Morning comment, 27 Nov 18

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
A partial rebound in crude oil and technology stocks gave Wall Street a much needed lift on Monday. The S&P500 closed with a solid gain of 1.55%, while the Nasdaq rose just over 2%. Positive sentiment was also reflected in a modest rise in Treasury yields and a slight tightening of credit spreads. But after the close, US futures erased some of the day’s gain after the WSJ published an interview with President Trump. In that interview Trump said that it was “highly unlikely” that the US would hold off from boosting tariff rates on USD200bn of Chinese imports from 1 January as scheduled (to 25% from the current rate of 10%). Moreover, Trump reiterated his intention to add tariffs on the remaining USD267bn of imports from China (at either a 10% or 25% rate) if no trade deal is forthcoming – comments perhaps designed to apply additional pressure on China ahead of his scheduled meeting with China’s Xi later this week.

US equity futures, however, eventually reversed the initial decline that took place after the Trump interview was published. And so, while Chinese and Hong Kong stocks are currently down a touch from yesterday’s close, the positive tone on Wall Street was reflected across almost all other Asian bourses today. A weaker yen helped Japan’s TOPIX rise 0.7%, while similar gains were seen in markets in South Korea and Australia.

In Europe, Trump’s comments that Theresa May’s Brexit deal could stymie hopes for a future US-UK trade deal has hit sterling this morning, with GBP currently back down to $1.275. But BTPs are only slightly underperforming having made significant gains yesterday on optimism among some investors that Italy’s Government would reduce significantly its 2019 budget deficit target at a special meeting last night. That meeting proved (predictably) inconsequential, with the main party leaders agreeing to wait for ‘technical reports’ to ‘quantify the real costs’ of budget measures before deciding what to do. It is, of course, absurd to suggest that, having already last month decided on its draft budget plans for the first time, the Prime Minister and two Deputy Prime Ministers would not have had objective budget costings available. And the leaders also insisted that they would still go ahead with key commitments to reverse past pension reforms and introduce a so-called citizens’ income. Reports do, however, suggest that those commitments could be phased in on a slower timetable, and that the deficit target for 2019 could be reduced by 0.2ppt from the Government’s original plans to 2.2% of GDP. That, however, would still represent a significant deterioration in the structural deficit rather than the improvement demanded by Italy’s previous commitment under EU rules, and would surely see the European Commission – and in due course the other member states – maintain their plans to launch an Excessive Deficit Procedure against the Italian Government.

Japan:
The only economic report of any note in Japan today was BoJ’s service sector PPI for October. In aggregate, prices rose 0.4%M/M, lifting annual inflation by 0.2ppt to 1.3%Y/Y – an outcome that was 0.1pts firmer than expected and, remarkably, the fastest pace since 1997 when the period associated with the 2014 consumption tax hike is excluded. In the detail, inflation in the transportation sector rose 0.2ppts to 2.5%Y/Y – a trend that should reverse in coming months as lower fuel prices feed through. Inflation in the information and communication sector eased 0.1ppt to 0.6%Y/Y and that in the finance and insurance sector was steady at 0.4%Y/Y. However, prices for volatile advertising services rose 1.6%Y/Y after declining 0.4%Y/Y in September and prices for ‘Other services” rose 1.2%Y/Y, driven by higher prices for engineering and temporary employment services.

Euro area:
After last week’s downbeat flash PMIs and yesterday’s disappointing Ifo survey, the steady flow of negative sentiment indicators from the euro area continued this morning. In particular, the INSEE French consumer confidence survey saw a notable drop in its headline indicator, from 95 to 92, the lowest level since early 2015 and well below the long-run average. Following the mass (and, at times, disorderly) ‘gilets jaunes’ demonstrations against fuel tax increases seen over recent weeks, the survey underscored the rapidly deteriorating mood among the French population. The decline in sentiment on the survey was broad based, with consumers’ assessment of future living standards taking the biggest hit accompanied by a sharp increase in household fears about unemployment. Overall, the survey suggests that French household consumption growth is likely to ease this quarter from 0.5%Q/Q in Q3.

