Morning comment: Euro area inflation, Chinese PMIs and Japanese data deluge

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
After starting the day in the red, Wall Street clawed its way to modest gains by early afternoon as news wires reported that President Trump was optimistic ahead of Saturday’s much-awaited meeting with China’s President Xi. According to those reports, this meeting might establish a framework for future discussion and see concessions from China that would allow Trump to delay planned increases in tariffs. However, the market weakened into the close to leave the S&P500 down a modest 0.2%. The 10-year US Treasury yield closed at 3.03% after briefly trading below 3% at one point, with the market little-impacted by a weaker-than-expected core PCE inflation reading and a set of FOMC minutes that emphasised the increasing data-dependence of policy decisions.

In Asia, markets have been similarly mixed as investors now await developments from the G-20 meeting. In Japan some firmer-than-expected economic data – including a material upside surprise in industrial output (details below) – saw the TOPIX perform better than most with a gain of 0.5%. By contrast, China’s CSI300 was little changed as China’s November PMI reports pointed to a further slowdown in growth. At the other end of the spectrum South Korea’s Kospi fell almost 1.0% after the BoK hiked its policy rate by 25bps to 1.75%, albeit in line with the expectations of most analysts. Australia’s ASX200 fell an even greater 1.6% – its worst day in more than a fortnight – with consumer stocks down especially sharply.

Japan:
A busy day in Japan has seen the release of a number of reports casting light on activity and inflation. As far as activity is concerned, the news was mostly positive. The key focus was METI’s IP report for October, which by this year’s standards revealed a rare positive surprise. After declining 0.4%M/M in September – and 1.4%Q/Q in Q3 – industrial output rose 2.9%M/M in October. This outcome was much firmer than market expectations of a 1.2%M/M gain and well above the 0.9%M/M growth suggested by METI’s bias-adjusted assessment of firms’ own forecasts (as reported last month). As a result, METI’s headline unadjusted series reports a 4.2%Y/Y increase in output following a 2.5%Y/Y decline in September. Calculated using the less volatile seasonally-adjusted series, annual growth rose to 2.5%Y/Y following a 0.1%Y/Y decline in output in September. In the industry detail, manufacturing output rose a slightly larger 3.0%M/M in October, with larger-than-average increases recorded in the making of general production and business machinery (6.9%M/M), electronic parts and devices (8.6%M/M) and transport equipment (4.6%M/M).

Needless to say, the October result largely reflects a rebound from the disruption that had been caused by Typhoon Jebi and the Hokkaido earthquake last month, as well as other weather events in Q3. However, METI chose to slightly upgrade its assessment of the manufacturing sector to “Industrial production is picking up slowly” from its previous assessment that “Industrial production is picking up slowly, but shows signs of decrease in part”. In this regard, METI has probably taken some heart from the latest survey of manufacturers which at face value points to further gains in output over the remainder of this quarter. In aggregate, firms now forecast that output will rise 0.6%M/M in November – an improvement on the 0.8%M/M decline that firms had forecast last month – followed by further growth of 2.2%M/M in December. If those gains were to be realised, and assuming no revisions, then output would grow almost 4%Q/Q in Q4. As usual, firms’ forecast for November will likely prove far too optimistic – METI’s bias-adjusted estimate suggests that a decline in output of about 2%M/M is more likely. However, the strong base provided by the October outcome means that growth should easily erase the decline in output that occurred in Q3, with an outcome of around 2%Q/Q a quite reasonable prospect.

Other details within today’s report also provided better reading. Shipments rebounded an even greater 5.4%M/M in October and so were up 7.7%Y/Y – albeit a level that is unlikely to be sustained next month. In any case, inventory levels fell 1.4%M/M and were down 0.8%Y/Y. Meanwhile, the overall inventory-shipments ratio fell a sharp 7.4%M/M to be down 8.3%Y/Y – a substantial improvement that paints the production outlook in a much more solid light than that seen in recent months. Of course that stands somewhat at odds with the decline in the manufacturing PMI to a 2-year low that was reported earlier this week, so we will need to continue to watch other indicators closely.

