Morning comment: Euro area CPI, UK confidence vote & house prices

Chris Scicluna
Mantas Vanagas

With financial stocks rallying strongly following the latest earnings reports – Bank of America rising over 7% and Goldman Sachs over 9% – Wall Street traded with a positive mind-set on Wednesday. However, late in the day, the WSJ reported that federal prosecutors were pursuing a criminal case against Huawei Technologies for allegedly stealing trade secrets from US business partners. Worries that this news might add to tensions between the US and China saw Wall Street weaken into the close with the S&P500 eventually closing with only a modest 0.2% gain. And in the Treasury market, while the 10-year yield initially rose to 2.74%, it subsequently reversed back to 2.71%. Meanwhile, there was unsurprisingly no reaction to the news that the UK Government had survived its no-confidence motion – nor Theresa May’s subsequent typically inconsequential statement from outside Downing Street – with the inevitable result well anticipated by investors.

There has been little in the way of substantive economic news in the Asian region today. There were no top-tier data releases while BoJ Governor Kuroda’s relatively academic speech to the G20 symposium in Tokyo gave no indication of what to expect from next week’s Policy Board meeting, focusing instead on macroeconomic issues related to demography. Therefore, notwithstanding the aforementioned Huawei story, some key bourses – such as Japan’s Topix which closed up 0.35% – took their lead from Wall Street and posted slight gains. But China’s main indices closed lower, with the CSI300 down 0.55%, although the authorities subsequently confirmed that Vice Premier Liu He will visit the US to resume trade talks at the end of the month. In the bond market, meanwhile, JGB yields fell fractionally.

In Europe, government bonds have made modest gains at the open while equities appear on the back foot, with US futures pointing lower too. But it’s set to be a relatively low-key day for economic news from Europe and the US, with the data on the docket unlikely to be show-stoppers. In the UK, meanwhile, Theresa May will resume her consultations on Brexit with various parliamentary groupings although we certainly do not expect a near-term breakthrough.

While May predictably won yesterday’s confidence vote in Parliament, the result highlighted the PM’s dependence on the backing of the Northern Irish DUP for her survival (with the Northern Irish votes she’d have lost) as well as her vulnerability to mutiny within her own party. So, she appears to have very limited room for manoeuvre as she resumes discussions today with various political groupings in an attempt to find a Parliamentary majority in favour of one form of Brexit or another. Against that backdrop, May’s reluctance to even hint at flexibility on her red-lines also bodes ill for a near-term breakthrough. So, we certainly won’t be holding our breath.

All the while, of course, the clock is still ticking towards the 29 March Article 50 deadline. There is now insufficient time for Parliament to discover and endorse an alternative Brexit deal, and adopt all of the necessary legislation to deliver it, for the UK to be able to leave the EU by end-March in an orderly manner. By the same token, there would also seem to be insufficient time for Parliament even to adopt the legislation necessary to prepare adequately for a no-deal Brexit. So, while May continues to insist that a no-deal Brexit should remain on the table – and by doing so allows Labour leader Corbyn to duck out of talks on the way forward – pressures from within her own Cabinet (such as from Chancellor of the Exchequer Hammond) and moves afoot by backbench MPs to try to wrest control of the process, mean that an eventual extension of the Article 50 process seems inevitable.

All this Brexit uncertainty, of course, continues to take its toll on the UK economy. The latest example came from today’s RICS Residential Market Survey, which pointed to intensifying downward pressures on house prices at the end of last year, with a net balance of 19% of survey respondents reporting falling prices in December and prices in decline in all regions bar the North-West. The weakness persisted on both sides of the market with indicators for new buyers enquiries and new vendor instructions remaining firmly in the negative territory, at -17% and -21% respectively. Against this backdrop, transaction levels maintained a downward trend, and the survey signalled a further decline in activity ahead. Indeed, the near-term sales expectations indicator dropped to the lowest level since the survey began in 1999. The equivalent indicator for expected price growth was also weaker – at -27% this was below the level seen immediately after the Brexit vote and the lowest since 2011. We certainly do not expect a significant recovery in price growth unless and until Brexit uncertainty lifts and real wages accelerate. (The BoE Credit Conditions and Bank Liabilities surveys are due later this morning.)

Speaking on the topic of “Demographic changes and macroeconomic challenges” at a G20 symposium organised by the BoJ and MoF in Tokyo, BoJ Governor Haruhiko Kuroda acknowledged the possibility that an aging population could put downward pressure on interest rates, increasing the risk of central banks facing the ‘zero lower bound problem’ While he added that central banks now know that they have the tools to stimulate the economy even in a low interest rate environment, he cautioned that “…we need to carefully monitor and evaluate the effects of these unconventional measures on economic developments, prices, and financial conditions since the transmission mechanisms, benefits, and side-effects of these measures could be different from those of conventional monetary policy measures based on controlling short-term interest rates”. These comments continue the BoJ’s increased emphasis on the potential side effects of ultra-low interest rate policies that has been particularly evident since the last Financial System Report in October.

Euro area:
Today will bring final euro area inflation data for December. After Monday’s figures from France (1.9%Y/Y) and Spain (1.2%Y/Y) aligned with the respective flash estimates, so too did today’s numbers from Germany (1.7%Y/Y) and Italy (1.2%Y/Y). As such, we expect today’s euro area data to confirm the flash estimates, with the headline CPI rate down 0.3ppt from November to an eight-month low of 1.6%Y/Y and the core rate unchanged at 1.0%Y/Y. Euro area construction output figures for November are also due. With production in the sector down in Germany and Spain but up in France, we expect a modest decline. In the markets, Spain will sell a range of bonds.

In the US, weekly jobless claims numbers and the Philly Fed index for January are due. The scheduled release of December housing starts and building permits figures will be postponed due to the government shutdown. In the markets, the Treasury will sell 10Y TIPS. 

The only economic report in Australia today concerned housing finance approvals in November. Following a surprise 2.1%M/M lift in October, the number of home loan approvals fell 0.9%M/M. Excluding the refinancing of existing dwellings, the number of approvals fell 0.5%M/M, thus also restoring the downward trend that was interrupted last month. The value of those loans fell 1.7%M/M and was down 11.3%Y/Y. Even so, the stock of outstanding residential loans at all ADI’s rose 4.4%Y/Y in November (investor loans rose 0.6%Y/Y while owner-occupier loans rose 6.4%Y/Y).

New Zealand:
The REINZ housing report revealed a 12.9%Y/Y decline in the number of home sales in December, compared with the 2.6%Y/Y lift reported in November. These data tend to be especially volatile during the holiday season, so clearer trends are unlikely to emerge until February. Meanwhile the REINZ house price index, which adjusts for the impact of compositional shifts in sales, rose 3.3%Y/Y, down slightly from 3.5%Y/Y last month. Prices fell 1.7%Y/Y in the previously-overheated Auckland market, but recorded an average increase of 8%Y/Y elsewhere in the country.

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