Morning comment: UK labour market, German and Japanese business sentiment

Mantas Vanagas

In the absence of significant news, Asian equity markets have posted no more than very modest gains on Tuesday, in line with yesterday’s developments in Europe. In Japan the TOPIX edged up a modest 0.3% despite the Reuters Tankan survey pointing to a decline in business sentiment to more than a two-year low this month (see below). There was only a small reaction in the yen and JGB markets to comments made by BoJ Governor Kuroda’s in the Diet, which included the observation that the Bank would consider additional policy easing – taking account of the costs and benefits of such a move – if this was required to achieve the inflation target (an observation that has been made many times before). In China equity markets were little changed following yesterday’s big rally.

Today saw the release of the Reuters Tankan for February which, disappointingly, pointed to a decline in sentiment in both the manufacturing and non-manufacturing sectors over the past month. Indeed, the headline diffusion index (DI) for the manufacturing sector suffered a fourth consecutive decline, falling a further 5pts to +13 – now the lowest reading since August 2016. Almost all industries recorded weaker conditions this month, with sentiment turning negative in the metals business and now only barely positive in the electrical machinery industry – the latter contrasting sharply with the considerable optimism that was present a year ago. Unfortunately, the forward-looking ‘forecast’ DI fell to +12 this month, suggesting that even fewer manufacturers are optimistic about business conditions over the coming three months. Meanwhile, after posting little change over the past three months, non-manufacturers have also become more cautious over the past month. The headline DI for this sector slumped 9pts to +22, marking the lowest reading since December 2016. And non-manufacturers were also inclined to see the outlook weakening slightly further over the next three months, with the forecast DI falling to +20. All industries within the sector reported less favourable business conditions this month, with the retail industry DI returning to 0. Needless to say, the results of this survey do not bode well for a lift in GDP growth during the current quarter following the very meek rebound posted in Q4.

Euro area:
Euro area construction output and current account figures for December will be the most notable data releases today. Despite a significant deterioration in general economic conditions, sentiment in the euro area construction remained elevated, but output growth appears to have moderated - in November the annual increase of 0.9%Y/Y was 2ppt lower compared with November 2017. Weakness in Germany appears to have been one of the major factors, but with construction orders in the largest member state remaining on an upward trend, we might see somewhat stronger growth at the end of the year.  Meanwhile, Germany's ZEW survey, one of the most timely indicators of business sentiment, will bring an update on how business conditions have changed this month. The index for the current situation has been on a downward trend since the start of 2018, and we might see another drop today. And the expectations indicator will probably remain consistent with a subdued outlook ahead.

The latest labour market report, the most notable new economic data in this week’s UK economic calendar, is due today. The headline employment growth is set to have remained elevated in December at around 150k3M/3M and its rate of increase will most likely rise from close to zero in Q3.  With GDP growth having slowed notably last quarter, the data will probably show that labour productivity in the UK remained very subdued at end of last year. Meanwhile, the unemployment rate should remain unchanged at 4%, below the BoE’s estimate of the equilibrium rate. Consistent with the tight labour market conditions, and in line with the upward trend in recent months, average weekly earnings growth is likely to take another small step up from 3.4%3M/Y in November, which was the strongest in more than a decade.

The shortened working week in the US kicks off today with the release of the latest NAHB housing survey. Its headline index declined in the last two months of 2018, but having stabilised at the beginning of this year, it is set to inch only slightly higher this month.

As expected, the minutes from this month’s RBA Board meeting – released today – provided no additional illumination regarding the policy outlook beyond that contained in the speech given by Governor Lowe and the comprehensive Statement on Monetary Policy that had followed the meeting. For the avoidance of doubt, the Bank’s ‘almost neutral’ stance was summed up by the following passage: “…members noted that there were significant uncertainties around the forecasts, with scenarios where an increase in the cash rate would be appropriate at some point and other scenarios where a decrease in the cash rate would be appropriate. Moreover, the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year, when an eventual increase in the cash rate had appeared more likely.” Governor Lowe will have the opportunity to update that outlook in a parliamentary testimony this Friday, including any reaction to the very important wage and employment data that will be released in Australia over the next two days.

On the data front the ANZ-Roy Morgan consumer confidence index rose 1.1pts to 115.2 last week, thus improving only slightly from the four-month low recorded during the previous week.

Categories : 

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