Moving to the day’s other economic news, the household employment survey also pointed to a rebound in activity in October. Indeed, employment rose an estimated 230k lifting annual growth by 0.4ppt to a surprisingly-robust 2.2%Y/Y. As a result, the employment rate (i.e. the proportion of the working-age population in employment) rose to a new high of 60.6%, up from 59.2% a year earlier. However, with the labour force rising by an even greater 330k in October, the unemployment rate nudged up 0.1ppt to a still extraordinarily low 2.4%, with the male unemployment rate rising to 2.7% but the female unemployment rate declining to just 2.2%. Separately, the MHLW reported that the effective job offer-to-applicant ratio eased 0.02pt to 1.62x – a modest decline from what had been a four-decade high. The number of new job offers edged down 0.2%M/M in October but was still up 4.6%Y/Y. The number of new job applicants rebounded 3.9%M/M, causing the effective new jobs-to-applicants ratio to fall 0.10ppts to 2.40x from last month’s all-time record high. So in summary, this report suggests that labour demand was very firm in October. And at least this month, labour supply was sufficient to prevent the labour market becoming even tighter. Of course the BoJ’s policymakers will continue to hope that sustained tight conditions will lead to stronger growth in labour incomes over time. The next check on that hypothesis will come from the Monthly Labour Survey for October, which will be released next Friday.

Continuing, housing starts edged up 0.7%M/M in October – a marginally firmer result than the market had expected – and so were up a negligible 0.3%Y/Y. This also means that the number of starts in October is little different to the average level recorded through Q3. Meanwhile, Japan’s largest contractors reported that construction orders fell 16.5%Y/Y in October. While private manufacturing orders rose 13.7%Y/Y, private non-manufacturing orders fell 15.4%Y/Y and government orders fell 25.4%Y/Y. It is worth noting that figures are volatile from month to month and the 3-month average was down a much less concerning 4.5%Y/Y in October. Meanwhile, the Cabinet Office consumer confidence survey pointed to a marginal weakening of consumer sentiment over the past month. The headline index fell 0.1pts to 42.9, marking the weakest reading since December 2016 but leaving the index comfortably above its long-term average. Within the detail, respondents’ indicated that their perception of their overall livelihood had weakened, but they were nonetheless more optimistic regarding developments in income growth and just as willing to purchase durable goods as they had been last month.

Finally, the advance CPI for the Tokyo area pointed to a greater-than-expected moderation of inflation at the headline level in November but provided no surprises at the core level. The seasonally-adjusted headline index was unchanged during the month, causing annual inflation to decline 0.7ppts to 0.8%Y/Y – 0.2ppts below market expectations. Fresh food prices fell 6.5%M/M and were down 2.8%Y/Y, in sharp contrast to the 12.6%Y/Y increase recorded in October. The ‘BoJ forecast’ core index (which excludes fresh food) rose 0.1%M/M for a third consecutive month, which was sufficient to leave annual inflation steady at 1.0%Y/Y. Energy prices rose 0.5%M/M, led by higher prices for electricity, and were up 7.8%Y/Y. However, the BoJ’s preferred measure of core prices – which excludes fresh food and energy – also recorded a rounded 0.1%M/M increase in November, leaving annual inflation on this measure steady at 0.6%Y/Y. As far as other aggregates are concerned, excluding fresh food, annual goods inflation picked up 0.1ppt to an 11-month high of 1.7%Y/Y, while prices for industrial products rose a steady 1.1%Y/Y. However, service sector inflation slowed 0.1ppts to 0.5%Y/Y, albeit still 0.3ppts firmer than this time last year. At face value this report suggests that next month’s national CPI will point to little change in core inflation. Of course, by December, falling fuel prices have a direct negative impact on the BoJ’s forecast core inflation measure at least. 

Euro area:
Today’s principal focus in Europe will be the flash estimate of euro area inflation in November. Following yesterday’s downside surprises to the preliminary estimates from Germany (down 0.2ppt to 2.2%Y/Y) and Spain (down 0.6ppt to 1.7%Y/Y), this morning’s equivalent figures from France were also weaker than expected. In particular, headline French inflation on the EU-harmonised measure fell 0.3ppt to a seven-month low of 2.2%Y/Y partly due to weaker services inflation. As a result, we continue to expect the headline euro area rate of CPI to fall by 0.3ppt to 1.9%Y/Y and the core measure to fall 0.1ppt to 1.0%Y/Y, bang in line with the average of the past three years. Flash estimates from Italy are also due today.

Other data due today include euro area unemployment figures for October. Having moved sideways at 8.1% for three consecutive months, the headline unemployment rate is expected to inch 0.1ppt lower in October. Final Italian GDP numbers for Q3, for which the current estimate showed that economic activity moved sideways from Q2, are also scheduled for release.

