Morning comment: Japanese earnings, German IP & labour costs

Chris Scicluna
Emily Nicol
Mantas Vanagas

Wall Street got off to very weak start yesterday as investors reacted to the news from earlier in the day concerning the arrest of the Huawei Technology’s CFO and as crude oil slumped 3% following the surprise failure of OPEC to announce production cuts at the conclusion of its latest meeting in Vienna. But while the S&P500 fell almost 3% in early trade – dragging European equities to a similar close – the negativity was substantially pared during the remainder of the session (and especially in the last hour of trade). And so the S&P500 was left with only a 0.15% loss at the close. To some extent this at least in part reflected the continued re-pricing of the outlook for the Fed. While a rate hike at the 18-19 December FOMC is still viewed as highly likely, market pricing suggests significant scepticism that there will be more than one further increase in the fed funds rate in 2019. 

While US futures have moved a little lower since the close, the resilience of Wall Street helped most Asian bourses recover a portion of the heavy losses that they had incurred on Thursday, with the notable exception of those in mainland China and Hong Kong where markets were little changed ahead of this weekend’s Chinese trade and CPI reports. After falling 1.8% yesterday, Japan’s TOPIX rose 0.6%, even though the local data was a very mixed bag (see below). Equity markets also moved slightly higher in Taiwan and South Korea.

A busy day lies ahead. In Europe, after some disappointing German IP data this morning (detail below), attention in the euro area’s largest member state will shift to the CDU’s leadership election, the outcome of which could have a significant impact on Merkel’s future as Chancellor. Elsewhere, Italian political dysfunction continues with Finance Minister Tria’s future in significant doubt as the government struggles to agree new fiscal plans. In Vienna, OPEC plus Russia will continue to try to reach agreement on oil production cuts. And Brexit will obviously continue to dominate in the UK as Theresa May’s latest wheeze to try to persuade MPs to back her deal in next week’s vote has predictably fallen flat. But the most notable new data for the markets today will obviously take place in the US with the latest labour market report set to provide significant new information for the FOMC ahead of this month’s monetary policy meeting.

The domestic focus in Japan today was on the household sector with the release of new reports on the performance of labour incomes and consumer spending for the month of October.

News on workers’ incomes and labour input was provided by the MHLW’s release of the preliminary results of the Monthly Labour Survey for October. As always, we caution that the preliminary wage and employment estimates can be subject to substantial revision in due course, while sampling changes introduced to the survey this year that have added further uncertainty about the actual pace of wages growth in Japan. That said, taken at face value, the October survey provided a welcome upside surprise, with the generally firmer picture pointing to a rebound from the natural disasters that had impacted the economy in September. Growth in the headline measure of total labour cash earnings (per person) increased to 1.5%Y/Y from 0.8%Y/Y previously – an outcome that was 0.4ppt firmer than market expectations. Taking a matched sample of business respondents – to try to look through the impact of sampling changes – growth in total labour cash earnings (per person) was slightly weaker at 1.0%Y/Y, but this was still considerably firmer than the mere 0.1%Y/Y increase registered in September.

Turning to the detail, pleasingly, the pick-up in headline growth was not attributable to the usual volatility in bonus payments. Indeed, growth in bonus payments slowed slightly to 6.8%Y/Y from 8.3%Y/Y in September. Rather, growth in contracted earnings doubled to 1.4%Y/Y in October, thus matching the two-decade high reported back in May. Growth in scheduled earnings (i.e. ordinary time) also increased to 1.3%Y/Y from 0.7%Y/Y previously, while growth in non-scheduled earnings (i.e. overtime) picked up to 1.9%Y/Y from 0.2%Y/Y. The preliminary estimates suggest that scheduled earnings of part-time workers rose 2.0%Y/Y on a per hour basis, down from 2.5%Y/Y in September. However, growth in scheduled monthly wages for full-time workers picked up to 1.3%Y/Y from 1.0%Y/Y previously, matching the highs seen in March and August of this year. After allowing for inflation, real total cash earnings (per person) still declined 0.1%Y/Y in October, but should pick-up in coming months as headline inflation falls under the weight of lower energy prices.

