Morning comment: Japan & Aussie surveys

Chris Scicluna
Emily Nicol

In a repeat of last Thursday’s price action, Wall Street erased initial sharp early losses on Monday – losses that had helped to drive the Stoxx600 down 1.9% – so that the S&P500 eventually closed with a modest 0.2% gain. The rebound was led by the technology sector – the Nasdaq closed up 0.7% – and seemed to be driven by a ‘buy the dip’ mentality rather than any particular economic news. The recovery in stocks saw 10-year Treasury yields rise off their session lows to close little changed from Friday at about 2.86%, while the US dollar enjoyed a strong session in part due to the influence of Brexit-related uncertainty on the value of sterling.

US equity futures have weakened slightly since Wall Street closed and Asian bourses have posted a mixed performance today. In Japan the TOPIX fell a further 0.9% despite an encouraging MoF/Cabinet Office Business Outlook Survey (more on this below), but JGB yields nudged up from yesterday’s five-month low. By contrast equity markets were modestly firmer in mainland China, Taiwan and Hong Kong. In a relatively quiet session for news, China’s Commerce Ministry reported that Vice Premier Liu He had spoken to US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer to exchange views on the timetable for future trade talks, suggesting that the arrest of Huawei CFO, Meng Wanzhou, may not completely derail talks as some have feared.

In Europe, equity markets look to be starting the day on the front foot while sterling is a touch firmer close to $1.2575, still about one cent lower than this time yesterday. Having ducked the Brexit ‘meaningful vote’ in the House of Commons previously scheduled for this evening, Theresa May will visit selected key EU leaders (including Merkel, Tusk and Juncker) to try to seek new reassurances (perhaps in the form of a new declaration) to try to help her sell her deal to MPs if and when (almost certainly not until next year) she decides to try again to seek parliamentary approval. Of course, any new concessions likely to be offered will be cosmetic rather than substantive, and so will be highly unlikely to shift the arithmetic among MPs, suggesting that Brexit uncertainty is only going to ramp higher still in the New Year.

Finally, euro area government bonds are a touch weaker with OATs underperforming somewhat after Emmanuel Macron yesterday evening announced a range of fiscal measures – a €100 per month increase in the minimum wage, encouragements for firms to pay tax-free end-year bonuses, the removal of tax on overtime payments and a cancellation of the CSG social charges for pensions of less than €2000 per month – to appease the Gilets Jaunes protesters. Those measures could well cost more than €10bn next year, with the effect of pushing the French budget deficit well above 3% of GDP. And so, that will surely also serve to embolden Italy’s Government members as they continue to argue the case with the European Commission for a budget deficit of more than 2% of GDP.

The domestic focus in Japan today was on the MoF/Cabinet Office Business Outlook Survey for Q3, which cast some further light on the expectations of the business sector in advance of this coming Friday’s more comprehensive BoJ Tankan survey. In keeping with yesterday’s Economy Watcher’s survey, the Business Outlook Survey suggests that firms – at least large- and medium-sized firms – perceive business conditions to have improved somewhat in recent months. Moreover, firms indicated that they expect a further improvement in business conditions over Q119 and, to a lesser extent, Q219 as well – an expectation that is continuing to underpin a very positive assessment of the outlook for capex notwithstanding the pullback that was evident in yesterday’s GDP revisions. The Business Outlook Survey often provides a good indicator of the direction of movement travelled by the key indicators in the more widely followed BoJ Tankan survey, so today’s results suggest that the consensus expectation of a modest decline across those indicators may yet prove too pessimistic.

Turning to the detail, amongst large firms, a net 4.3% of respondents reported an improvement in business conditions in Q4, while a net 4.7% of firms reported an improvement in domestic economic conditions. Looking ahead to the coming two quarters, the net proportion of firms forecasting a further improvement in business conditions was 4.7% and 1.4% respectively, with optimism tracking a little firmer in the non-manufacturing sector than in the manufacturing sector. The expectations of medium-sized firms were generally slightly less optimistic. And as usual, small firms did not share the optimism of their larger counterparts, with firms reporting weaker business and domestic economic conditions over the past three months and an expectation of further deterioration over the coming two quarters. Meanwhile, firms of all size and in both the manufacturing and non-manufacturing sectors continue to signal that they have insufficient staff for their needs, with that shortage forecast to continue over the coming two quarters.

