Morning comment: Japan trade data ahead of the Fed

Chris Scicluna
Mantas Vanagas

Wall Street got off to a positive start yesterday, with the S&P500 gaining as much as 1.1% in morning trade. That positivity didn’t last long, however, with a near 8% slump in the price of WTI crude (touching $46/bbl at one point) helping to drive the S&P500 to a loss of as much as 0.7% by mid-afternoon. A late recovery saved the day and allowed the S&P500 to close flat. The 10-year Treasury yield, however, remained 3bps lower near 2.82% at close as investors looked forward to the likelihood of a ‘dovish hike’ when the Fed announced the outcome of its latest policy meeting today.

With that background, it has been a mixed session for equity markets across Asian today as investors now await the outcome from the FOMC’s final meeting for this year. In Japan, the TOPIX is down 0.4% following a weaker-than-expected November trade report (more on this below), and in light of a further modest strengthening of the yen. Equity markets also traded lower in mainland China (-1.2%), but gains were seen in markets in Taiwan (+0.7%), Singapore (+0.6%) and South Korea (+0.8%).

In the bond markets, meanwhile, JGBs were struck by a rare bout of marked volatility. While the BoJ left its purchase amount unchanged at its regular purchase operation of 5-10-year JGBs, a rally in JGB futures to a more-than-two-year high sparked a margin call. And so, an initial drop in the 10-year JGB yield to just 0.01% was swiftly followed by a jump back to 0.04%. Finally, in Europe, BTPs have outperformed significantly at the open on reports that the European Commission is, at last, sufficiently content with the Italian government’s revised budget plans for it to halt launching formal disciplinary proceedings.

The only major economic report released in Japan today concerned external trade during November, providing the BoJ’s Board with some final – and as it turns out, disappointing – clues on the recent performance of the economy ahead of tomorrow’s policy meeting. In seasonally-adjusted terms, Japan reported a trade deficit of ¥492.2bn – more than ¥200bn wider than market expectations. This deficit was the largest recorded since February 2015 and means that Japan has recorded a cumulative deficit of ¥788bn over the past 12 months.

Turning to the detail, after rebounding 4.9%M/M in October, export values suffered a decline of 3.0%M/M in November – a weaker result than the market had expected – so that annual growth fell back to a negligible 0.1%Y/Y from 8.2%Y/Y previously. By contrast, imports fell just 0.1%M/M in October following a sharp 6.0%M/M uplift in October, so that annual growth remained a very sturdy 12.5%Y/Y. Export values disappointed across a number of major categories. Of particular note, exports of general machinery fell 2.3%Y/Y in November, while exports of electrical machinery fell 2.7%Y/Y. Growth in exports of manufactured goods slowed to 3.0%Y/Y from 9.2%Y/Y previously. A significant driver of import growth continues to be mineral fuels (up 39.0%Y/Y). Imports of general machinery slowed to 17.6%Y/Y from 28.1%Y/Y in October, while imports of manufactured goods slowed to just 4.7%Y/Y from 20.1%Y/Y previously.

As usual today the BoJ also released its estimates of export and import volumes, thus providing a timely assessment of what these figures might mean for the prospect of net exports contributing positively to a rebound in GDP in Q4. The BoJ estimates that real exports fell a disappointing 2.9%M/M in November, leading to an annual contraction of 2.4%Y/Y. By contrast, real imports fell a slightly smaller 2.3%M/M and remained up 3.2%Y/Y. As a result, while for the first two months of this quarter real exports are still 1.5% above the average level experienced through Q3 – courtesy of the post-disaster bounce recorded in October – real imports are a much greater 4.4% above their Q3 average. So at this point, net merchandise exports are on course to make a third consecutive negative contribution to GDP growth in Q4 – possibly more negative than the 0.1ppt subtractions recorded over the previous two quarters.

The BoJ will publish export volume data by region and commodity next week. For now, the MoF’s own export volume index fell 1.9%Y/Y in November, compared with a 3.8%Y/Y increase in October. The MoF’s breakdown indicates that exports to China fell 5.8%Y/Y, contrasting with modest growth of 1.0%Y/Y in October. Exports to the rest of Asia fell 4.5%Y/Y, following growth of 1.3%Y/Y previously. Growth in exports to the US slowed sharply to 1.9%Y/Y from 10.1%Y/Y previously, but growth in exports to the EU slowed only slightly to 6.3%Y/Y from 6.9%Y/Y previously. The MoF’s estimates indicate that import volumes grew 4.2%Y/Y in November, down from 10.3%Y/Y in October.

