a whole was still in line with the BoE forecast. With energy prices set to continue rising, inflation in the coming months might remain relatively stable, and we might see a modest upward revision to the inflation forecasts.
On the data front, the October PMIs for manufacturing and construction, due on Thursday and Friday, will be most interesting. The former increased 0.8pt in September but that shift is now expected to be reversed, while the latter should be little changed after a drop to 52.1, a six-month low, previously. Other survey data releases will also be of interest: the CBI will release its Distributive Trade Survey today, and this will give the first insights into how activity in the retail sector evolved this month after strong growth in the summer and a somewhat weaker outturn in September. And on Wednesday, the GfK will release its consumer confidence indicator. BoE lending data are also out today.
Turning to the US, today’s personal income and spending report for September will confirm the monthly profile for consumer spending (which rose a robust 4.0%Q/Q in Q3) and the core PCE deflator (which was up 1.6%Q/Q ann. in Q3) implicit in Friday’s national accounts report. The Conference Board’s consumer survey for October will be the main focus tomorrow, while the S&P/CoreLogic home price index for August will also be released that day. On Wednesday the Employment Cost Index for Q3 will be awaited keenly by the Fed and bond investors alike. Meanwhile, the ADP report for October will cast some light ahead of release of the official employment report at the end of the week. On Thursday, the main focus will be the manufacturing ISM for October, with the final manufacturing PMI for October, construction spending data for September and the first estimates of labour productivity and unit labour costs for Q3 also released that day.
On Friday, a very busy week will end with most attention centred on the official employment report for October: according to Bloomberg, NFPs are currently expected to rise close to 195k (our US team is more conservative, with a forecast of 180k), with the unemployment rate remaining unchanged and average hourly earnings rising 0.2%M/M and 3.2%Y/Y. The full trade balance and factory orders reports for September will also be released on Friday, along with October auto sales. There are no Treasury bond auctions due but another heavy week for corporate reporting will see Q3 earnings revealed by about a quarter of the companies comprising the S&P500.
Over the weekend, China reported that growth in industrial profits had slowed to 4.1%Y/Y in September from 9.2%Y/Y in August. Year-to-date growth remained somewhat sturdier at 14.7%Y/Y, reflecting strong growth through Q2. On the same basis, manufacturing profits rose 12.5%Y/Y, down from 13.5%Y/Y in the year to August. Over the coming week, the main focus will be Wednesday’s official PMI readings for October, with Bloomberg’s survey suggesting that the closely-watched manufacturing index will slip a further 0.2ppt to 50.6 – if so, that would represent the lowest reading since February. The Caixin manufacturing PMI, focusing more on conditions in the private SME sector, will follow on Friday.
There were no economic reports released in Australia today but the diary is jam-packed over the remainder of this week. The September building approvals report is released tomorrow, with a modest rebound in dwelling approvals likely to follow the sharp decline registered in August (driven by the volatile apartment category). This week’s key release is Wednesday’s Q3 CPI report. Despite the solid performance of the economy, Bloomberg’s survey suggests that the market expects headline inflation to drop 0.2ppts to 1.9%Y/Y with the average of the RBA’s favoured core measures – the trimmed mean and weighted median – expected to remain steady at 1.9%Y/Y i.e. below the bottom of the RBA’s 2-3% target range for annual inflation.
Among other reports, the RBA will release the money and credit aggregates for September on Wednesday, with developments in housing credit continuing to be the main focus. On Thursday most interest will centre on the trade balance for September, which should continue to report a healthy surplus. There will also be interest in the CoreLogic house price report for October – prices have edged lower every month this year – and the twin manufacturing PMI reports for October (recall the flash CBA manufacturing PMI pointed to a modest improvement in the sector during the month). On Friday the key focus will be the September retail sales report, which will also include an estimate of volume growth during Q3. According to Bloomberg’s survey, the market expects nominal spending to have advanced at the same pace as the 0.3%M/M gain registered in August, leading to volume growth of 0.4%Q/Q – just a third of that reported in Q2. The Q3 PPI rounds out this week’s data flow on Friday.
There were no major economic reports released in New Zealand today. With the final RBNZ policy review for 2018 just over a week away, the main focus this week will be Wednesday’s ANZ Business Outlook Survey for October to see whether last month’s modest lift in business sentiment – from very depressed levels – has continued. The remainder of this week’s diary includes the building consents report for September (also Wednesday); the QV house price index and ANZ Job ads index for October (both Thursday); and the ANZ-Roy Morgan consumer confidence index for October (Friday).