Elsewhere in the survey, respondents also provided their fourth estimate of sales, profits and capex for the FY18 year. Firms forecast growth in sales of 2.8%Y/Y, up from 2.4%Y/Y in the prior survey, led by 3.2%Y/Y growth amongst manufacturers. Ordinary profits are forecast to rise 0.4%Y/Y, which represents a slight improvement from the 0.4%Y/Y decline that had been forecast previously. This modest growth reflects an expected 1.7%Y/Y lift in profits amongst non-manufacturers, whereas manufacturers expect profits to decline 2.3%Y/Y (profits in the second half of the year are forecast to fall 6.0%Y/Y). Reflecting widespread skill shortages and the high absolute level of profitability, firms forecast that spending on plant and machinery and software will grow 9.1%Y/Y in FY18 – down only slightly from the forecast growth of 9.9%Y/Y made in the previous survey. That upbeat outlook remains mostly due to the manufacturing sector, where spending is forecast to rise unchanged 21.8%Y/Y. Spending amongst non-manufacturers is forecast to increase just 1.9%Y/Y, down from 3.3%Y/Y in the prior survey.

Euro area:
While the dust settles on Macron’s announcement of new fiscal largesse, the French dataflow continued this morning with the latest payrolls report showing a smaller than previously thought increase in private sector employment in Q3. The increase of 22.4k left private sector payrolls up just 0.1%Q/Q (matching the weakest quarterly rate in three years) and 197k and 1.0% higher compared with Q317 (the weakest annual rate since 2016). And there was a further drop in public sector payrolls, down for the fourth quarter out of the past five in Q3 and by 7.4k (-0.1%) to leave them 0.4% (22k) lower compared with a year ago. Within the sectoral breakdown, payroll employment continued to fall in the manufacturing sector to its lowest level in a year, but was much stronger among construction firms, rising to the highest level since Q414. When excluding temporary workers, there was a notable increase in service sector payrolls too. Against this backdrop, however, average monthly wage growth slowed to 0.3%Q/Q in Q3, to leave the year-on-year increase unchanged at a so-so 1.5%.

Looking ahead, the remainder of the day will likely be relatively quiet with just the German ZEW survey of financial market participants due for release. While this will be one of the first sentiment indicators for December to be published, it often tracks developments in equity markets and should not necessarily be interpreted as a reliable guide to German economic activity.

While Theresa May flies off to the continent to try to seek new reassurances about the ‘backstop’ arrangements in the Withdrawal Agreement – aimed at preventing a hard border in Ireland at the end of the initial post-Brexit transition period – data-wise the focus in the UK will be the labour market figures. And not least given the lack of momentum revealed by yesterday’s output data, these might be expected to be relatively subdued, with a possible moderation in the pace of job growth from slightly more than 20k3M/3M in September, and the headline unemployment rate unchanged at 4.1%. Average hourly earnings growth, however, should be close to the rate of 3.0%3M/Y (3.2%3M/Y excluding bonuses) seen in September.

In the US, today will bring the latest NFIB small business optimism survey for November, as well PPI data for the same month, with the latter likely to be weighed down by the slump in energy prices. In the markets, the US Treasury will sell 3Y notes.

The domestic focus in Australia today was on the release the NAB Business Survey for November. The headline business confidence index fell 2pts to +3, which is marginally below its long-run average. Respondents remained more positive about their own situation than about the economy in general, however. The closely-watched business conditions index printed at +11 in November, down 2pts from a slightly upwardly-revised October reading and still around double the long-run average for the series. Within the detail, the trading index nudged fell 2pts to +15 but the employment index rose 2pts to +9. Finally, while firms indicated a robust 1.2%Q/Q lift in labour costs over three past three months, output prices rose just 0.4% over the same period – an outcome that suggests that annual CPI inflation is likely to remain well below the midpoint of the RBA’s 2-3% target range in the near-term at least.

In other news, ahead of tomorrow’s monthly Westpac consumer confidence reading, the weekly ANZ-Roy Morgan index fell 1.8pts to a five-week low 117.7, led by a weaker assessment of the short-term outlook for the economy. Meanwhile, consistent with higher frequency indicators, the ABS reported that its quarterly House Price Index had declined 1.5%Q/Q in Q3 so that prices were down 1.9%Y/Y. Prices fell 1.9%Q/Q in Sydney and 2.6%Q/Q in Melbourne. At the other end of the spectrum, prices in Hobart rose a further 1.3%Q/Q to be up 13.0%Y/Y.

New Zealand:
The main economic report released in New Zealand today was the Electronic Card Transactions survey for November – a timely indicator of retail spending based on payments processed electronically. The value of total spending in the retail sector 0.4%M/M, reflecting a price-driven 7.2%M/M decline in spending at fuel stores. Core spending, which excludes fuel and vehicles, rose 0.5%M/M and was up 4.8%Y/Y. Spending in the hospitality sector rose 1.3%M/M and 6.1%Y/Y. Following today’s data average headline spending over the first two months of Q4 is running 0.9% above the Q3 average, while core spending is up a somewhat firmer 1.2%.

Today also saw the release of the ANZ ‘Truckometer’ for November – a measure of traffic flows that is correlated with economic activity. The heavy traffic index fell 1.9%M/M following downwardly-revised increase of 4.3%M/M in October. Taking a 3-month average, annual growth slowed to 3.0%Y/Y from 4.2%Y/Y previously. 

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