Elsewhere in the survey, the number of regular employees rose 0.2%M/M in October, but annual growth was steady at 1.1%Y/Y. The preliminary estimates suggested that the number of full-time employees rose 0.7%Y/Y, up from 0.6%Y/Y previously, while growth in part-time employment slowed to 2.2%Y/Y from 2.8%Y/Y previously. However, given the marked tendency for subsequent revisions to boost part-time employment at the expense of full-time employment, this finding is likely to be substantially overturned when the final estimates are released. Finally, after slumping 3.1%M/M in September – likely largely due to disruptions caused by natural disasters – aggregate hours worked (per person) were reported to have rebounded 3.1%M/M in October. Even so, total hours worked (per person) was still down 0.3%Y/Y, thus maintaining the long-term downward trend. 

Moving to consumer spending, 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 rose 1.8%M/M in October – a disappointingly small rebound considering the 4.5%M/M slump that occurred in September. As a result spending was still down 0.3%Y/Y – an improvement on the 1.6%Y/Y decline reported last month but much weaker than the 1.0%Y/Y advance that the market had been expecting. However, core spending – which excludes housing, auto sales and certain other expenditures – rose 2.0%M/M in October. This followed a much smaller 1.9%M/M decline in September, so annual growth on this measure was positive at 1.3%Y/Y. So while the level of headline spending in October was slightly below the average through Q3, the level of core spending was 1.8% firmer. Elsewhere in the survey, and again after adjusting for a discontinuity, it was reported that real disposable income for workers’ households fell 2.4%Y/Y in October – even worse than the 1.8%Y/Y decline reported in September.

However, the spending indicators from MIC’s survey have proven to be a very inconsistent predictor of the national accounts measure of private consumption (especially so in recent times). Fortunately, later in the day the BoJ released its updated Consumption Activity Index, which as an indicator of private consumption spending is bettered only by the slightly less timely Cabinet Official Synthetic Consumption Index. Less fortunately, the BoJ’s index – which is constructed using both demand- and supply-side indicators – rose an underwhelming 0.3%M/M in real terms in October.

According to the BoJ’s data, real spending on durables and services rose 3.5%M/M and 0.9%M/M respectively following declines in September, whereas real spending on non-durable goods fell 1.7%M/M. Moreover, the increase in spending reported in October now follows a downwardly-revised 0.6%M/M decline in spending in September – a far cry from the previously reported 0.3%M/M advance. As a result, while the revised data reports that annual growth in spending picked up to 0.6%Y/Y in October, growth was still below the 1.0%Y/Y pace that had previously been estimated in September. Meanwhile, the travel-adjusted real index – which conceptually aligns most closely with the national accounts measure of private consumption by removing the net spending of tourists – rose an even weaker 0.1%M/M in October following a revised 0.5%M/M decline in September. This leaves the level of spending in October still 0.1% below the Q3 average. We would hope to see a firmer result next month, supported by ongoing income growth and lower fuel prices, and this will be required if a positive growth through Q4 is to be assured. In the meantime we await next week’s Cabinet Office data for the most definitive indication of how consumer spending evolved in October.

Euro area:
Yesterday’s decent October factory orders data from German had boosted hopes for healthy growth in industrial production. But this morning’s figures disappointed, showing a 0.5%M/M drop in output that month. Manufacturing production was down 0.4%M/M, with the consumer goods category reporting a drop of 3.2%M/M, the steepest decline since mid-2012. Activity levels in construction and energy were also lower, down 0.3%M/M and 3.2%M/M respectively. In Q3, industrial output declined by 0.7%Q/Q, and today’s figures appear to represent a further loss of momentum, with the level of production down a further 0.3% compared to last quarter’s average. In contrast to the German data, the equivalent industrial production figures from France, also released this morning, were slightly better than expected. Total IP rose 1.2%M/M, matching the strongest rate since May last year, while manufacturing output was up 1.4%M/M. However, on a three-month basis, growth slowed to 0.2%3M/3M following a rise of 0.7%Q/Q in Q3.

