Morning comment: Japanese jobs, Aussie house prices, China PMI, euro CPI & US payrolls

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Further concerns about softer demand from China and Europe – reflected notably in a profit warning and associated slump in stock of DowDuPont – saw the DJI close modestly in the red yesterday. However, bolstered by a further decline in US Treasury yields – the curve moving down 4-5bps – the broader S&P500 still managed a solid 0.9% gain, driven mostly by increases in defensive stocks. US futures did weaken slightly after the close, however, with Amazon stock falling more than 5% in extended trading following the release of its Q1 revenue forecast. Elsewhere in markets, credit spreads narrowed and the US dollar rebounded modestly as President Trump tweeted that US-China trade talks “…are going well with good intent and spirit on both sides”, albeit adding that “No final deal will be made until my friend President Xi and I meet in the near future to discuss and agree on some of the longstanding and more difficult points”.

The sense of some gradual, if nebulous, progress on the trade front reflected China’s renewed promise to import “substantially” more agricultural, energy, industrial products and services from the US. And President Trump announced that Treasury Secretary Steve Mnuchin and Trade Representative Robert Lighthizer would return to China for further meetings in the middle of this month. And, ahead of the week-long Lunar New Year holiday, investors seemingly judged that was sufficient for the time being, and so shrugged off a weak Caixin manufacturing PMI report to deliver further gains in Chinese stocks, with the CSI300 closing up 1.4%. Elsewhere in the region, Japan’s latest labour market report was a mixed bag (details below), and the TOPIX fell 0.2%, while 10-year JGB yields fell 2bps to -0.02% following the overnight rally in US Treasury market.

Looking ahead, the focus this morning in the euro area will be flash inflation numbers for January, after which all eyes will be on the US labour market report.

Japan:
The main domestic focus in Japan today was on the release of labour market data for December. After growing robustly in both October and November, household employment fell a sharp 450k in December – sufficient to almost completely erase those earlier gains. Annual growth in employment slowed 0.6ppt to 1.8%Y/Y – still remarkably strong considering moderate growth in overall economic activity, and somewhat at odds with the weaker growth suggested by the MHLW’s survey of firms (especially in light of recent downward revisions). In December, the strongest increases compared to a year earlier were recorded in the manufacturing sector, followed closely by the accommodation and hospitality sector – sectors both benefiting from increased foreign demand. The employment rate (i.e. the proportion of the working-age population in employment) declined 0.4ppt to 60.0% in December – now 0.6ppt below the October highpoint but still 1.1ppt higher than a year earlier.

While employment fell sharply during the month, the labour force declined an even greater 510k. As a result, the unemployment rate still nudged down 0.1ppt to 2.4%, with the male unemployment rate declining 0.1ppts to 2.6% and the female unemployment remaining steady at just 2.3%. Separately, the MHLW reported that the effective job offer-to-applicant ratio remained steady at 1.63x – just below the four-decade high recorded back in September. The number of new job offers rose 0.8%M/M in December but was nonetheless down 5.7%Y/Y. The number of new job applicants rose 0.5%M/M, causing the effective new jobs-to-applicants ratio to edge up 0.1ppts to 2.41x.

In summary, this report suggests that on balance there was little growth in employment during Q4, but job openings remain plentiful and the labour market remains extremely tight. The BoJ’s policymakers will continue to hope that sustained tight conditions will lead to stronger growth in labour incomes over time, perpetuating the ‘virtuous’ income and spending cycle that they are relying upon to lift CPI inflation over time. The next check on that hypothesis will come from the Monthly Labour Survey for December, which will be released next Friday.

In other news, the final results of the January manufacturing PMI survey were only slightly less discouraging than the preliminary findings released earlier in the month. The headline business conditions index was revised up 0.3pt to 50.3, leaving it 2.3pts below the December reading and still the weakest reading since August 2016. Within the detail the output index was revised up 0.2pt to a still contractionary 49.4 (also down a whopping 4.6pts for the month). The new orders index was also revised up 0.2pts to 48.7, but leaving it still down a concerning 2.6pts for the month. However, the new export orders index was revised down 0.1pt to just 46.0, leaving it down 3.1pts for the month and at its lowest level since July 2016. Meanwhile, the employment index was revised up 0.3pts to 51.5 – surprisingly robust considering the tone seen elsewhere in the survey. Finally, the input prices index was revised up 0.6pt to 57.6, reducing its decline for the month to 0.9pt. The output prices index was revised up 0.2pt to 52.1, leaving it slightly below the average level recorded through 2018.

