Morning comment: Italian deficit and UK labour market

Mantas Vanagas
Emily Nicol

While the US Treasury market was closed for the Veterans’ Day holiday, exchanges were open on Monday. Investors on Wall Street wasted no time in erasing the remainder of last week’s post-election rally, with the S&P500 closing down 2.0%, weighed down by especially heavy losses in the technology sector as investors continued to ponder guidance given during the almost-completed earnings season (GE fell 6.9% and Apple fell 5.0%).

Not surprisingly, in another light day for local economic news, the slump on Wall Street drove significant early weakness across most major Asian bourses today. However, most markets moved off their lows following a report that Chinese Vice Premier Liu He would soon visit Washington for further trade talks and as US Vice President Mike Pence – in Tokyo for a meeting with Japan’s Abe – said that President Trump believes that progress can be made to settle the US-China dispute. As a result, after initially opening lower, China’s CSI300 eventually rose 1.0%. However, Japan’s TOPIX closed with a sharp 2.0% loss, albeit paring a decline that had amounted to over 3% in early trade, and Australia’s ASX200 fell 1.8%. US equity futures rose modestly as optimism improved following the trade news. This allowed the US 10-year Treasury yield to reverse some of the initial 4bps decline that occurred when trading re-opened following Monday’s holiday.

In terms of today’s flow of economic data from major economies, the most notable release appears to be the UK labour market figures, which will probably confirm that upward pressure on wages continued to grow. However, they may be overshadowed by political news about Brexit negotiations and Italian fiscal plans. Yesterday EU’s Chief negotiator Barnier confirmed “that parameters of a possible [withdrawal] agreement are very largely defined”, while PM Theresa May suggested that talks were “in the endgame”. Despite this there will not be a meaningful discussion on Brexit at today’s Cabinet meeting. Meanwhile, BTP and other Italian asset prices will remain volatile as the Italian government submits new fiscal plans to the European Commission. The main deficit target for next year is set to remain unchanged at 2.4% of GDP, a level unacceptable for the Commission. However, Italian officials might attempt to demonstrate some flexibility by lowering their growth forecasts and introducing more control mechanisms to keep public spending in line with its plans.

Euro area:
Italy aside, a relatively quiet day for new data in the euro area has already brought the final estimate of October inflation from Germany. The headline EU harmonised rate was confirmed at 2.4%Y/Y, up 0.2ppt to the highest level since February 2012. On the national measure, headline CPI also rose 0.2ppt to 2.5%Y/Y, the highest rate for more than a decade. Within the details, energy price inflation continued to have a considerable impact in October, rising 8.9%Y/Y. In contrast, food price inflation slowed in October. But while non-durable consumer goods price inflation moved sideways in October, services prices were boosted in part by package holidays. And so, core inflation also edged higher last month to 1.7%Y/Y, a fifteen-month high.  

Later today, we will receive more economic data from Germany in the form of the latest ZEW survey indicators – a survey of financial market professionals. The current situation gauge has been on a downward trajectory since the beginning of the year and a further decline, from 70.1 to around 65, which would be the lowest level since the end of 2016, is on the cards. Similarly, the forward looking index is likely to signal some deterioration too, with the relevant index likely hitting the lowest reading since 2011. Admittedly, this survey tends to follow equity market moves (the DAX has recently fallen sharply to its lowest level since late 2016) and is therefore not necessarily a reliable guide to the near-term outlook for economic activity.

The latest figures from labour market will begin the flow of this week’s top-tier data releases from the UK. Headline wage growth picked up in the three months to August, and further increases are on the cards in September, with headline average weekly earnings set to reach 3.0%3M/Y% for the first time in three years. Excluding bonuses, growth will probably be a touch stronger at 3.1%3M/Y, unchanged from August. This notwithstanding, this report is likely to show that the period of subdued employment growth continued. The headline three month pace dropped to around zero in the last two months, and while we will probably see a slightly higher reading for September, it should be far from the triple-digit increases often seen in the first half of the year. The weaker employment growth should leave the headline unemployment rate unchanged at 4%.

In the US, today will bring the October Federal Budget and the NFIB small business sentiment figures. The public finance data are likely to show much higher deficit compared with October 2017, as calendar effects pushed some spending from October into September last year.  Meanwhile, the NFIB survey headline index will probably be little changed from September and only slightly lower than the all-time high reached in August.

The domestic focus in Australia today was on the release the NAB Business Survey for October. The headline business confidence index fell 2pts to +4, which is marginally below its long-run average. Respondents remained more positive about their own situation than about the economy in general, however. The closely-watched business conditions index printed at +12 in October. While also down 2pts for the month to a 20-month low, this reading was still double the long-run average for the series. Within the detail, the trading index nudged up 1pt to +18 but the employment index fell 4pts to a 4-month low of +7. Finally, it is worth noting that firms reported that their output prices rose 0.6% over the past three months – an outcome at the upper end of the recent range for this series, which has trended modestly higher over the past two years.

In other news, ahead of tomorrow’s monthly Westpac consumer confidence reading, the weekly ANZ-Roy Morgan index rose 2.6%M/M to 119.8, marking the highest reading since late July. The improvement was driven by most components of the index, but with the largest improvement centred on short-term expectations for the economy.

New Zealand:
A quiet day in for data in New Zealand saw news that food prices fell 0.6%M/M in October, while annual inflation stood at just 0.6%Y/Y. The main driver of the weakness in October was a second consecutive 8.7%M/M decline in the price of vegetables (now down 7.5%Y/Y).

In other news, little more than two week’s out from the publication of the RBNZ’s semi-annual Financial Stability Report (FSR), Deputy Governor Geoff Bascand gave a speech in which he reiterated that New Zealand has two main vulnerabilities: (1) a high level of indebtedness in the household and dairy sectors and (2) a reliance on foreign sources of funding. With regard to loan-to-value ratios (LVRs), he noted that these were introduced to address elevated risks in the housing market. Importantly, Bascand went on to say “The question we are assessing in the upcoming Financial Stability Report is whether the same restrictions are needed in the current environment.” It is worth noting that the last modest easing of the LVR restrictions, which took place at the beginning of this year, was announced with the publication of the last November’s FSR. Given Bascand’s comment, a further slight easing of the LVR restrictions seems likely to be announced on 28 November.

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