Meanwhile, the latest German retail sales figures, published this morning, seemed to provide confused messages about the strength of spending at the start of the fourth quarter. Certainly, the year-on-year increase of 5% in October was striking and significantly exceeded expectations, being the fastest pace of growth since May 2017. But this in part reflected two extra working days last month compared with October 2017, which was one of the weakest months for sales last year. And, most importantly, on a seasonally adjusted basis retail sales continued to disappoint, declining for the fourth consecutive month (and the fifth month out of the past six), down 0.3%M/M, to leave them down 0.8%3M/3M. So, while Germany’s retail sales do not always provide the best guide to the national accounts measure of household consumption, they add to recent evidence suggesting that a vigorous rebound in German GDP growth in Q4 seems unlikely.   

In the bond markets, Italy will sell floating-rate bonds.

UK:
The only data release of note from the UK today is the Lloyds Business Barometer, which has already been released this morning. Following a sharp drop in October to 19, the lowest level since August 2017, the headline index recovered some of the lost ground this month, bouncing back to 24. Satisfaction with current economic conditions was stronger than last month, although the relevant indicator remained well below its average so far in 2018. And while business activity expectations also improved on the month, their respective index remained down on levels seen in the first half of the year. So, despite the suggestion of an overall improvement in business conditions, the survey remained consistent with a weak momentum in the UK economy in Q4.

US:
Ahead of Trump’s weekend showdown with Xi in Buenos Aires, it should be an uneventful day for economic news from the US. The week’s data diary will conclude with the release of the Chicago PMI for November while New York Fed President John Williams will speak on the global economy.

China:
Beyond the speculation about what might happen in Buenos Aires, the focus in China today was on the release its official PMI reports for November. The official composite PMI fell 0.3pts to 52.8, with the closely-watched manufacturing PMI falling 0.2pts to 50.0 – the lowest reading since July 2016 and below market expectations. Weaker readings were recorded for both large and small-sized firms, with the PMI for the former falling to 50.6 and that for the latter falling to 49.2. In the detail, the production index edged down 0.1pts to 51.9, but remained well above this year’s February low of 50.7. However, the overall new orders index fell a further 0.4pts to 50.4 – a level last seen in July 2016. And in a further sign that US tariffs are impacting the economy, the export orders index stood at a contractionary 47.0, albeit up 0.1pts from last month’s low. Indeed, the PMI for the steel industry slumped to just 45.2 in November. The news outside of the manufacturing sector was also disappointing, with the non-manufacturing PMI declining a further 0.5pts to a 15-month low of 53.4 – still clearly expansionary but a 15-month low, nonetheless. Within the detail the new orders index remained stable at a barely-expansionary 50.1 while the employment index fell to an 8-month low of 49.4.

Australia:
Today the RBA released its money and credit statistics for October. Private sector credit rose 0.4%M/M, the same as in September, leaving annual growth steady at 4.6%Y/Y. As was the case last month, growth was driven by a 0.6%M/M increase in business credit, lifting annual growth by 0.3ppts to 4.6%Y/Y. Housing credit again rose a subdued 0.3%M/M, so that annual growth slowed by 0.1ppts to 5.1%Y/Y. While owner-occupier housing credit rose 0.4%M/M and 7.0%Y/Y, investor housing credit was unchanged this month and up just 1.3%Y/Y.

New Zealand:
After falling to a 3-year low last month, the ANZ-Roy Morgan consumer confidence index rebounded 2.8%M/M to a 5-month high of 118.6 in November – still just a little below the historic average (in contrast to business confidence, which remains much weaker than average). This month respondents were slightly more positive about the outlook for their family finances, while year-ahead expectations for the economy returned to positive territory (just). Meanwhile, respondents continued to indicate a willingness to buy major household items in numbers that are normally consistent with growth in retail volumes of over 4%Y/Y.

In other news, the number of dwelling approvals rose 1.5%M/M in October and was up 8.4%Y/Y (house approvals rose 6.1%Y/Y). In value terms approvals for new residential buildings rose 10.8%Y/Y, while approvals for non-residential buildings rose 6.5%Y/Y. Weaker readings for other construction activity meant that the value of all construction approvals rose a slightly weaker 5.7%Y/Y in October.

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