After rallying 5% last week, and a further 1% on Monday, a lack of clarity from official sources regarding what had been agreed at the weekend’s Trump-Xi meeting saw the market begin to weigh the possibility that “the Emperor has no clothes”. With scepticism fuelled by Trump’s tweets questioning whether “a REAL deal with China is actually possible” and noting (should such a reminder be necessary) that “I am a tariff man”, the S&P500 fell 3.2%, closing near its lows for the session, with financials and industrials both declining by more the 4%. Further weighing on financials was a flattening of the yield curve, with the 10-year Treasury yield falling 5bps to 2.92% but hitting a low of 2.88% at one point, despite some upbeat commentary from NY Fed chair John Williams. Credit spreads widened, especially in the US where CDX IG moved out 5bps and CDX HY widened 22bps.
While equity markets across most of Asia had pre-empted some of Wall Street’s weakness, perhaps unsurprisingly they have nonetheless mostly recorded further significant losses today. After leading the market lower yesterday, Japan’s TOPIX fell a further 0.5%, albeit moving off its lows as the yen depreciated off its session highs and US futures moved slightly higher. In Hong Kong the Hang Seng fell 1.5% and Taiwan’s TAIEX fell 1.7%. Markets in South Korea and Australia fell by around ¾%, with a disappointing Q3 GDP report weighing on the latter (more on this below). Perhaps surprisingly, China’s CSI300 was down just 0.5%, although this has to be seen in the context of year-to-date losses of close to 20%. In the bond market Japan’s 10-year JGB yield fell to 0.06% – the lowest since July. Speaking in Niigata, BoJ Deputy Governor Masazumi Wakatabe largely stuck to the BoJ’s existing script – as represented by the last Outlook Report – including noting the downside risks to inflation associated with the difficult task of raising inflation expectations and from next year’s scheduled consumption tax hike.
The only economic reports in Japan today were the service sector and composite PMI surveys for November. Overall business conditions in the service sector appear to have been little changed over the past month. After rebounding 2.2pt to a 6-month high last month, the headline business activity index edged down just 0.1pt to 52.3 in November. Within the detail, the new orders index fell 1.1pt to 52.8, but the future activity index rose 0.5pt to 56.3, marking the highest reading since January. The employment index edged up 0.1pt to 50.7. The news regarding prices was mixed, with the input prices index falling 0.7pt to 54.8 but the output prices index rising 0.2pt 51.4. Combining today's results with this month’s results from the manufacturing sector, the headline composite PMI output index edged down 0.1pt to 52.4 – still above this year's average – while the composite output prices index nudged down 0.2pt to 52.1.
Data-wise, today will bring euro area retail sales figures for October. While German sales were down 0.3%M/M, representing the fourth consecutive monthly decline, spending was up in France and Spain. And so, sales in the euro area as a whole are expected to have risen slightly following a flat previous month, to stand about 2.0% higher than a year earlier. The final services and composite PMIs for November are also due – while the composite PMI might well get a small upwards revision from the flash estimate of 52.4, thanks to the slightly improved manufacturing figure released yesterday, it might well still represent the lowest level in almost four years. And the Italian composite PMI seems likely to fall further from October’s six-year low of 49.3 to signal growing recession risks. In the markets, Spain will sell 3Y, 5Y and 10Y bonds. And we’ll continue to watch for news on Italy’s budget plans, although there seems to have been little progress overnight, while Finance Minister Tria seems to be making it known that he’s had enough of being the piggy in the middle of the ruling party leaders and is considering quitting as soon as the budget passes parliament.
Brexit will obviously remain centre-stage as the Parliamentary debate on May’s deal continues. Following her three defeats in successive votes in the House of Commons yesterday, the Prime Minister’s authority looks shot to pieces. And notably, the passing of the Grieve amendment – that will allow Parliament to amend any new Brexit motion that May brings forward if and when she loses the ‘meaningful vote’ still penciled in for next Tuesday – suggests that the probability of a second referendum is now higher than ever. Of course, that increased probability might yet be exploited by Theresa May to try to persuade Brexiter MPs to back her own deal. But the release today of the Attorney General’s legal advice on the Withdrawal Agreement and Political Declaration – which seems likely to flag the risks that the UK might be stuck indefinitely in limbo in the backstop arrangements after Brexit – might be a further blow to her strategy in that respect.