Of course, all eyes today will be on the conclusion of the Fed’s latest FOMC meeting. The FOMC seems highly likely to hike the fed funds rate target range by a further 25bps to 2.25-2.50%. But, not least given Jay Powell’s recent commentary and the minutes of the November meeting, the FOMC is also expected to amend its statement to suggest that future rate hikes are data-dependent rather than firmly baked in. And it will also likely publish some more dovish dot-plots than the previous set issued in September, with the dots showing expectations for rate hikes next year likely to be clustered around the one-to-three range. Data-wise, today will bring November’s existing home sales figures, as well as balance of payments data for Q3.

While Brexit noise will likely continue to dominate the news flow, with the government set to publish its long-awaited immigration white paper, the data focus in the UK today will be on November’s inflation figures where we expect to see the impact of the recent slump in oil prices starting to feed through. In particular, we forecast the headline and core CPI rates both to fall by 0.1ppt to 2.3%Y/Y and 1.8%Y/Y respectively. In addition, the data flow will bring the latest House Price Index for October. And the CBI’s latest Industrial Trends Survey will provide further insight into the hit on manufacturing orders against the backdrop of ongoing Brexit uncertainty.

Euro area:
Italian government bonds have made further gains this morning, with the spread of 2Y BTPs over Bunds currently down 14bps, on reports that today’s meeting of European Commissioners will decide to refrain from launching an Excessive Deficit Procedure (EDP). The decision will reflect the government’s decision to cut its 2019 deficit target by 0.36ppt to 2.04% of GDP, with about €4bn of public spending cuts also identified. Of course, the decision of Emmanuel Macron to try to pacify demonstrators with a plan for a deficit of more than 3% of GDP next year might have influenced the decision-making of the Commissioners, as will the desire not to antagonise voters ahead of the European Parliament next spring. Nevertheless, given the weakening of the Italian economy, we expect the downwardly revised Italian target to be missed, with an overshooting of the deficit likely in due course to see the next European Commission eventually having to launch its EDP.

It is relatively quiet data-wise for top-tier euro area releases today, with construction output figures for October the most notable. These might well report some payback for the surge in activity (2%M/M) seen in this sector in September, although surveys suggest that sentiment here remains more upbeat than in manufacturing and construction. Meanwhile, German PPI data for November, released this morning, showed that producer inflation remained unchanged in November at 3.3%Y/Y, the joint highest level since 2011. Energy inflation eased slightly from the peak of 9.4%Y/Y in October to 8.9%Y/Y, but all other major categories reported a small increase. Looking ahead, we expect German (and euro area) PPI to decline steadily in response to falling global oil prices.

Ahead of tomorrow’s Labour Force survey, the DEWR reported that its index of internet job vacancies fell a modest 0.1%M/M in trend terms in November, leaving the index up just 0.4%Y/Y.

In other news, APRA – Australia’s lead prudential regulator – announced that it has decided to remove the benchmark applied to interest-only residential mortgage loans for all institutions that have provided assurances on the strength of their lending standards (which represents the majority). The proportion of such loans had halved since the benchmark was first applied in March 2017, with interest-only lending at high LVRs also down markedly. According to APRA, the benchmark has now ‘served its purpose’. That said, APRA continues to regard such lending as “higher risk” and it plans to conduct a full review of such lending next year. APRA also noted that any re-acceleration of such lending at an industry wide level would raise systemic concerns and cause it to consider the application of measures in response. So while today’s decision will be beneficial to the housing market, the positive impact is likely to be small.

New Zealand:
Ahead of tomorrow’s national accounts, New Zealand reported a seasonally-adjusted current account deficit of NZD2.56bn in Q3, down very slightly from NZD2.66bn in Q2 but slightly larger than market expectations. The deficit on the goods balance narrowed to NZD1.00bn from NZD1.34bn previously, but the surplus on the services balance declined to NZD1.07bn from NZD1.42bn previously. As usual the key driver of the overall current account deficit was the deficit on the primary and secondary income balance, which narrowed only slightly to NZD2.63bn. Today’s result means that the current account deficit stood at a 5-year high of 3.6% of GDP for the year to Q3. However, the value of New Zealand’s net international liabilities edged up just 0.1ppt to 53.7% of GDP.

In other news, following yesterday’s improved sentiment reading from the business sector, the Westpac consumer confidence index rebounded fell 5.6pts to 109.1 in Q4 – now just below the average reading across the 30-year history of this series. The present conditions index rose 4.0pts to 107.5, while the expectations index fell jumped 6.7pts to 107.5. Improved sentiment likely reflects the recent sharp decline in fuel prices, following a steep increase – amplified by tax increases – during Q3. Meanwhile, in line with previously announced intentions to substantially lift the minimum wage, the Government confirmed that the statutory minimum wage would rise by $1.20 per hour to $17.70 per hour on 1 April – an increase of 7.3%. The Government also signalled that it expects to lift the minimum wage by a further 6.8% on 1 April 2020. 

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