Despite a mostly positive session in Asia, both US and European equity markets were once again on the back foot on Monday. At the close the S&P500 was down 2.1% – it had been down as much as 2.7% – and at its lowest level since October last year. Losses were quite broad-based but were led by real estate stocks, which suffered after the NAHB housing index fell sharply for a second straight month to its lowest reading since May 2015. The risk off tone was reflected in both lower Treasury yields (10Y down 3bps to 2.86%) and wider credit spreads, while the US dollar was slightly weaker. In commodity markets, crude oil remained under significant downward pressure with WTI trading below $50/bbl.
With that background, and during a very quiet day for local economic data, Asian equity markets have faced renewed – but generally restrained – downward pressure today. A stronger yen did the TOPIX no favours, with the index declining 2%. Meanwhile, after posting solid gains yesterday, both Singapore and Australia saw those gains erased today. And in mainland China, as in his speech commemorating 40th anniversary of China’s economic reforms President Xi offered no hints of any new initiatives on the horizon to boost the economy, the CSI300 fell 1.0%.
In her statement in the House of Commons yesterday, Theresa May gave the impression that she is seeking deliberately to run down the Article 50 clock to reduce the options available to MPs, announcing her intention for Parliament to vote on her Brexit deal in the week commencing 14 January, and arguing against an extension of the Article 50 notice or the holding of a second referendum – momentum for which appeared to build further over the weekend. And after Cabinet members on the weekend openly doubted that May’s deal could possibly gain the support of Parliament, Brexit will continue to dominate in the UK on Tuesday, with May’s Cabinet set to discuss intensified no-deal preparations. But after Jeremy Corbyn yesterday attempted to call a no confidence motion in the Prime Minister (which has no legal and even political weight) it remains to be seen whether he will in due course take up Theresa May’s challenge to call a full blown no confidence motion in the government –which he would almost certainly lose right now. Meanwhile, there are no top-tier UK economic data due for release today.
Tuesday brings the German Ifo business survey for December. Last week’s flash German PMIs saw declines in both the headline manufacturing and services indices to leave the composite PMI at 52.2, the lowest since July 2013. So, while conditions in the construction sector are likely to remain highly favourable, we expect the headline Ifo business climate index to fall for a fourth successive month to below 105, the lowest level in almost two years.
In the US, the housing market appears to remain the main source of weakness with yesterday’s NAHB Housing Market Index having showed a further deterioration in the business sentiment in this sector, with the headline survey indicator having fallen to the lowest level since mid-2015. Today’s dataflow brings more economic indicators from this sector in the shape of the latest housing starts and building permits data for the month of November. Inventories of unsold houses rose significantly in recent months, so starts of single-family units are set to have fallen further, while the multi-family category might also post a decline.
Yet again the release of the minutes from the RBA’s latest Board meeting provided no surprises, in keeping with the post-meeting press statement. The concluding ‘Considerations for Monetary Policy’ section repeated the Board’s earlier assessment that, based on the Bank’s forecasts, “…the current stance of monetary policy would continue to support economic growth and allow for further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target.” And looking further ahead, it was also again stated that “members continued to agree that the next move in the cash rate would more likely be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy.” In the discussion it was noted that household consumption continued to be a source of uncertainty because of low growth in household income, high debt levels and declining house prices. At this stage, downside risks associated with these influences are being countered by the Bank’s positive outlook for the labour market, including an expectation that wage growth will continued the gradual improvement seen over the past year. This will keep the market focused firmly on developments in the labour market, starting with Thursday’s November Labour Force report.
In other news, the weekly ANZ-Roy Morgan consumer confidence index edged up just 0.1pt to 117.8 last week, driven by an improved perception of buying conditions for major household purchases.
Today’s ANZ Business Outlook Survey for December pointed to an improvement in business sentiment compared with the November survey that was released just three weeks ago. The headline business confidence index rose 13pts to -24.1 – still heavily negative but nonetheless the best reading since April. Meanwhile, the more important index measuring firms’ own activity outlook rose 6pts to +13.6 – still well below average, but the highest level visited since May. Firms’ hiring intentions improved 5.2pts to an 8-month high of +7.4 – now just a little below the long-term average – and the capex index returned to positive territory for the first time since July. Despite the improved outlook for activity, the pricing indicators weakened this month, with firms’ average year-ahead inflation expectation falling 0.14ppts to a 3-month low of 2.15% – a development likely explained by a sharp decline in fuel prices and the recent strengthening of the NZ dollar.