Buoyed by the weekend’s official Chinese PMIs – the key manufacturing index rose back above 50 for the first time since April while the non-manufacturing index also leapt to an eight-month high – Asian financial markets have started the week on the front foot, with gains in all the main equity indices. Admittedly, the increases in China’s markets were relatively modest, with the CSI300 closing up just 0.2%. But while the latest Japanese data were mixed (the latest capital spending survey confirmed that business investment in Q3 picked up from the prior quarter but pointed to weaker sales and profits, while vehicle sales remained weak too), the TOPIX rose a firmer 0.9%. The Hang Seng closed up 0.4% ahead of the release of some further shockingly weak figures for Hong Kong retail sales – down 26.2%Y/Y in volume terms in October.
In the bond markets, the stronger Chinese PMIs translated into weaker USTs, with 10Y yields currently up about 8bps from Friday’s to above 1.85% for the first time in a fortnight. JGBs also fell, with 10Y yields up more than 3bps to about -0.06%, the highest in almost three weeks. And euro area govvies have opened lower too, with yields on 10Y Bunds about 6bps higher close to -0.30%, despite the big question mark hanging over the future of Germany’s government after Merkel’s junior partner Social Democrat Party (SPD) on Saturday elected a new leadership highly sceptical of the party’s role in the coalition. (More on this and today’s Japanese and Chinese data release below).
Looking ahead, a week that will be heavy on top-tier US economic data – including nonfarm payrolls on Friday – brings the manufacturing ISM survey today, while the UK’s equivalent manufacturing PMIs are due and ECB President Christine Lagarde will testify at the European Parliament.
The MoF’s latest survey of financial statements of corporations – which will feed into the second release of GDP a week today – today suggested that overall growth might well be pushed higher from the initial underwhelming estimate of 0.1%Q/Q, but also showed that firms’ sales were hit by weak external demand and a softening of domestic demand too.
In particular, the MoF’s survey suggested that nominal capital spending rose in Q3 for the third consecutive quarter out of the past four and by a seemingly solid 1.2%Q/Q – following a decline of 0.2%Q/Q in Q2 – with a similar pace of growth in the non-manufacturing and manufacturing sectors alike. That left capex up more than 7%Y/Y, the strongest annual rate for five quarters. The preliminary GDP report had similarly seen nominal non-residential investment rise 1.2%Q/Q in Q3, while real private non-residential investment also rose by 0.9%Q/Q. But the survey also suggested a slightly smaller drag from private inventories than initially estimated. So, when revised national accounts figures are published next Monday, we might well see GDP growth revised up by as much as 0.2ppt to 0.3%Q/Q.
However, other details in the survey suggested that the prospects for investment over the near term are weaker. Sales were down for the third successive quarter in Q3 and by the steepest pace for four years (-1.5%Q/Q), to leave them down 2.6%Y/Y, the first annual decline for three years. And the weakness was broad based, with manufacturers’ sales down 1.5%Y/Y, while sales at non-manufacturers were down compared to a year earlier for the first time since Q316. So, it was perhaps not surprising to see that profits were weaker in Q3 too, with the 1.1%Q/Q decline leaving them down more than 5%Y/Y, with another double-digit year-on-year drop in profits at manufacturers (-15.1%Y/Y), while growth in profits at non-manufacturers was just 0.5%Y/Y.
Meanwhile, Japan’s latest vehicle sales figures offered further insight into the pullback in domestic demand since October’s consumption tax hike. Unsurprisingly, these showed a further double-digit year-on-year pace of decline in November, although the 14.6%Y/Y drop was significantly smaller than the 26.4%Y/Y fall previously. Nevertheless, it further suggests that spending on big-ticket items has seen a similar retrenchment in demand than in the aftermath of the 2014 tax hike.
Among today’s other Japanese data releases, there was a modest upwards revision to the final manufacturing PMI in November, up 0.3pt from the flash estimate to 48.9. That, however, left it firmly in contractionary territory for the seventh consecutive month and on average in the first two months of Q4 0.6pt lower than the Q3 average. Looking ahead, Wednesday will bring the associated final services and composite PMIs for November, followed on Friday by more spending-related releases for October, including the BoJ’s consumption activity index and MIC household spending figures, and the latest labour earnings data for the same month. In the markets, the MoF will sell 10Y JGBs tomorrow and 30Y JGBs on Thursday.
This morning’s risk-on market mood is down to China’s PMIs. Most notably, the headline official manufacturing PMI, released on Saturday, rose 0.9pt to 50.2, the first reading above 50 since April and a nine-month high. Within the detail, the output index leapt 1.8pts to 52.6, also the highest since March, while the new orders index rose 1.7pts to 51.3, suggesting positive growth in output ahead. Today’s Caixin private sector manufacturing PMI rose just 0.1pt to 51.8, but that still left it at the highest level since January 2013.
The non-manufacturing PMIs were also stronger, with the official index up 1.6pts to 54.4, the highest since January, with the new orders index up 1.9pts to 51.3, the highest since June. (The equivalent Caixin non-manufacturing PMIs are due on Wednesday.) But while, overall, today’s data were clearly encouraging, suggesting that China’s slowdown might have passed its worst, we caution that a rebound in November following October’s holidays should have been inevitable. December’s figures should be closely watched for a more reliable guide to China’s current cyclical position.
