Morning comment: Japan CPI, ECB account & Brexit

Chris Scicluna
Mantas Vanagas

Overview:
A small rebound in energy and technology stocks saw the S&P500 rise as much as 1.1% in early pre-Thanksgiving trade on Wednesday. However, much of that gain was pared in late trade – especially in the technology sector – leaving the S&P500 with a modest 0.3% gain at the close. The Treasury market was little changed while the US dollar weakened slightly.

With that background it has been a mixed session in Asia today. A weaker yen (close to ¥113/$) allowed Japan’s TOPIX to more than erase Wednesday’s loss with a gain of 0.8%, while firmer commodity prices helped Australia’s ASX200 break a 4-day losing streak with an advance of 0.9%. But while the Hang Seng has also closed up on the day, China’s CSI300 fell 0.4%, erasing yesterday’s modest gain. In the bond market, meanwhile, JGBs were unmoved by a Japanese CPI report that met market expectations (more on this below).

In Europe, sterling has firmed very slightly against the dollar this morning despite the failure yesterday evening of Theresa May and Jean-Claude Juncker to finalise a draft Brexit political declaration – the two will try again on Saturday. And after yesterday’s significant gains, BTPs are a touch weaker this morning with media reports containing mixed messages about the willingness of the leaders of Italy’s two ruling parties to amend their fiscal plans. Prime Minister Conte – who is arguably little more than a puppet for Salvini and Di Maio – will address the Italian parliament on the matter later this afternoon and no doubt blame the country’s predicament on the previous government’s failings as well as Brussels.  

Japan:
The domestic focus in Japan today was on the CPI report for October. This report provided no major surprises, with all key inflation aggregates conforming to market expectations. Following a flat September, the headline index rose a seasonally-adjusted 0.2%M/M last month, lifting the annual inflation rate by 0.2ppt to 1.4%Y/Y. The price of fresh food fell 0.3%M/M but was still up a hefty 10.8%Y/Y. As a result, the core inflation index used by the BoJ in its quarterly Outlook Report forecast – which simply excludes fresh food prices from the CPI – also rose 0.2%M/M, leaving annual inflation on this measure stable at 1.0%Y/Y.

Within the detail, energy prices rose a further 1.7%M/M in October and were thus up 8.9%Y/Y – a strong trend that, given the recent collapse in prices for fuel, will surely reverse when next month’s data are released. This meant that the BoJ’s preferred measure of core prices, which excludes both fresh food and energy prices, rose a more subdued 0.1%M/M in October, leaving annual inflation steady at just 0.4%Y/Y. The measure of core prices that strips out prices of all food items and energy (as monitored closely in many other major economies) also rose 0.1%M/M, lifting annual inflation on this measure by 0.1ppt to a paltry 0.2%Y/Y. For a second consecutive month prices for non-energy industrial goods were unchanged from a year earlier and prices for services rose just 0.2%Y/Y.

So, in summary, even given extreme tightness in the labour market, at this stage the underlying inflation pulse remains barely positive and nowhere near consistent with the BoJ’s current 2% target. And with the recent slump in global oil prices bound to apply downward pressure on the headline and forecast measures of core inflation over coming months, as well as inflation expectations, the BoJ forecasts for inflation are likely to come under significant downward pressure (again). Indeed, if oil prices stay around current levels, the BoJ’s forecast core inflation measure could well be back close to (or even below) zero this time next year after adjusting for the impact of the consumption tax. This is especially so given that the BoJ’s outlook for GDP growth in FY18 also appears too optimistic. Therefore, in the absence of clear signs of negative feedback on the financial sector, there remains little prospect of the BoJ reducing the degree of accommodation provided by its “yield curve control”, as also suggested by the decline in JGB yields over the past month.

Moving on, the final results of the MHLW’s Monthly Labour Survey for September pointed to slower growth in labour incomes than had been suggested by the preliminary report. Growth in the headline measure of total labour cash earnings (per person) was revised down 0.3ppt to 0.8%Y/Y, leaving growth unchanged from that reported in August. Moreover, taking a matched sample of business respondents (to adjust for recent changes in methodology), growth in total labour cash earnings (per person) was just 0.1%Y/Y in September – revised down 0.1ppt from the preliminary survey and down from 0.9%Y/Y in August.