Euro area:
The main data focus today will be the euro area flash CPI release. While German inflation (on the EU harmonised measure) held steady in January at 1.7%Y/Y, the respective preliminary French estimate showed a drop of 0.5ppt from December to an eleven-month low of 1.4%Y/Y, while in Spain the annual CPI rate was down a steeper-than-expected 0.2ppt to 1.0%Y/Y. So, we maintain our view that the euro area figure will show a further drop from December’s reading of 1.6%Y/Y to an eleven-month low of 1.3%Y/Y. But with the weaker readings in France and Spain driven primarily by softer energy inflation, the euro area’s core CPI rate is likely to be unchanged at a still-paltry 1.0%Y/Y.

This morning will also bring the final manufacturing PMIs for January, which are likely to confirm the message of the preliminary estimates that conditions took a further notable turn for the worse in the sector at the start of the year. Indeed, the flash euro area index declined 0.9pt to 50.5, a more-than-four-year low.

UK:
January manufacturing PMIs will be the data focus in the UK too. In October, the headline index dipped to the lowest level since the Brexit referendum, but during the last two months of last year it recovered and reached 54.2 in December as inventory accumulation against the backdrop of no-deal Brexit risks provided a boost. Expectations are for renewed weakness in the sector at the start of 2019, with uncertainty having picked up again. 

US:
In the US, it will be a busy end to the week for economic releases, with January’s labour market report and the manufacturing ISM most notable. While January’s non-farm payrolls will not be directly affected by the government shutdown, expectations are for only a moderate increase this month, rising at roughly half the 312k rate in December. The unemployment rate, however, is expected to remain unchanged although methodological changes could cloud the picture. The manufacturing ISM, meanwhile, is expected to have moved broadly sideways in January having declined sharply in December to a two-year low of 54.3. Today will also bring monthly vehicle sales figures for January, and construction spending and wholesale inventories numbers for November.

China:
Following yesterday’s very slightly improved official manufacturing PMI reading, today saw the release of the Caixin manufacturing PMI for January – a survey that is more focused on SMEs. The headline index fell 1.4pts to 48.3 – the weakest result since February 2016. While this outcome was below market expectations, it was not necessarily inconsistent with the official manufacturing PMI which, as we noted yesterday, had depicted increasing weakness amongst smaller firms even as conditions improved somewhat for larger firms. Within the somewhat mixed detail, the output index fell 2.2pts to 48.1 – the lowest reading since June 2016 – but the future output index rose 1.6pts to an 8-month high of 55.6. In a similar vein, the new orders index fell 2.5pts to 47.3, but the new export orders index rose 2.1pts to 50.4 – the highest reading since March last year. The survey’s pricing indicators were uniformly weaker , with the input prices index falling 0.7pts to 48.1 and the output prices index falling 0.5pts to 47.9 – the latter the lowest reading since January 2016. As we noted yesterday, given the impact of holidays, some cautioun needs to be exercised in reading these surveys at this time of the year.

Australia:
Australia’s twin manufacturing PMIs also pointed to relatively subdued – but still positive – business conditions in January. The CBA index fell 0.1pts to 53.9 (0.4pts below the flash reading), while the especially-volatile AiG index rebounded 2.5pts to 52.5. It is worth noting that neither index is followed closely by the market. 

Of greater importance, the CoreLogic house price index fell 1.2%M/M in January, only slightly less than the 1.3%M/M decline recorded in December. The marks the 15th consecutive month in which prices have declined, with the annual decline now standing at 6.9%Y/Y. The largest declines remain in the east, with Sydney prices down 1.3%M/M and 9.7%Y/Y and Melbourne prices down 1.6%M/M and 8.3%Y/Y. To date the RBA has been sanguine about these price declines, which come after a huge run-up in prices during prior years. Next week’s Statement on Monetary Policy will provide the RBA with an opportunity to update the market on its outlook for the economy and monetary policy, including any implications should house price declines gather pace.

Finally, this week’s set of quarterly pricing indicators concluded with the release of the PPI report for Q4. The overall finished goods PPI rose 0.5%Q/Q and 2.0%Y/Y, but the PPI for domestic goods rose a slower 0.4%Q/Q and 1.8%Y/Y – the latter in line with the rate of core CPI inflation reported back on Wednesday.

New Zealand:
The ANZ-Roy Morgan consumer confidence index pointed to little change in sentiment in January, with the headline index falling a negligible 0.2%M/M to 121.7 – this following a near 6% lift over the previous two months. There was similarly little change in component indices, with a steady and robust net 36% of respondents remaining of the view that it is a good time to buy major household items.

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