Morning comment: Carney's testimony, RBA minutes

Mantas Vanagas
Chris Scicluna

Following a mostly positive session in Asia, Wall Street traded weaker from the get-go yesterday. In particular, technology stocks came under renewed downward pressure amongst reports of further cutbacks in iPhone production and as a further slump in crypto-currency values applied downward pressure to chipmakers. A weak housing report from the NAHB – indeed the weakest since August 2016 – added to the negative tone. At the close the S&P500 was down 1.7%, albeit slightly above its lows for the session. Both US Treasury yields and the US dollar were slightly weaker too.

Not surprisingly, developments on Wall Street have weighed on Asian bourses today with widespread losses in recorded across the region. The major bourses have fallen close to 2% in both mainland China and Hong Kong. But despite a drop of more than 5% in Nissan’s share price, the Topix closed down a more moderate 0.7%, while losses of around 1% were seen in South Korea and Singapore. Meanwhile JGB yields were little changed as BoJ Governor Kuroda told the Diet that the Bank had little chance of achieving 2% inflation in FY20, but reiterated that the current policy approach – including the negative policy rate – was best suited to achieving the target over time.

Euro area:
Today’s most notable data releases from the euro area are already out in the shape of German PPI and French labour market figures. In line with expectations, the former reported a small pick-up in producer price inflation, from 3.2%Y/Y to 3.3%Y/Y, matching the highest reading since the end of 2011. Energy prices, up 9.4%Y/Y, were the main factor driving producer inflation higher, with petroleum products reporting a hefty increase in prices of 19.2%Y/Y, while gas and electricity prices rose more than 9%Y/Y. Excluding energy prices, however, PPI inflation was only 1.6%Y/Y, unchanged from September. Energy price inflation is now roughly at its peak, and so we expect headline PPI in Germany (and the euro area as a whole) – and indeed headline CPI – to decline steadily lower over coming months.

Meanwhile, the French jobless data were somewhat disappointing, with the headline unemployment rates remaining unchanged from the previous quarter in Q3 at 8.8% in metropolitan France and 9.1% when the overseas departments are also included, both down 0.5ppt from a year earlier. Nevertheless, the employment rate of the working-age population in metropolitan France edged up 0.1ppt to 65.9%, representing the highest level since the early 1980s, with full-time employment rate up 0.3ppt and the part-time rate down by the same amount.   

Following the publication of the latest Inflation Report earlier this month, today BoE Governor Carney and other MPC members are set to testify before the Treasury Select Committee. The UK’s October inflation figures were lower than the BoE expected and the latest economic sentiment surveys have been consistent with a sharp slowdown in economic momentum at the start of Q4. So, their assessment of how the economy is performing will certainly be of interest. But having repeated many times that UK’s economic outlook and the path of the BoE monetary policy to a large extent will depend on what will be agreed in the Brexit negotiations, there is little doubt that they will be pressed to comment on the implications of the draft Withdrawal Agreement. It seems difficult to believe that they will be prepared to give a thorough opinion ahead of the publication next week of their assessment of the likely monetary and financial impact, although Carney might be expected to repeat his previous intimations that its adoption would likely imply an upwards revision to the BoE’s baseline forecasts for growth and inflation, and hence the strong likelihood of another rate hike in the first half of 2019 and additional tightening beyond.

Data-wise, the CBI’s Industrial Trends survey will be worth watching for any insights into how sentiment in the manufacturing sector is holding up against the backdrop of intense uncertainty about the future trading arrangements between the UK and the EU. We expect another downbeat survey.

In the US, the dataflow will bring October housing starts data, which should show a modest increase in October following a 5.3%M/M drop in September. Single-family homes will probably remain at a low level, but the more volatile multi-family category might should improve from the low level in September. Nevertheless, the data will likely remain consistent with a housing sector that has lost a good deal of momentum.

Yet again the release of the minutes from the RBA’s latest Board meeting provided no surprises, in keeping with the post-meeting press statement and subsequent Statement on Monetary Policy. The concluding ‘Considerations for Monetary Policy’ section repeated the Board’s earlier assessment that, based on the Bank’s forecasts, “…the current stance of monetary policy would continue to support economic growth and allow for further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target.” And looking further ahead, it was also again stated that “members continued to agree that the next move in the cash rate would more likely be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy.”  RBA Governor Lowe will give a dinner speech in Melbourne shortly, although the title – Trust and Prosperity – suggests a speech more focused on regulatory matters than those of monetary policy.

On the data front, the ANZ-Roy Morgan weekly consumer confidence index fell 2.0pts to 117.8, leaving it a little above the average reading since the survey began in 2010.

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