Morning comment: German confidence & Aussie construction ahead of Powell

Chris Scicluna
Mantas Vanagas

Following a slightly weaker session in Europe, Wall Street managed to close with modest gains on Tuesday as investors began to look forward to a confirmed dinner meeting this coming Saturday in Buenos Aires between President Trump and President Xi. The S&P500 rose 0.3%, led by gains in the defensive sectors. Meanwhile Treasury yields were little changed as investors shrugged off President Trump’s renewed criticism of the Fed’s policy tightening and as a speech by Fed Vice-Chair Richard Clarida offered no fresh insights into the outlook for monetary policy.

With that background, on a day largely devoid of significant local data, Asian bourses have generally performed positively – perhaps surprisingly so with chief Trump economic advisor, Larry Kudlow, telling reporters that “President Xi may have a lot more to say in the bilateral, I hope he does by the way, I think we all hope he does . . . but at the moment, we don‘t see it.” China’s CSI300 rose 1.3%, with gains of more than 1% also seen in Hong Kong and Taiwan. In Japan, the TOPIX rose 0.6% – a fourth consecutive gain and so delivering the highest close in more than a fortnight. By contrast, Australia’s ASX200 fell marginally with the material sector weighed down by a disappointing Q3 construction report (more on this below).

Euro area:
Italy’s government continues to prevaricate about fiscal policy but shows no sign whatsoever of coming up with a budget plan that doesn’t represent a non-negligible structural deterioration in the public finances. And all the while, the euro area dataflow continues to disappoint. Following last week’s downbeat flash PMIs, Monday’s disappointing Ifo survey and yesterday’s weaker surveys from France and Italy, the steady flow of negative sentiment indicators continued today with the latest German GfK consumer confidence survey, which saw the headline sentiment index decline by 0.2ppt to 10.4, the lowest level since mid-2017.

More downbeat expectations on economic growth appears to be the main driver of the softening in German consumer confidence, with the relevant index having fallen to 17.4, well down from the peak of 54.4 seen at the start of this year and around half of the average level over the last twelve months. A more subdued economic outlook also prompted consumers to reassess their income expectations, which weakened for a second consecutive month to the lowest level since March 2017. Nevertheless, households’ propensity to buy seems to be holding up well – the relevant indicator rose for a second consecutive month – perhaps thanks to still favourable labour market conditions. Nevertheless, German consumers cut their spending in Q3 for the first quarter in almost five years. And, given the more downbeat tone to this survey, we do not expect a particularly vigorous rebound in consumption in Q4.

Looking ahead, the ECB’s euro area bank lending data for October are due later this morning. And ECB Executive Board members Praet, Cœuré and De Guindos have the opportunity to signal a more dovish approach from the Governing Council at next month’s policy meeting when they speak publicly today. In the bond markets, Germany will sell 10Y Bunds.

Brexit will continue to dominate the news-flow in the UK, with the Treasury and BoE both set to publish assessments of the draft EU-UK Brexit deal. According to the Daily Telegraph, the Treasury analysis will suggest that leaving the EU without a deal would lead to UK GDP being about 7.5% lower in fifteen years than it otherwise would be under continued EU membership, compared to a 1-2% shortfall under Theresa May’s plan. The BoE’s analysis, due later this afternoon, will likely suggest that, if Theresa May’s deal is approved, GDP growth would be a touch firmer than under the MPC’s current central projection, implying that monetary policy would be tightened somewhat faster than the three to four hikes over three years suggested at the time of the publication of the last Inflation Report. Obviously, it remains to be seen whether May’s deal will remain a runner for much longer with current indications suggesting it will be defeated by a margin of 100 MPs or more when the ‘meaningful vote’ is held next month. (We will also receive the BoE’s latest Financial Stability report and latest bank stress test results this afternoon.)

Data-wise, the BRC Shop Price index released overnight suggested that prices on the UK High Street were broadly stable this month. The headline rate of inflation on this survey rose slightly, from -0.2%Y/Y to 0.1%Y/Y, which alongside readings from August and September represented only the third positive reading on this series since the first half of 2013. Looking at the details, both food and non-food categories reported higher inflation. But, given that transportation costs are likely to start falling due to lower oil prices, and with retail sales data suggesting weaker momentum in the sector as we approach year-end, retail price inflation might go into reverse over the coming months.

In the US, all eyes will be on Fed Chair Powell’s speech to the Economic Club of New York. Meanwhile, the data-flow brings a second reading on Q3 GDP growth (initial estimate 3.5%Q/Q ann.), together with advance trade and inventory reports for October, new home sales figures for the same month, and the Richmond Fed’s manufacturing survey for November. In terms of the trade report, exports could prove disappointing once again, weighed by softer growth in emerging markets and Europe as well as the stronger dollar. However, with imports having been exaggerated in September due to efforts to beat the impact of the imposition of Trump’s tariffs, the net effect is likely to be a narrowing in the monthly trade deficit. Meanwhile, in the bond market, the Treasury will sell 7Y Notes and 2Y FRNs.

The countdown to the release of Australia’s quarterly national accounts on 5 December continued today with the release of the construction report for Q3. The volume of total construction work done fell 2.8%Q/Q – a far cry from the 0.9%Q/Q increase that the market had expected – following a slightly upwardly-revised 1.8%Q/Q advance in Q2. In the detail, building work fell 1.5%Q/Q but was still up 4.3%Y/Y, with residential building activity down 1.0%Q/Q and non-residential building activity down 2.4%Q/Q. Meanwhile, the volatile engineering work component of construction fell 4.5%Q/Q, with base effects associated with a surge in work in Q317 meaning that activity was down a whopping 34.4%Y/Y. Coming on top of the weak 0.2%Q/Q lift in retail volumes reported earlier this month, the early GDP partials have disappointed. A more comprehensive picture of business investment in Q3 will be provided by tomorrow’s CAPEX survey. 

New Zealand:
The main focus in New Zealand today was on the release of the RBNZ’s semi-annual Financial Stability Report. According to the RBNZ, risks to New Zealand’s financial system have eased over the past six months. Vulnerabilities remain, especially in the household sector which is exposed to financial shocks due to a heavy mortgage debt burden. However, the Bank noted that “both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending”. In response, as had been signalled in a recent speech by Deputy Governor Bascand, the RBNZ announced a further modest easing of loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. Specifically, from 1 January, up to 20% – rather than the current 15% – of new mortgage loans to owner occupiers can have deposits of less than 20%. In addition, up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%). This should give a small boost to the housing market over the coming summer months.

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