The UK data-flow will obviously remain of secondary importance to the Brexit news. But the November PMIs will continue today with the release of the services and composite indices. And with the headline manufacturing and construction indices having ticked higher in November, the services PMI is also expected to pick up after dropping in October to 52.2, the second lowest level since the Brexit referendum. UK new car registrations data for November are also due this morning.
In the US, financial markets will be closed to mark the occasion of the funeral of President George HW Bush. Likewise Fed Chair Powell’s congressional testimony, originally scheduled for today, has been postponed. And most of the economic data originally slated for release – the ADP employment and non-manufacturing ISM reports for November along with revised estimates of labour productivity for Q3 – have now been pushed back to tomorrow. However, the Fed’s Beige Book will be released today as originally scheduled.
The only economic report released in China today was the Caixin service sector PMI for November. After declining sharply to a 13-month low last month, the headline services index rebounded an even sharper 3.0pts to a 5-month high of 53.8 in November. Within the detail the new orders index rebounded 2.4pts to 52.5, but the future activity index declined 1.7pts to a 4-month low of 56.1. The pricing indices were mixed this month, with the input prices index steady at 53.3 but the output prices index falling 0.5pt to 50.2. Combined with information from the manufacturing sector, the composite output index rose 1.4pts to 51.9 – an improvement but still the third weakest outcome recorded this year.
The domestic focus in Australia today was on the release of the national accounts for Q3. The news was disappointing, with real GDP rising just 0.3%Q/Q – just half that expected by the market. And when combined with a downward revision to growth at the end of last year, this meant that annual growth slowed to 2.8%Y/Y – 0.5ppt below market expectations – following downwardly-revised growth of 3.1%Y/Y in Q2. This outcome also compares unfavourably with the RBA’s most recent projections, which foresaw annual growth of 3½%Y/Y for the 2018 year (in quarter-point rounded terms). For that forecast to be met the economy will now have to grow by slightly more than 1%Q/Q in Q4, which seems like a tall order at this stage.
In the detail of the expenditure measure, domestic final demand rose just 0.3%Q/Q – the smallest increase since the small contraction registered in Q316. Household consumption also rose just 0.3%Q/Q and yet the household savings rate still fell to 2.4% – the lowest rate recorded since Q407 (but, thanks to positive revisions, still higher than had been estimated previously). As indicated by yesterday’s releases, public consumption rose 0.5%Q/Q and public investment rose 3.4%Q/Q. Private investment decreased 0.8%Q/Q, driven by non-dwelling construction (-3.8%Q/Q) and ownership transfer costs (-4.2%Q/Q). Partly offsetting these falls were increases in machinery and equipment (1.3%Q/Q) and dwellings (1.0%Q/Q). Exports rose just 0.1%Q/Q – as expected strong nominal growth was largely accounted for by higher prices – and imports fell 1.5%Q/Q, so that net exports made a positive contribution to growth of 0.4ppt. Inventories subtracted 0.3ppt from growth in Q3, however. Elsewhere in the accounts, nominal GDP rose 1.0%Q/Q in Q3 was up 5.2%Y/Y. The GDP deflator rose 0.7%Q/Q but the domestic final demand and household income deflators rose just 0.4%Q/Q.
Given overnight developments in the US, Australian bond yields and the Australia dollar were already under downward pressure and the weaker-than-expected GDP report simply reinforced these pressures. As far as the RBA is concerned, the weaker outcome probably means that the modest upward revision to the growth forecasts contained in the Bank’s November Statement on Monetary Policy will likely be rolled back when the Bank next publishes forecasts in February. Even so, we doubt that this will have much impact on the Bank’s policy stance which, in our view, continues to depend mostly on how growth is translated into developments in the labour market and inflation. Therefore, despite today’s downside surprise, the RBA will very likely continue to believe that the next policy move will be a tightening, but not until late next year at the earliest.
In other news, the final CBA services PMI reading for October printed at 53.7 in November – up 2.0pts for the month and 1.0pt above the flash estimate. In combination with the improved results from the manufacturing sector, the final reading for the composite PMI was 53.9, up 1.9pts from October. The much longer-running but more volatile AiG services index also provided better news, rebounding 4.0pts to 55.1 in November.