Morning comment: Japan retail sales, Spanish inflation

Chris Scicluna
Mantas Vanagas

Following a quiet European session, equity markets burst into life during the US afternoon as investors responded positively to remarks made by Fed Chair Jerome Powell in a speech to the Economic Club of New York. While the speech mainly concerned issues of financial stability – timed to coincide with the release of the Fed’s first Financial Stability Report – Powell did preface his remarks with some observations on the economy and monetary policy. While the tone regarding the economy remained upbeat, investors took particular note of Powell’s observation that interest rates “remain just below the broad range of estimates of the level that would be neutral for the economy”. To some extent, that might be considered to be stating the obvious – the current range for the fed funds rate is 2.00-2.25%, while that ‘broad range’ of FOMC estimates of the long-run equilibrium fed funds rate is 2.5-3.5%. Nevertheless, also of note was Powell’s comment that, in assessing future policy moves, “We will be paying very close attention to what incoming economic and financial data are telling us” – i.e. decisions will be data dependent. Again, that’s hardly a shock. But these remarks, which might suggest that we are nearing the time at which quarterly hikes in the Fed Funds rate can no longer be taken for granted, generated a modest rally in the Treasury market. And after being only modestly positive in early trade, the S&P500 leapt to close with a 2.3% gain – technology and consumer discretionary stocks rising about 3½ – and so at its highest level since 9 November. While credit spreads tightened following Powell’s comments, the US dollar fell.

On the open equity markets across Asia took their lead from Wall Street’s strong rally on a day that was again short of significant local economic news. However, the gains seen in Asian bourses were much more restrained, with an initial rally pared over the course of the day. The muted response in Asia was probably due in part to President Trump’s tweet that he was studying the possibility of new auto tariffs in light of this week’s announced GM plant closures. Meanwhile, with Powell’s speech out of the way, investors’ attention has now turned nervously to this coming weekend’s important meeting between President Trump and President Xi. This nervousness was especially evident in China where, with the November PMI reports also looming tomorrow, the CSI300 eventually closed down 1.3% with stocks also closing in the red in Hong Kong. In Japan a stronger-than-expected lift in retail sales was countered by a firmer yen as the US dollar extended its post-Powell decline, but the TOPIX still rose 0.35% to post its fifth consecutive advance. Slightly larger gains were seen in Singapore and Australia.

The only economic release of any note today was METI’s retail sales report for October – an unreliable indicator of overall consumer spending as depicted in the national accounts. Total retail spending rose a much great-than-expected 1.2%M/M, causing annual growth to improve to 3.5%Y/Y from 2.2%Y/Y previously. A key contributor to that growth was a 3.9%M/M lift in motor vehicle sales (now up 6.6%Y/Y), with some additional demand probably created due to damage caused by the recent storms and the Hokkaido earthquake. Spending on apparel rose 1.2%M/M, while spending on general merchandise rose a more restrained 0.6%M/M. The strong growth recorded in October leaves sales running 1.5% above the average level through Q3, which in in turn recorded growth of 1.1%Q/Q compared with Q2 – a far cry from the 0.1%Q/Q contraction in private consumption as measured in the national accounts. The BoJ’s Consumption Activity Index (released 7 December) and the Cabinet Office Synthetic Consumption Index (usually released a few days later) will provide a much more reliable guide of whether private consumption has returned to positive growth in Q4.

Euro area:
Following the weak flash PMI, Ifo, GfK, INSEE and ISTAT surveys, today will maintain the steady flow of downbeat confidence indicators from the euro area with November’s Commission survey. The headline indicator has fallen every month this year and a further drop to a twenty-month low is anticipated today. Today is also bringing the first indications of inflation in November with the flash estimates from Germany expected to decline on the EU-harmonised measure to 2.3%Y/Y, thanks not least to lower energy inflation. Indeed, for the same reason, the initial estimate of Spanish inflation on the same measure just released fell a larger-than-expected 0.6ppt to 1.7%Y/Y, the weakest since April. And given recent shifts in global oil prices, headline inflation in the euro area should fall steadily over coming months too.

