Morning comment: Asian PMIs, Euro CPI, US jobs

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
With Apple’s downwardly revised revenue guidance followed by the steepest fall in the manufacturing ISM index since the Great Recession, the industrial-sector weakness seen in other major economies throughout last year looked yesterday finally to be catching up with the US. With investors already jittery, the market response was predictable, with the S&P500 opening lower and eventually closing down 2½% on the day and the NASDAQ down 3%. Those declines were perhaps only restrained by revised judgments on the outlook for FOMC policy, with Fed Funds futures now pricing in a US rate cut in early 2020, and USTs rallying with 10Y yields taking a further step down to below 2.60% for the first time in almost one year.

Against that backdrop, the opening of Japanese markets today for the first time this year inevitably saw stocks initially head significantly lower. And despite a better showing during the afternoon session, the Topix closed down 1½%. As the BoJ refrained from reducing its purchases of 5-10Y paper at its first bond-buying operation of 2019, yields on 10Y JGBs fell 4bps to -0.05%, the lowest in more than two years. However, after the flash appreciation of the yen in Asian time on Thursday, forex markets were much more stable today. And elsewhere the tone was more positive, with news that a US delegation will return to Beijing on Monday for trade talks helping to improve the mood and the Chinese Caixin services PMI beating expectations. Indeed, at close, China’s CSI300 had risen 2.4% while the Hang Seng is currently up 2%. And S&P500 futures are currently up about 1%.

Looking ahead, the flash estimate of euro area inflation in December, due this morning, is set to take a notable step down principally due to falling energy prices, which will weigh further on the headline CPI rate over coming months. Meanwhile, the UK services PMI for December will be watched for further weakening of activity on heightened Brexit uncertainty. And, of course, following yesterday’s concerning manufacturing ISM survey but strong ADP jobs number, all eyes will be on the US labour market report. Shortly afterwards Jay Powell will have an opportunity to comment on recent events in an interview, alongside his two predecessors Yellen and Bernanke, to be broadcast from the American Economic Association’s annual meeting. And Democrat and Republican leaders will meet Trump at the White House after the House of Representatives yesterday voted to end the partial government shutdown but still left the parties a long way from finding a solution that might be signed off by the President.

Japan/China:
The economic data focus in Asia was on further December PMIs, with the overall message a little more positive than of late. Japan’s final manufacturing survey saw the headline index upwardly revised by 0.2pt from the flash estimate to 52.6. The output component was similarly revised higher to 54.0 in December, an increase of 1.5pts on the month and its highest reading since April, to leave it averaging 53.1 over the fourth quarter as a whole, up 0.6pt from Q3 albeit still below the readings of the previous three quarters. But while the new export orders PMI was revised notably higher (by 1.1pts), it was still down 1.6pts on the month and signalled contraction. So, while the new orders component was up an unrevised 0.5pt at 51.4, this was still some 1.5pts below last year’s average. Elsewhere, the employment index fell a steeper-than-previously-estimated 1.1pts to 51.8, a four-month low, while the pricing indices were also significantly weaker. Indeed, the input prices index fell 2.2pts to an eight-month low of 58.4 and the output prices index fell 1.7pts to a seven-month low of 51.9. So overall, today’s PMI would seem to point to a bounce back in manufacturing output in Q4 and ongoing expansion in the sector ahead, although likely with less vigour than that seen in recent years and with even less price pressure than of late too.

In China, meanwhile, the Caixin services and composite PMIs also signalled ongoing expansion at the end of last year. Contrary to expectations of a decline but consistent with the government’s equivalent survey released at the start of the week, the headline services PMI rose 0.1pt to a six-month high of 53.9. While the new orders component edged down slightly (by 0.2pt to 52.3), firms were slightly more optimistic about future activity. So, with the Caixin manufacturing output PMI – reported on Wednesday – having edged back above 50 in December, the headline composite PMI rose 0.3pt to 52.2, the highest level since July. This notwithstanding, the average over the fourth quarter as a whole (51.5) was the weakest reading since Q217, suggesting a moderation in growth at the end of 2018. Indeed, when Q4 GDP figures are released on 21 January, our China economist Kevin Lai expects growth of 6.3%Y/Y, down from 6.5%Y/Y in Q3, which would be the weakest reading since the quarterly series began in 1992.

