Morning comment: Japanese services, Aussie confidence & lending

Chris Scicluna
Emily Nicol

Wall Street again lacked direction on Monday, with the S&P500 closing up less than 0.1% amidst a dearth of important news. However, the 10Y Treasury yield nudged up about 2bps – albeit simply reversing Friday’s move – and the US dollar was somewhat firmer. But since Wall Street closed, US equity futures have rallied about ½% and the 10Y Treasury yield has increased a further 3bps to 2.68%. These moves came after US Senate Appropriations Committee Chair Richard Shelby said that a tentative deal had been reached on seven spending bills required to avert a further government shutdown at the end of this week. In particular, the plan would give President Trump just under $1.4bn to progress his much-desired border wall with Mexico, rather than the $5.7bn than he has been seeking. In other seemingly-positive news, in contrast to what had been indicated by last week’s reports, Trump was reportedly upbeat about China at a rally in Texas, stating that he would “make great deals on trade”, with those remarks following comments by one of his advisers that he was keen to meet Xi “very soon”, reigniting hopes that an accord might be struck soon.

These reports have lifted equity markets across Asia today, especially in Japan. Following Monday’s holiday, and with the assistance of a weaker yen, the TOPIX rebounded 2.2% to more than erase the steep decline that had occurred on Friday. In the JGB market the 10Y yield rose about 1.5bps (albeit remaining in negative territory), supported by the BoJ’s decision to reduce its purchase amount of 10-25Y bonds by ¥20bn to ¥180bn at today’s operation, the first cut in its purchase amounts since mid-December and the first reduction in this particular maturity bucket since July. Gains in the major bourses elsewhere in the region were generally around ½% – in line with US equity futures – although Taiwan rallied close to 1% and stocks in Singapore were flat. In Australia the 10Y bond yield rose 5bps to 2.12% after business sentiment was reported to have improved in January, although new housing loan approvals were reported to have ended last year on a very weak note (more on this below). Kiwi bond yields edged lower despite firmer local data, with investors clearly expecting a dovish message from the RBNZ at tomorrow’s policy review.

Today METI released more information on the performance of the all-important service sector in the form of the Tertiary Industry Activity Index for December – of particular interest with the preliminary national accounts for Q4 now just two days away. Following a decline of 0.4%M/M in November – 0.1ppt weaker than first estimated – the overall index fell a further 0.3%M/M in December, slightly disappointing market expectations. As a result, annual growth fell to just 0.4%Y/Y from a revised 1.3%Y/Y in November. Within the detail, positive contributions from the utility and retail sectors was outweighed by weaker activity in the business-related services, wholesale trade and living/amusement sectors. Importantly, given the sharp lift in activity reported back in October, today’s outcome still leaves the overall index in Q4 sitting 1.1% above the average level recorded through Q3, representing the strongest quarter in almost five years. As a result, the service sector made a decent contribution to GDP growth during the quarter. And while construction looks to have contracted, with manufacturing production having risen some 2.0%Q/Q in Q4, GDP looks all but certain to have rebounded in Q4 from the 0.6%Q/Q drop in Q3.

Euro area:
It should be a quiet day for economic data from the euro area with no top-tier releases due. But the ECOFIN Council will confirm its nomination of Irish Central Bank President Philip Lane to be its preferred candidate to take over from Peter Praet as ECB Chief Economist from the start of June. That Lane was the sole candidate reflects not only the fact that it was Ireland’s turn for a place on the ECB’s Executive Board, but also that he’s a very strong economist who will make for a very credible successor for Praet, who himself conducted this pivotal with aplomb throughout his term.

Speaking publicly in Hong Kong earlier today, Lane kept his powder dry, stating (not inappropriately) that policy will be data dependent this year and that the ECB's updated economic forecasts in March will play a key role in determining the way forward. Of course, for several months now the euro area data-flow has been dire, so that would tally with the market's view that rates are likely to be left unchanged this year. With Lane’s appointment in due course to be approved by leaders and the European Parliament, attention will shift more forcefully to the race to be next ECB President, with the possible French candidates (Cœuré and Villeroy de Galhau) arguably the most credible of the likely successors to Mario Draghi and ones who would – together with Lane – ensure a good deal of continuity of policy and communication ahead.

Elsewhere, while attention remains on Italian government dysfunction following the strong showing for the League and its right-wing bloc – and very weak performance of its populist coalition partners the Five Star Movement – in the weekend’s regional elections in Abruzzo, investors should also keep an eye on events Spain, where the Socialist government’s budget proposals will be debated in Parliament today ahead of a planned vote tomorrow. With Catalan parties seemingly unwilling to support the fiscal plans at a time when the trial of separatists who led the charge for the 2017 independence referendum is just getting underway, reports suggest that PM Pedro Sanchez could be tempted to call an early election for the spring. Of course, so far he's denied his intention to do so, but things could suddenly change.