Meanwhile, the final release of French GDP figures for Q3 confirmed the previous estimate of 0.4%Q/Q growth last quarter, which represented the strongest reading this year after earlier quarters were hit by strikes. Nevertheless, the annual pace of growth was revised slightly lower, from 1.5%Y/Y to 1.4%Y/Y, the slowest pace since the end of 2016. Looking at the major components, private consumption was among the main drivers of growth last quarter, but it remains to be seen if the momentum will be maintained this quarter given that consumer confidence continues to follow a clear downward trend. At the first glance, the French data for consumer spending on goods also released this morning were respectable, showing an increase of 0.8%M/M in October. But this gain followed a drop of 2.0%M/M in September. The improvement in October was widespread among major categories, with food products (up 0.9%M/M), manufactured goods (up 0.8%M/M) and energy (up 0.7%M/M) all contributing positively. But smoothing out the monthly volatility, over the three months to October consumer spending on goods was merely flat, down from the 0.4%3M/3M growth rate in September. And against the backdrop of the mass ‘gilets jaunes’ demonstrations against fuel tax increases seen over recent weeks, and with the INSEE consumer sentiment index earlier this week having shown a sharp drop this month, a notable pick-up in consumer spending at the end of the year appears quite unlikely.

Finally, while the Italian government continues to prevaricate about its irresponsible fiscal plans, in the bond market Italy will sell 5Y and 10Y BTPs today.

Focus in the UK will obviously remain on the Brexit debate, after yesterday saw the BoE judge that a ‘no deal’ Brexit would prompt the deepest recession since the second world war, a collapse in house prices and steep rate hikes to boot, while Theresa May’s preferred deal would also see GDP growth fall well short of an alternative scenario whereby the UK remains in the EU. We do not think that the BoE assessment, or that of the Government also published yesterday, will have a massive impact on the outcome of the ‘meaningful vote’ in Parliament on 11 December.

Today’s UK dataflow brings just the latest BoE lending figures for October. The UK Finance data released earlier this week showed that mortgage approvals picked up last month and that the mortgage lending flow was somewhat higher too, and we might expect that the message from today’s data to be similar.

Today will bring further information from the Fed with the release of the minutes from this month’s (admittedly inconsequential) FOMC meeting. And there’s also a busy data schedule. Most interest in that respect will centre on the personal income and spending report for October which will include the Fed’s key inflation measure, the core PCE deflator. Solid readings for both income and spending look to be on the cards. But while higher energy prices will boost the headline PCE deflator, the CPI report points to a subdued increase on the core measure. Pending home sales data for October and the usual weekly claims numbers are also due.

The main domestic focus in Australia today was on the release of the CAPEX survey for Q3, which provided further important indications ahead of the full national accounts (due 5 December) as well as an update on firms’ expected spending over the coming year. The total volume of capex spending fell 0.5%Q/Q in Q3, in contrast to market expectations of 1.0%Q/Q gain (a previously reported 2.5%Q/Q decline in Q2 was revised to a smaller contraction of 0.9%Q/Q), however. Following on from yesterday’s disappointing construction data, the CAPEX estimate of spending on buildings and structures fell 2.8%Q/Q and 6.9%Y/Y. More importantly, spending on plant and equipment, which goes directly into the national accounts, rose 2.2%Q/Q and 7.7%Y/Y.

As usual, a good deal of the interest today was on firms’ forward capex plans, and the news here was positive. For the 2018/19 financial year, firms’ forecast nominal spending was 4.4% above the comparable estimate made for 2017/18, and 11.3% above the last estimate made three months ago. Forecast spending on plant and equipment was 8.0% above the comparable forecast made for 2017/18, while forecast spending on buildings and structures was 2.0% higher notwithstanding the soft readings on actual spending recorded over the past year. Within the mining sector forecast spending was 1.1% lower than the comparable estimate for 2017/18. However, in the manufacturing sector forecast spending was 7.4% higher, with forecast spending on plant and equipment rising sharply over the past three months. In the remaining industries – which makes up the bulk of investment spending these days – forecast spending was 6.8% above the comparable estimate for 2017/18, and up 13.9% from the estimate made three months ago. As a result, these estimates appear consistent with the RBA’s positive assessment of the outlook for capex spending in the non-mining sector capex. There was no market reaction to the publication, suggesting that these estimates were also consistent with the expectations of investors.

New Zealand
The ANZ Business Outlook Survey for November pointed to almost no change in business sentiment over the past month. Indeed, the headline business confidence index was steady at last month’s historically-depressed reading of -37.1. Meanwhile, the more important index measuring firms’ own activity outlook edged up to 7.6 from 7.4 last month. While this continues to indicate a positive assessment, this reading is still more than 20pts below the average reading for the survey and thus continues to suggest that firms expect below-trend growth. Firms’ hiring intentions improved modestly to a 4-month high of 2.2, but capex plans slipped to -4.1 – both indices remaining well below their average levels. Meanwhile, firms’ average year-ahead inflation expectation rose a further 0.07ppts to a 2.29%, thus returning to a level last visited in June.



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