Meanwhile, the latest German labour cost figures were a touch firmer on the quarter (up 1.0%Q/Q from 0.3%Q/Q previously). But that increase still only took the annual rate up to 2.7%Y/Y, barely stronger than the average of the past four years. Given recent stronger wage settlements emerging from the tight labour market, that is something of a disappointment being hardly suggestive of a sudden step up in German price pressures.

Later today, revised euro area GDP figures are also scheduled for release. While the final reading of Q3 GDP is likely to confirm the slowdown in growth to 0.2%Q/Q, there is a small risk of a downwards revision. The first official expenditure breakdown is likely to show that net trade provided a notable drag.

In terms of politics, we continue to await news on the Italian government’s revised fiscal plans. But with Finance  Minister Tria increasingly marginalised and undermined by other key players including Prime Minister Conte, we remain as downbeat as ever on what new policies might emerge ahead of the parliamentary votes that are likely to come early next week.

In Germany, meanwhile, regional delegates from the ruling CDU will today elect a party leader to replace Angela Merkel. While Merkel will remain Chancellor for the time being – ideally in her view until the end of the current Bundestag term in the autumn of 2021 – the new party leader will be perfectly positioned to become a future (and perhaps the next) German leader. The vote of CDU members looks too tight to predict. Merkel’s preferred candidate, the pragmatic, broadly centrist Annegret Kramp-Karrenbauer, currently CDU General Secretary, is ahead in the polls. And victory for her could give Merkel some breathing space. But Merkel’s long-standing rival and critic, the more conservative Friedrich Merz, who this week gained the support of Bundestag speaker Wolfgang Schäuble, is very much in the race. Victory for him would add to Merkel’s troubles. And a poor showing by the CDU in the spring European Parliament elections could then act as a trigger for Merkel’s replacement as Chancellor, possibly by Schäuble on a caretaker basis if not Merz himself. (The third candidate for the CDU leadership, the right-wing Health Minister Jens Spahn, looks very much the outsider.)

While Parliament will take a breather from debating the Brexit deal, all the indications are that Theresa May is firmly on track for a Parliamentary beating if and when the ‘meaningful vote’ goes ahead next Tuesday. The Conservative backbench amendment proposed yesterday afternoon – seemingly with May’s backing – to provide MPs with a say over any future decision whether to move to the Northern Ireland backstop or instead extend the transition period appears unsurprisingly to have already been rejected by the Northern Irish DUP and Conservative Brexiters. Indeed, the reported assessment of one of the latter that the proposal looked ‘desperate’ can hardly be quibbled with. And so, with May looking increasingly snookered, the probability that the deadlock will only be broken by a second referendum continues to rise.

All eyes later today will, of course, be on the US labour market report for November, with non-farm payrolls expected to have risen a little less than 200k. Of course, developments in the unemployment rate and wage growth will also be scrutinised closely, with investors surely hoping that a modest increase in average labour earnings would allow the Fed to take a more dovish stance at the year’s final FOMC meeting on 18-19 December. The preliminary results of the University of Michigan consumer survey for December will also be released today, together with final wholesale inventory data for October.

New Zealand:
The countdown to the release of the national accounts on 20 December continued today with the publication of the Wholesale Trade Survey for Q3. Total wholesale sales rose 2.5%Q/Q lifting annual growth to 8.6%Y/Y, with growth recorded across all subsectors aside from the auto sector. The PPI outputs index for the wholesale sector rose just 0.7%Q/Q in Q3, suggesting that real sales grew close to 2%Q/Q – a more encouraging result than that seen from the construction sector earlier this week. Data from the manufacturing sector will be released on Monday.

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at