Morning comment: Japan spending, German factory orders & RBA

Emily Nicol
Mantas Vanagas

Another strong non-manufacturing ISM report – the headline index fell less than expected to a still-sturdy 60.3 – helped the S&P500 close with a 0.6% gain on Monday, thus unwinding almost all of Friday’s loss. Other asset markets were generally fairly quiet, however, with little change in bond yields, only a slight tightening of credit spreads and the US dollar weakening very modestly.

Against that background it has been a mixed day for Asian markets as investors now await the results of the US mid-term elections. After perhaps proving surprisingly resilient on Monday, China’s CSI300 has declined a further 0.6% today. Investors were seemingly not fully convinced by Vice President Wang Qishan’s remarks at a Singapore conference, including the suggestion that “The Chinese side is ready to have discussions with the US on issues of mutual concern and work for a solution on trade acceptable to both sides,” By contrast, and despite the publication of weak household spending figures for September (more on these below), Japan’s TOPIX rose 1.1%. And Australia’s equity market rallied 1%, with gains consolidated after the RBA issued a slightly more positive assessment of the economic outlook but no change in its ‘on hold’ policy stance (more on this below).

In Europe, as the Brexit negotiations appear to be stuck at the border, today’s data continue to highlight the moderating economic backdrop, with German factory orders signalling further weakening in that country’s manufacturing sector while euro area final composite PMIs today will likely indicate a soft start to Q4.

The only economic report of any note in Japan today was the MIC’s latest household spending and income report. After adjusting for a discontinuity caused by changes undertaken to the survey at the beginning of this year, MIC reported that real spending amongst two-or-more person households slumped 4.5%M/M in September. This outcome followed a 3.5%M/M lift in spending in August, but nonetheless left spending down 1.6%Y/Y – a much weaker result than the market had been expecting. Core spending – which excludes housing, auto sales and certain other expenditures – fell 1.9%M/M in September and was down 0.3%Y/Y.

Despite the weak September reading, the core index rose 1.4%Q/Q in Q3 following a 2.4%Q/Q slump in Q2. However, unfortunately, this indicator is an inconsistent predictor of the national accounts measure of private consumption. This has been especially so in recent times, with private consumption rising 0.7%Q/Q in Q2 and more reliable indicators already suggesting a pullback in spending in Q3. Elsewhere in the survey, and again after adjusting for a discontinuity, it was reported that real disposable income for workers’ households fell 1.8%Y/Y in September after a decline of 0.9%Y/Y in August. Tomorrow’s Monthly Labour Survey for September will provide a more reliable gauge of growth in incomes, although this survey has also been subject to changes that have somewhat clouded its interpretation.

Euro area:
The data focus in the euro area today will be final October services and composite PMIs. The flash numbers indicated that last month the euro area composite index dropped to a more-than-two-year low of 52.7 and that firms were least optimistic in almost four years, and tomorrow’s figures seem likely to reiterate that message. While Germany’s flash composite PMI fell to the lowest in about 3½ years, the first releases from Italy and Spain will also be notable, in particular in the former, given the coalition government’s ongoing confrontation with the EU over next year’s budget which is likely to have affected business confidence.

Meanwhile, ahead of tomorrow’s German industrial production figures, this morning brought further insight into the performance of Germany’s manufacturing sector in Q3 with the latest factory orders figures. And these beat expectations with total orders up 0.3%M/M in September, following upwardly revised growth of 2½%M/M in August. The increase in September was more than fully accounted for by a rebound in domestic orders (up 2.8%M/M), while new orders from overseas were down almost 1½%M/M thanks to a more-than 3 ½%M/M decline in orders by countries outside the euro area. But when excluding major orders, the performance was less impressive, declining more than 1½%M/M. Moreover, on average in Q3, total orders were down for the third consecutive quarter and by 1%Q/Q, indicating another weak showing from Germany’s manufacturers last quarter and a continued tepid outlook for the sector too. Indeed, today’s manufacturing turnover figures – which typically closely align with manufacturing output – were again disappointing, showing a decline of 1.1%M/M in September (-1.4%Q/Q) suggesting that the production figures due to be published tomorrow will again report a subdued outturn that month.

While Theresa May is reportedly due to provide ministers with a new policy paper this morning before further discussions on how to deal with the Irish border issue, the Irish Prime Minister yesterday reaffirmed his belief that any backstop had to be enduring and could only be removed with the agreement of the EU. And so, with some Cabinet members still insisting that any backstop must be time limited, we still limited prospect of a breakthrough this week, therefore making the prospect of a Summit on 22 November unlikely, with expectations now shifting towards later in November or even December.

Against this backdrop, and following yesterday’s weak services PMI to leave the composite index at its lowest level since the Brexit vote, today’s BRC Retail Sales Monitor suggested that retail sales growth remained unimpressive in October. Like-for-like sales were up by a below-average 0.1%M/M, while total sales rose 1.3%Y/Y, up from 0.7%Y/Y in September but lower compared to the summer months. Looking through the monthly volatility, the increase in total sales on a three-month basis of 1.1%3M/Y was the weakest since April. While grocery sales growth remained positive, the increase of 2.3%3M/Y was the lowest in four months, while non-food sales were broadly flat.  With consumer sentiment remaining very subdued and real wages growing only modestly, as we head into year-end, the most important period for the High Street, we do not expect the retail spending trend to improve dramatically.

The main focus in the US today will be the mid-term elections, with polls indicating that the Democrats will most likely win over the House but that the GOP will retain control of the Senate. Data-wise, the only notable item in today’s calendar is the JOLTS job opening figures for September. In the markets, the US Treasury will sell 10-year notes.

The main focus in Australia today – aside from the Melbourne Cup – was the outcome of the RBA’s November Board meeting. Once again there was no perceptible market reaction to the RBA’s latest commentary. For the record, the Bank retained the cash rate at 1.5% and the concluding paragraph of the post-meeting statement, which summarises the Bank’s stance, was once again completely unchanged from last month. Amongst other things, that paragraph continues to observe that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” In other words, while the Bank continues to expect that its next move will be a policy tightening, this move is likely to be some distance away – perhaps in the second half of next year, but probably requiring a material lift in wage growth for that to occur.

That said, we would characterise the RBA’s general commentary as being a touch more positive than that seen previously. As regards the economy, and as a pointer to this coming Friday’s quarterly Statement on Monetary Policy, the Bank noted that its central forecast for GDP growth in 2018 and 2019 has been revised up a little to “around 3½%”, compared to its previous (August) forecast of growth “a bit above 3%”. And with the unemployment rate already tracking below its August forecast, the Bank now expects it to reach 4¾% in 2020 – slightly below the 5% rate that was forecast previously. Meanwhile, the Bank characterised the Q3 CPI outcome – which was a bit weaker than market expectations – as being consistent with its own forecast. The Bank also made a point of noting that the relatively soft outcome for the quarter was influenced by declines in some administered prices due to changes in government policies. Looking ahead, the Bank’s stated that its central scenario is for inflation to be “2¼% in 2019 and a bit higher in the following year”. This appears marginally firmer than the outlook foreseen in August, when the Bank forecast headline inflation of 2¼% in both years.

In other news, the weekly ANZ-Roy Morgan index rose 2.2pts to 116.8 last week, further unwinding the sharp decline recorded a fortnight earlier. This returns the index to a level marginally above the average for the survey.

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