China's data offer a little festive cheer

Chris Scicluna
Emily Nicol

While we are sceptical about the nature and potential benefits of the alleged US-China first-phase trade agreement, the latest Chinese macroeconomic data released today at least gave cause for cautious optimism, with industrial production and retail sales beating expectations. So, China’s stock markets chalked up gains at the start of the week, with the CSI300 closing up 0.5%. Elsewhere, however, Asian equity indices saw a mix of largely modest gains and losses, e.g. the TOPIX closed down 0.2%M/M as the latest Japanese economic data – which included December’s flash PMIs as well as consumption and services activity figures for October – provided a mixed picture with respect to the weakness in activity after the consumption tax hike.

In bond markets, USTs are a touch weaker, although the 2bps rise in 10Y yields close to 1.85% still left them down about 9bps from this time on Friday. JGBs were only slightly weaker too (10Y yields up less than 1bp to -0.027%). And with the region’s equities very much on the front foot, euro area govvies are slightly weaker, so far shrugging off downside surprises from the German and French flash PMIs (the equivalent euro area figures are due shortly).

With sterling little changed from Friday evening, Gilts have also moved slightly lower at the start of a week which could bring the nomination of Mark Carney’s successor as Governor at the BoE as well as the MPC’s latest policy announcement (Thursday). The BoJ’s latest announcements will also come on Thursday, although – like the BoE – we don’t expect a change to policy this week.

It’s set to be a busy week for economic news from Japan, with several top-tier data releases for November, including trade on Wednesday and CPI inflation on Friday, scheduled as well as the conclusion of the BoJ’s latest Policy Board meeting on Thursday. While recent figures inevitably underscore expectations that the economy contracted in Q4, the latest PMIs (see below) suggest that conditions had started to improve as the quarter progressed. And while the BoJ’s Tankan last week inevitably implied a deterioration over the quarter as a whole – due to October’s super typhoon as well as the consumption tax hike – it was arguably not as bad as had been feared and certainly won’t be a game-changer for the BoJ. Furthermore, with 10Y JGB yields close to the centre of the BoJ’s zero percent target range, the yen having fallen back over recent weeks too and some progress achieved on US-China trade, surely no one expects the Policy Board to amend policy this week.

Today’s release of the Cabinet Office’s synthetic consumption figures – which provide the best guide for the national accounts measure of consumption – suggested that the hit to spending at the start of Q4 was smaller than had been implied by other monthly releases. Indeed, while this inevitably showed that consumption fell back in October, the 2.6%M/M drop was only marginally larger than the increase seen in September and was significantly smaller than the initial decline seen after the April 2014 tax hike (-7.8%M/M). This, however, was in marked contrast to the METI’s tertiary activity data – also published today and perhaps impacted to a greater extent by the Typhoon – which reported that retail services activity fell a whopping 16%M/M, while wholesale trade fell 9.2%M/M and living and amusement-related services were down 6.6%M/M. So, overall tertiary activity fell 4.6%M/M in October, double the pace of increase seen in September.

Following a notable deterioration in business conditions in October, the PMIs had suggested a modest improvement in November. Today’s flash survey for December also showed the headline index edging slightly higher at the end of the year too, up 0.3pt to 50.6, admittedly merely consistent with stagnation in the sector. But with the manufacturing PMI having fallen back this month, the composite PMI moved sideways at 49.8 to leave the quarterly average (49.6) at the lowest for more than three years.

Today’s survey was also more downbeat about the pricing environment, with the composite output price PMI down 1.5pt to 49.1, the lowest since September 2016. And the BoJ’s Tankan summary of the “inflation outlook of enterprises” unsurprisingly suggested that firms remained unconvinced that the BoJ will meet its 2% inflation target even five years ahead. Indeed, firms on average still forecast headline inflation to rise to 0.8%Y/Y in twelve months, and just 1.1%Y/Y in five years’ time.

Looking further ahead, Wednesday will bring the latest goods trade and tourism figures for November, which will be watched closely for further signs weakness caused by the spat with South Korea. While Friday’s inflation figures are likely to show a modest increase in the headline CPI rate, up 0.3ppt to ½%Y/Y, this will reflect a smaller negative contribution from energy inflation. Indeed, when excluding energy and fresh food prices, the BoJ’s preferred core measure is expect to move sideways at 0.7%Y/Y. Friday will also bring department store sales for November. In the markets, the MoF will sell 20Y JGBs tomorrow.

With the market mood buoyed somewhat by progress on the US-China first-phase trade deal, the November Chinese economic activity data also gave cause for cautious optimism, as they tallied with last month’s PMIs and beat expectations. In particular, growth in industrial production jumped 1.5ppts to a five-month high of 6.2%Y/Y. That was supported, among other things, by a pickup in autos production, for which growth rebounded to its strongest rate since June 2018. And retail sales growth also accelerated to a five-month high of 0.8ppt, to 8.0%Y/Y.

Nevertheless, on a year-to-date basis IP growth was still unchanged at a ten-year low of 5.6%YTD/Y for a fourth successive month. Likewise, retail sales slowed on the same basis, up 8.0%YTD/Y, matching the bottom of the range of the past two decades. And urban fixed asset investment growth was unchanged at 5.2%YTD/Y, the weakest pace since at least 1998, with a slowdown in the state-owned sector (down 0.5ppt to 6.9%YTD/Y) even as growth in the private sector edged up 0.1ppt from the prior month’s three-year low to 4.5%YTD/Y. And, certainly, it’s far too soon to judge that China’s economy has turned the corner for the better – after all, a rebound in activity in November was inevitable following the extra weakness in October related to the celebrations for the 70th Anniversary of the People’s Republic, while the earlier Lunar New Year Holiday in 2020 will also have encouraged firms to frontload production to November.