All eyes in the UK will be on Theresa May’s latest statement to Parliament on Brexit this afternoon. But we don’t expect to hear anything particularly new, with May simply likely to continue to argue that she needs more time to try to strike a deal with the EU. So, on Thursday, MPs will debate the continued lack of progress and vote on proposed amendments to a ‘neutral’ government motion on the state of play, just as they did on 29 January. As on that occasion, theoretically those votes could establish new Parliamentary processes to allow MPs to influence more substantively the future course of Brexit policy. But the failure of MPs to agree anything last month suggests that the Parliamentarians will likely similarly fail to take greater control of the process this week. Instead, in line with Government’s latest proposal on the timetable, if no new decal with the EU has been reached by then, Parliament will be able to come back again at the end of February to discuss progress and vote on next steps, with a meaningful vote then most likely to be held next month.

Of course, by running down the clock in this way and raising the spectre of a disorderly no-deal, May hopes to persuade just enough Labour and Tory backbenchers to shift their support in favour of her preferred ‘blindfold Brexit’ deal in light of the absence of any orderly alternative. And as the Eurosceptic leader of the opposition Corbyn still seems likely to be content to cast a blind eye towards those Labour MPs voting for May’s deal in such circumstances, her blindfold Brexit remains the scenario to which we attach by some margin the greatest probability.

Beyond the politics, following yesterday’s weak UK GDP data – which most notably showed a fourth consecutive quarterly decline in business fixed investment in Q4 (1.4%Q/Q) to leave it a whopping 3.7% lower than a year earlier – and fresh from downgrading the MPC’s growth and inflation forecasts last week, BoE Governor Carney is due to speak in London on Tuesday on the global economy and the risks to the outlook.

In the US, today will bring the NFIB small business survey for January and JOLTS jobs survey for December.

The domestic focus in Australia today was on the release the NAB Business Survey for January, especially given that the closely-watched business conditions index had reported a sharp decline last month. The good news is that this index reversed about half of last month’s decline, rising 4pts to +7 – a level that is broadly in line with the long-run average. The headline business confidence index rose 1pts to +4, which remains marginally below its long-run average. Within the detail, this month respondents were more positive about trading conditions, forward orders, profitability and employment, but slightly less positive about export sales and capex. On the pricing side, the survey was unequivocally weaker this month, however. Firms indicated a 0.6% lift in labour costs over three past three months – the least since October 2015. Meanwhile, firms’ again reported that their output prices rose just 0.4% over the past three months – an outcome that suggests that annual CPI inflation is likely to remain well below the midpoint of the RBA’s 2-3% target range in the near-term at least.

In other news, more evidence of weakness in the housing market was provided by the housing finance report for December. While the market had anticipated a decline this month, the ABS reported that the number of home loan approvals slumped a much greater-than-expected 6.1%M/M. In value terms this equated to a 4.4%M/M decline, with the value of new lending for owner-occupied dwellings down 6.4%M/M and that for investment dwellings down 4.6%M/M. As a result, in seasonally adjusted terms, the value of new lending for owner occupier dwellings is now down 16.2%Y/Y and the value of new lending for investment dwellings is down an even sharper 27.8%Y/Y. Finally, ahead of tomorrow’s monthly Westpac consumer confidence reading, the weekly ANZ-Roy Morgan index fell 4.0pts to a four-month low of 114.1, led by a less positive assessment of recent financial developments and the outlook for the economy.

New Zealand:
The countdown to tomorrow’s RBNZ policy review continued today with the release of the Electronic Card Transactions survey – a timely indicator of retail spending based on payments processed electronically. After declining a sharp 2.3%M/M in December – only partly due to a price-driven slump in spending on fuel – spending rebounded a stronger-than-expected 1.8%M/M in January. A key driver of that growth was spending on durables and apparel, which rose 5.1%M/M and 2.9%M/M respectively – sufficient to more than erase the substantial declines recorded in December. Given today’s outcome, core spending, which excludes fuel and vehicles, rose 2.2%M/M and 4.6%Y/Y. And while headline spending in January was just 0.1% above the Q4 average, core spending was up a much firmer 1.1%.

In other news, the ANZ ‘Truckometer’– a measure of traffic flows that is correlated with economic activity – also strengthened in January. Specifically, after falling steeply over the previous two months, the heavy traffic index rebounded 3.5%M/M to lift annual growth back to 1.9%Y/Y. Meanwhile, the RBNZ’s quarterly Survey of Expectations – a small survey of economists and business people – reported that the mean 1-year-ahead inflation expectation had fallen 0.3ppts to 1.8%Y/Y but the mean 2-year-ahead expectation was steady at 2.0%Y/Y. Perhaps not surprisingly, the survey also indicated that on balance a small proportion of respondents now believe that monetary conditions are likely to get slightly easier over the coming year, rather than slightly tighter as was the case previously.

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