Euro area:
Today brings what is perhaps the most notable euro area economic report of the week in the shape of the flash estimates of inflation in December. Following downside surprises a week ago in the equivalent data from Germany (down 0.5ppt to an eight-month low of 1.7%Y/Y on the EU-harmonised measure) and Spain (to 1.2%Y/Y, also down 0.5ppt from November and an eight-month low), this morning’s French figures also surprised on the downside with a drop of 0.3ppt in the headline inflation rate to 1.9%Y/Y, also the weakest reading since April. As a result, we now expect the euro area headline CPI rate to decline 0.4ppt to an eight-month low of 1.6%Y/Y. But with that drop to be principally caused by falling energy inflation, however, we still expect euro area core inflation to be unchanged at 1.0%Y/Y. The flash estimate of Italian inflation in December, also due later this morning, is expected to post a decline of 0.2ppt from November to 1.4%Y/Y.

Later this morning, we’ll also see the final euro area services and composite PMIs for December. According to the flash estimates, the euro area services PMI fell 2pts to 51.4, its lowest level since November 2014, while the composite PMI fell 1.4pts to 51.3, likewise the lowest in more than four years. Among the PMIs from the member states, the Italian indices, to be published for the first time, will be closely watched for further signs of recession. German unemployment figures for December are also due on this busy morning for new euro area economic data.

UK:
Today is also a busier day for UK economic data, with the services PMIs most notable on the docket. In November, the headline services activity PMI fell a hefty 1.8pts to 50.4, the lowest level since July 2016 and second-lowest since end-2012. As a result, the composite PMI fell to 50.7, suggesting that economic growth had slowed to a near-halt in the middle of Q4. While the headline manufacturing PMI picked up on inventory accumulation and an associated rise in new orders, the respective output index fell 0.8pt to 52.5, to leave the average for Q4 suggesting the weakest quarter for production growth since Q216. Likewise, we expect today’s services PMI to be consistent with Brexit-related weakness. BoE bank lending data for November are also due later this morning.

So far this morning we have already received the latest BRC Shop Price index, which provided an update on retail prices at the end of the year. Despite the drop in fuel prices, which would have reduced distribution costs, after returning to positive territory in November the BRC’s measure of High Street inflation rose further at the end of the year to 0.3%Y/Y, the highest since April 2013. Food inflation inched lower to 1.5%Y/Y, a level consistent with the average for 2018 as a whole. But the non-food category saw prices fall only 0.4%Y/Y, a significant improvement from the 2½%Y/Y declines seen around mid-year, perhaps with the recent weakening of sterling playing a role. Although reports this week pointed to a broadly satisfactory showing over the festive period from key retailers John Lewis and Next, overall consumer demand appears to have softened. And with consumer confidence having deteriorated since the end of the summer, we still think that inflationary pressures on the High Street will weaken in the near term.

Meanwhile, sentiment in the housing market seems to have taken a turn for the worse towards the end of the year. This morning’s release by Nationwide suggested that in December UK house prices declined by 0.7%M/M. As such, compared to a year ago the average home price was up only 0.5%Y/Y, the slowest pace of growth since February 2013.

US:
All eyes today, of course, will be on the December US labour market report, which is set to be published despite the ongoing partial federal government shutdown. With economic growth momentum having moderated, only a modest rebound in non-farm payroll growth to 180k in December from 155k in November is expected, while the unemployment rate is expected to remain unchanged at 3.7%. Yesterday’s ADP private sector payrolls estimate (271k) would suggest upside risks to that non-farm payroll figure, while the manufacturing ISM might suggest otherwise. Meanwhile, average hourly earnings growth is expected to have risen back to 0.3%M/M, but that would also likely see the annual rate moderate 0.1ppt to 3.0%Y/Y.

Beyond the data, Fed Chair Powell will participate in a joint interview with his predecessors Yellen and Bernanke at the American Economic Association’s annual meeting. FOMC members Bostic and Barkin are also scheduled to speak publicly. And investors will keep an eye on any developments that might signal light at the end of the tunnel for the federal government shutdown.

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