Euro area:
This week’s data calendar kicks off with arguably the most noteworthy release in the form of December’s euro area flash PMIs. This morning’s preliminary releases from Germany and France have provided mixed messages, with a renewed deterioration in manufacturing (the German PMI fell 0.7pt to 43.4, while the French PMI fell 1.4pts to 50.3) contrasting with a modest improvement in services, to leave the composite PMIs broadly unchanged at 49.4 and 52.0 respectively.

So, we expect the euro area’s headline manufacturing index to have declined in December to remain firmly in contractionary territory. And with the equivalent services index set to remain at a relatively subdued level, overall the composite PMI will be little improved from the 50.6 reading of November, which itself was the joint second-lowest since mid-2013. Indeed, the composite PMI for Q4 is likely to be roughly ½pt lower than the Q3 average and consistent with a softer pace of GDP growth.

The Commission’s flash consumer confidence indicator – due Friday – also seems unlikely to break out of the sideways trend seen since the start of the year. National sentiment indicators due include the German ifo (Wednesday) and French INSEE business indices (Thursday) and German GfK consumer and Italian ISTAT economic surveys (Friday).

With respect to price pressures, today’s euro area labour costs figures for Q3 will be watched, while Wednesday will bring revised euro area inflation figures for November. These are likely to confirm that headline and core inflation ticked higher last month, by 0.3ppt to 1.0%Y/Y and 0.2ppt to 1.3%Y/Y respectively. Other euro area releases include November new car registrations and October trade figures (tomorrow), and October construction output data (Wednesday). Elsewhere, ECB Chief Economist Philip Lane will chair a panel at an ECB conference on fiscal policy and EMU governance on Thursday.

As PM Johnson announces a mini Cabinet reshuffle today, and the week might well bring the nomination for the next BoE Governor to replace Mark Carney at the end of January (with the risks of a highly politicised appointment), the main event in the UK this week will be the BoE policy announcement on Thursday. The MPC adopted a more downbeat assessment of the economic outlook at November’s meeting and two Committee members (Haskel and Saunders) voted for a 25bps rate cut – the first split decision since June 2018. This meeting seems likely to be largely uneventful, with Bank Rate set again to be left unchanged at 0.75%. The same two members might be expected to vote for monetary easing even if near-term Brexit uncertainty has now lifted with the UK bound to leave the EU at end-January.

The policy statement will certainly be closely watched for the Bank’s judgement on recent developments. While near-term political uncertainties – both domestic and external – have diminished somewhat, GDP has failed to rise in any month since August, and sentiment indicators remain consistent with contraction in Q4, compared to the BoE’s previous expectation of growth of 0.2%Q/Q. Certainly, the flash December PMIs, due this morning, are expected to show that, despite a modest improvement on the month, the headline manufacturing and services indices remain below the key 50-level.

The remainder of the week will be a busy one for top-tier releases too, with labour market, inflation and retail sales figures due tomorrow, Wednesday and Thursday respectively. With employment expected to have fallen for the third consecutive month in October, the unemployment rate is likely to tick slightly higher to 3.9%. Wage growth is also forecast to have fallen back. Against this backdrop, Wednesday’s inflation release is likely to confirm that price pressures remain relatively subdued – indeed, we expect headline inflation to decline 0.1ppt to 1.4%Y/Y, which would be the weakest rate for three years. Finally, the retail sales figures for November are likely to be somewhat misleading, with the annual rate likely to be negatively impacted by the timing of the Black Friday sales – the ONS will incorporate this discounting period this year in the data for December rather than November. This release will also be accompanied by the CBI’s distributive trades survey for December, which might shed more light on conditions in the retail sector over the fourth quarter as a whole. In the markets, finally, the DMO will sell 5Y Gilts tomorrow.

In the US, following the release of the Empire Manufacturing and flash Markit PMI indices today, the first of the week’s top-tier releases will come tomorrow with November’s IP data. These are expected to show that manufacturing output fully reversed the 0.6%M/M decline in October. Aside from the weekly jobless claims figures, Thursday will bring balance of payments data for Q3 as well as the latest Philly Fed and Conference Board’s leading indices. Of most interest on Friday will be the monthly personal income and spending figures for November, which will include the closely watched deflators. That day will also bring revised Q3 GDP data and University of Michigan’s consumer sentiment survey. Meanwhile, housing market indicators due include the NAHB house price index (today), housing starts (tomorrow) and existing home sales (Thursday). In terms of Fed speak, Williams, Kaplan and Rosengren will speak publicly tomorrow, while Brainard speak at the ECB’s conference on Thursday. In the markets, the US Treasury will sell 5Y TIPS on Thursday.

The main economic focus this week will be Thursday’s employment report for November. This is expected to show that employment reversed October’s 19k decline, to leave the unemployment rate unchanged at 5.3%, suggesting still significant amounts of spare capacity in the labour market. Ahead of this will bring the skilled vacancy figures for November on Wednesday, while the latest lending data for October are due tomorrow.

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