It’s a busy week for economic news in Australia, not least with the conclusion of the RBA’s latest monetary policy meeting (tomorrow) and the first estimate of Q3 GDP (Wednesday). But having cut interest rates three times since June to a record low 0.75% and some signs that the economy, and in particular the housing market (see more below), has passed a turning point for the better, the RBA is widely expected to keep policy on hold. Nevertheless, the accompanying statement seems bound to emphasise that it will continue to monitor developments in the labour market and not that the RBA “is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.
In terms of data, GDP is expected to have expanded 0.5%Q/Q in Q3, to leave it 1.6% higher compared with a year earlier. Indeed, while today’s inventory figures suggested a further decline in Q3 (0.4%Q/Q) this still implies a modest positive contribution to GDP growth (circa 0.2ppt) last quarter for the first quarter in three. Tomorrow’s net exports data are also expected to imply that it provided a modest boost to growth for the third consecutive quarter (0.2ppt). Meanwhile, Thursday will bring some insights into activity at the start of the fourth quarter, with monthly trade and retail sales figures for October.
Perhaps of most note today, however, were the latest CoreLogic house price figures, which showed a further solid increase in November for the fifth consecutive month. Indeed, the headline median city price index rose by 2.0%M/M, the strongest monthly pace since mid-2003. And this left prices up a sizeable 4.6%3M/3M and 0.4%Y/Y, then first positive figure since March 2018. Once again, prices in Sydney led the way, up 2.7%M/M to be up about 7% from the trough, while those in Melbourne were up 2.2%M/M. But with prices in Perth now also rising alongside those in Brisbane and Adelaide, Darwin was the only capital to post a further fall in prices last month.
The future of Germany’s Grand Coalition government (GroKo) is in doubt after Saturday’s announcement that Norbert Walter-Borjans (former Finance Minister of North Rhine-Westphalia) and his running mate, the left-leaning GroKo critic Saskia Esken, had won the Social Democrat Party’s (SPD) leadership contest. Esken subsequently called for a renegotiation of the 2018 coalition agreement – to include a significant fiscal stimulus, lashings of infrastructure spending and a more aggressive anti-climate change agenda – something that Chancellor Merkel’s CDU/CSU alliance might seem unwilling to countenance. The future of the coalition might be determined over the coming week at the SPD’s conference. Should it choose to withdraw from government, expect the CDU/CSU to continue with a minority administration for the time being, although the chances of an early General Election before the middle of next year would clearly rise.
Data-wise, as far as euro area releases are concerned, the final manufacturing PMIs for November have just been released. And after the flash figures provided hints that the pace of deterioration in the sector has eased with a second successive monthly increase, the final estimates reported upwards revisions. In particular, the headline eureo area manufacturing PMI was revised up 0.3pt to 46.9, up 1.0pt from October and 1.2pts from the trough in September. The equivalent figures for Germany (44.1) and France (51.7) were also revised up.
The final services and composite PMIs, for which the flash estimates suggested further weakening of momentum, are due on Wednesday. The following day will bring an updated estimate of Q3 GDP, which seems likely to confirm growth of 0.2%Q/Q. More interesting will be the release of the expenditure breakdown, which seems likely to show that growth was driven by consumption while fixed investment contracted. Q3 employment figures are also due on Thursday along with October’s retail sales data, and both are likely to show little if any growth in the latest period. At the member state level, the data focus will be Germany’s industrial sector, with October factory orders due on Thursday and IP for the same month due on Friday. A second successive monthly increase is expected, although the anticipated rise in IP is not expected to reverse the drop in September.
Ahead of the Governing Council meeting next week, ECB President Lagarde will testify at the European Parliament today, while the European Parliament committee hearings into the Executive Board nominees Isabel Schnabel and Fabio Panetta will be held tomorrow. In the markets, Germany will sell 10Y Bunds on Wednesday while France and Spain are scheduled to sell a range of bonds on Thursday.
While politics will continue to dominate the UK news flow this week ahead of next week’s General Election, the main UK economic focus in the first half of the week will be on the final November PMIs. The manufacturing survey (today) is expected to confirm the deterioration seen in the preliminary release, with the headline index having declined 1.3pts to 48.3, the seventh successive sub-50 reading. The construction PMI (tomorrow) is also likely to report ongoing significant weakness this month. And with the flash services survey having surprised on the downside, with the headline index declining 1.4pts to 48.6, the composite PMI will likely be confirmed at 48.5, a drop of 1.5pt from October to its second-lowest level since the Global Financial Crisis. Tomorrow will also bring the BRC’s latest retail sales monitor for November, while new car registrations figures for the same month will follow on Thursday. In the markets, the DMO will sell 10Y Gilts tomorrow and 30Y Gilts on Thursday.
In the US, a busy week will kick off today with the ISM manufacturing survey and final Markit PMIs for the sector. The related non-manufacturing ISM and services PMIs come on Wednesday. In between, tomorrow will bring November vehicle sales data. The ADP employment report is also due on Wednesday, ahead of the weekly claims numbers on Thursday, when final October factory orders and trade data will be released. Most notably, the November labour market report is due on Friday. The consensus forecast for nonfarm payrolls is currently a rise of about 190k, above the average for the past six months, boosted by returning GM workers. The unemployment rate is expected to remain unchanged at 3.6%, while monthly wage growth is expected to tick up slightly to 0.3%M/M, albeit leaving the annual rate unchanged at 3.0%Y/Y. The preliminary University of Michigan consumer confidence survey for December is also due on Friday. There are no UST auctions currently scheduled this week.