Against the backdrop of the Italian Government’s budget shenanigans, meanwhile, today will bring the results of the latest Italian ISTAT business and consumer sentiment surveys. With firms in Italy seemingly having more to worry about than in other member states given the recent leap in BTP yields and associated tightening of financial conditions, today’s survey results are expected to report a further loss of confidence in the middle of Q4, with the headline business climate index forecast to fall to its lowest level since 2016. However, despite an anticipated decline, Italian consumer confidence is still expected to have remained at a relatively elevated level consistent with the high support ratings still enjoyed by the two ruling political parties. In the bond market, meanwhile, Italy will auction 2Y fixed-rate and 5Y inflation-linked bonds.

UK:
With May’s chances of securing House of Commons ratification for her Brexit deal in the ‘meaningful vote’ on 11 December seemingly diminishing by the day, an ECJ hearing gets underway today to confirm whether the Article 50 notice could be unilaterally revoked by the UK Government to halt Brexit. The Government’s legal position on the matter, released yesterday, suggested that – contrary to earlier indications – MPs could, if they wish, simply direct it to halt the Article 50 process in order to prevent Brexit from happening. We suspect that the ECJ will, in due course, confirm that assessment via its judgement, which would offer a further possible (if unlikely) scenario for MPs to consider if and when May’s deal is rejected by the House of Commons.

In addition to the steady flow of Brexit-related news, today will bring the quarterly CBI Distributive Trades survey. The latest retail sales figures surprised on the downside showing that activity on the High Street slowed in October after very strong growth in Q2 and Q3. Today’s survey will probably signal a further moderation this month.

US:
In the US, tomorrow sees the release of the Conference Board’s consumer confidence survey for November, alongside the FHFA and Case-Shiller house price indices for September. Policy-wise, Vice Chair Clarida – who recently suggested that policy should be data dependent – is due to speak in New York, while in the markets the Treasury will sell 5Y notes.

China:
China’s industrial profits rose just 3.6%Y/Y in October, down from 4.1%Y/Y last month and the weakest outcome since March. Reflecting stronger gains earlier in the year, profits rose 13.6%Y/Y on a year-to-date basis, in part due to a 47.1%Y/Y rebound in the mining sector. Manufacturing profits rose 11.5%Y/Y.

Australia:
A quiet day for data in Australia saw news that the weekly ANZ-Roy Morgan consumer confidence index had increased 0.8pts to 118.6 last week – almost identical to the average reading over the past year. The improved result was driven by greater optimism about the near-term economic outlook and about buying conditions for major household purchases.

In other news, PM Scott Morrison announced that the next budget would be released on 2 April, confirming that the Government’s intention remains to run ‘full term’ ahead of an election to be held in May. According to Morrison the budget will project an earlier return to fiscal surplus, with preliminary details to be published in the mid-year update released next month. Morrison’s announcement came on a day when his Liberal Party lost a further seat, with MP Julia Banks resigning and joining the cross benches. Banks will support the government – which now commands just 74 of the 150 seats in the House – on confidence and supply.

New Zealand:
New Zealand reported a merchandise trade deficit of NZD1.30bn in October – more than NZD0.4bn above market expectations, but down from a deficit of NZD1.56bn last month. As a result, the annual deficit increased to NZD5.64bn – the largest gap recorded since 2007. Relative to market expectations, all of the surprise this month was on the imports side of the ledger, where values rose to a record NZD6.15bn – up 14.1%Y/Y. This growth was in part due to a sharp rise in imports of crude oil (up 72.0%Y/Y). Also notable was a surprising 18.6%Y/Y leap in imports of consumer goods, while imports of machinery and plant rose just 12.5%Y/Y. By contrast exports rose 6.6%Y/Y, with growth weighed down by lower prices for dairy-related products.

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