Morning comment: Dire Japan & France PMIs ahead of ECB

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Following yesterday’s modest gains on Wall Street, most Asian equity indices have moved higher today, with markets in China (with the CSI300 up 0.6%) and Korea (the KOPSI closed up 0.8%) leading the way. But moves in Japan, where the flash manufacturing PMI was decidedly weak (see below), were more limited, with the TOPIX up just 0.3% and Nikkei down slightly. Fixed income markets were quiet, however, with yields on 10Y USTs close to 2.74% and 10Y JGBs stuck at zero percent. And moves in forex markets were underwhelming although the Aussie dollar fell ½% to a three-week low after some mixed labour market data and as one of the big four local banks raised mortgage rates against the backdrop of the cooling property market.

In Europe, having appreciated yesterday on perceptions a diminished risk of a no-deal Brexit, sterling remains above $1.30 for the first time in two months. But the euro has been volatile, euro govvies are on the front foot and euro area equities have fallen back after this morning’s flash French composite PMI weakened significantly further but Germany’s composite PMI improved slightly ahead of the release of the euro area numbers. Looking further ahead, the conclusion of the latest ECB policy meeting, which will provide Draghi with the opportunity to send a dovish message to the markets consistent with the weak tone of most recent data.

Japan:
While the BoJ’s Policy Board yesterday maintained a broadly upbeat assessment of the near-term economic outlook, today’s flash manufacturing PMIs tallied with the downbeat tone of the Reuters Tankan earlier this week suggesting that conditions in the sector have taken a notable turn for the worse at the start of 2019. Indeed, the headline PMI fell the most (-2.6pts) since April 2014 when the consumption tax was last increased, to 50.0 its lowest level since August 2016 and consistent with stagnation. And the detail of the report was overwhelmingly downbeat, with for example, the output component declining 4.8pts to 49.2, signalling contraction for the first time since mid-2016. The new orders index also fell a further 2.8pts to 48.6 with another notable drop in overseas orders component to just 46.1, both at their lowest for 2½ years. While the employment PMI continued to signal ongoing jobs growth in the sector, this too was reportedly the softest increase for more than two years. Finally, with respect to inflation, the output price PMI remained little changed at 51.9, but there was further evidence of reducing pressure in the inflation pipeline, with the input price component dropping to 56.9, its lowest level for fifteen months.

Euro area:
Today’s main event in the euro area will be the conclusion of the ECB’s latest policy meeting, which provides Draghi with the opportunity to provide a more dovish tone in suiting with the recent further deterioration in the economic data-flow. While the ECB’s policy guidance will highly likely be left unchanged, Draghi’s opening statement should acknowledge that the risks to the economic outlook are now skewed to the downside. Indeed, at the European Parliament last week Draghi admitted that uncertainties remain prominent while some Governing Council members at December’s meeting had already cautioned more strongly about rising downside risks. However, we do not expect to see until March at the earliest any tweaks to the policy guidance that the ECB’s key interest rates are expected “to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary”. The next substantive policy initiative of the ECB will relate to liquidity, and today’s the press conference might also see Draghi questioned about whether, and if so what, work is currently underway on future long-term refinancing operations to facilitate early refinancing of the TLTRO-II funds scheduled to mature from mid-2020.

Before the ECB announcements, we will get more insights into the strength of economic activity at the start of the year with the January flash PMIs. In December the euro area composite indicator plummeted to 51.1, a level last seen four years ago, with continued weakness in manufacturing and a notable deterioration in services. And, although yesterday’s consumer confidence index posted a modest increase, the euro area PMIs seem unlikely to suggest a significant rebound in January. Certainly, this was the message from the flash French PMIs, just released. Admittedly there was a pickup in the headline manufacturing PMI by 1.5pts to 51.2, matching the level seen last October, with an even larger increase in that sector’s output index up 2.2pts to 49.2, albeit still signalling contraction. And the services sector – which is what matters most for the French economy – reportedly continued to suffer at the start of the year, with the PMI down a further 1.5pts to 47.5, its weakest level for almost five years and a drop of more than 7½pts since November. So, the composite PMI declined 0.8pt in January to 47.9, its weakest level for more than four years.

In contrast, the German numbers told pretty much the opposite story. The manufacturing PMI slipped 1.6pts to 49.9, with the output index down to 50.2, its lowest since April 2013. But the services PMI was improved, rising 1.3pts to 53.1 to almost fully reverse the previous month’s decline. And so, the composite PMI was also higher, up 0.5pt to 52.1, still however the second-lowest reading in four years.

US/UK:
As the shutdown persists, It will inevitably be another relatively quiet day for new economic data from the US, with only weekly jobless claims data and preliminary PMIs for January due for release. And there are no notable new economic releases on the docket in the UK.

Australia:
The latest Australian labour market report was a mixed bag. At face value, the figures looked good, with employment up a larger-than-expected 21.6k following an upwardly revised gain of 39k the previous month. And with labour force participation rate little changed at 65.6%, the unemployment rate dropped 0.1ppt back to 5.0%, matching the seven-year low reached in September and October, while the underemployment rate edged lower to 8.4% too. However, for the second successive month, all of the gain in jobs came from part-time workers, while full-time employment dropped 3k following a decline of 7.3k previously. So, the pace of full-time job growth slipped to 1.9%Y/Y and total job growth slowed to 2.2%Y/Y, still respectable but both the softest rates in 2½ years. Overall, the report will have done nothing to shift the RBA’s assessment of the overall economic outlook, with policymakers still awaiting an acceleration in wage growth before being prepared to tighten policy.

 

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