The downward revision in headline growth was largely attributable to the usual volatility in bonus payments – now estimated to have increased 8.3%Y/Y, rather than the whopping 13.3%Y/Y increase estimated previously. Growth in contracted earnings was revised down 0.1ppt to a six-month low of 0.7%Y/Y, with scheduled earnings (i.e. ordinary time) also rising 0.7%Y/Y but non-scheduled earnings (i.e. overtime) growing just 0.2%Y/Y. Scheduled earnings of part-time workers rose 2.5%Y/Y on a per-hour basis, down 0.1ppt from August. Growth in scheduled monthly wages for full-time workers declined 0.3ppt to 1.0%Y/Y. After allowing for inflation, real total cash earnings (per person) disappointingly fell 0.6%Y/Y in September. So, households seem likely to remain highly intolerant of price rises and thus sceptical of the merits of achieving the BoJ’s 2% inflation target.  

Elsewhere in the labour survey, overall growth in employees was confirmed at 1.1%Y/Y. As usual, revisions have boosted growth in part-time employment (revised up 1.1ppts to 2.8%Y/Y) at the expense of full-time employment (revised down 0.4ppt to 0.6%Y/Y). Finally, after rebounding in August, aggregate hours worked (per person) were reported to have slumped 3.1%M/M in September – likely largely due to disruptions caused by Japan’s natural disasters – and so were down 3.4%Y/Y. These disruptions have likely impacted the earnings data too, so the preliminary October report will be awaited with more than usual interest.

Finally, we note that today’s tourism data point to a sharp rebound in arrivals from the disaster-impacted month of September. Indeed, total arrivals rose 1.8%Y/Y in October, compared with the 5.3%Y/Y decline reported a month earlier. That said, it remains the case that growth in arrivals has clearly slowed over recent months from the extraordinary pace seen over the prior six years. Arrivals from South Korea – Japan’s second largest market – were down 8.0%Y/Y in October.

Euro area:
Today the ECB will publish its account of the October monetary policy meeting. Following that meeting Draghi insisted that the Governing Council still considered risks to the economic outlook to be broadly balanced, but we will study the account to gauge the extent of concerns about the recent dataflow. Attention will also be on any further insight into the future monetary policy debate, including possible changes to reinvestment policy to be agreed in December and suggestions for another round of very long-term refinancing operations, which will need to be announced in due course.

Data-wise, this afternoon will bring the European Commission’s flash euro area consumer confidence index for November. Having been on a steady downtrend after peaking in January, the consumer confidence index inched up 0.2ppt in October to -2.7, still the second-lowest reading since May 2017. But the consensus expectation for November is for a renewed decline, which would suggest the likelihood that household spending growth will remain relatively subdued in Q4.

The INSEE business sentiment survey released this morning suggested that business conditions in France were stable in the middle of Q4, with the headline survey index moving sideways in November at 104. Since the end of last year, when it reached a post-crisis high, this indicator has been following a downward trajectory. And while it remains firmly above its long-term average, the latest readings are consistent with much weaker economic momentum. Looking at the details, manufacturing, construction and retail trade components all reported small improvements, while services sector sentiment was unchanged. But disappointingly, the employment climate index declined by two points to 105, the lowest level since early 2017, mainly representing concerns about employment in services sector. The French unemployment figures released earlier this week showed that the unemployment rate was merely stable in Q3 at a still-high 9.1% (8.8% on the mainland). So, while the employment climate appears to remain broadly favourable and above its long-term average, the pace of labour market tightening in France appears to have slowed.

UK:
So, yesterday evening’s discussions between May and Juncker failed to make a Brexit breakthrough. And the outstanding issues are all politically tricky, including May’s desire for a commitment to strive for frictionless trade in goods in future despite her primary objective of controls on freedom of movement; access to UK fishing waters for French, Dutch and Danish trawlermen; and the Spain’s desire for a veto on future trade arrangements governing Gibraltar. EU officials will discuss the state of play this morning. But with the tone between May and Juncker still civil, and events still appearing well-choreographed, on balance we expect a breakthrough to be reached when May and Juncker meet again on Saturday, and the draft Withdrawal Agreement and Political Declarations to be agreed at Sunday’s special summit. A far steeper obstacle to May’s Brexit plan will, of course, lie ahead next month when the UK parliament’s ratification will be sought. With so many Tory MPs having already pledged to vote against the deal first time around, the government’s defeat first time around looks assured. But MPs would then be asked to vote again in some shape or form. And whether sufficient Tories and Labour MPs eventually change tack to support May’s deal in an attempt to avoid a no-deal Brexit – or indeed the path finally opens to a second referendum – remains unclear.

New Zealand:
Today’s only Kiwi economic report was the release of migrant and visitor arrival information for October. After adjusting for seasonality, a net migrant inflow of about 4,700 people was recorded this month – similar to that seen last month but about 1,000 people less than in the same month last year. This slowdown mostly reflects fewer arrivals. Meanwhile, the report revealed a 4.0%M/M rebound in short-term overseas visitor arrivals during the month, lifting annual growth to 5.4%Y/Y.

 

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