Morning comment: German IP & Japan Confidence

Chris Scicluna
Mantas Vanagas
Emily Nicol

Despite a mixed showing yesterday for European equities and a somewhat steeper-than-expected decline in the non-manufacturing ISM index, US stocks made further moderate gains, with the S&P500 closing up 0.7% and the NASDAQ rising 1.3% as the improved tone from Friday lingered and the dollar eased to a its lowest level in more than two and a half months. USTs were slightly weaker, with 10Y yields rising just shy of 2.70%.

With less momentum from the US and no significant positive economic or trade-talk news, however, Asian markets today were rather mixed. Despite a softer consumer confidence survey, Japanese markets fared better than most as the yen weakened, although some of the initial gains were given up later in the day to leave the Topix up 0.4% at the close. But Chinese stocks closed lower (the CSI fell 0.2%) as did the main indices in Korea and Taiwan. Meanwhile, 10Y JGB yields edged back above zero while the dollar firmed somewhat. In Europe, government bonds have largely opened lower despite some further very weak German industrial production data and the likelihood of another deterioration in the Commission’s economic sentiment indices later this morning. 

Coming on the back of yesterday’s disappointing services PMI, Japan’s consumer confidence survey today suggested that households were less upbeat in December, maintaining the downward trend in sentiment seen since the start of last year. In particular, the headline confidence indicator fell for the third consecutive month to 42.7, still just above its long-run average, but nevertheless its lowest level for more than two years. Perhaps surprisingly given ongoing tightening in the labour market, households’ confidence about employment conditions continued to deteriorate, falling to a two-year low. This notwithstanding, households’ willingness to buy durable goods edged up in December to its highest since June, hinting at a modest pickup in spending on big-ticket items heading into the New Year. Indeed, this was this only component in the survey to rise on average in Q4, albeit by just 0.3pt to leave it broadly in line with the average for the year.

Euro area:
Recent data from Germany’s manufacturing sector have been weak, with November’s factory orders figures reported yesterday showing falls of 1.0%M/M and 4.3%Y/Y, the sharpest annual decline since 2012, and the December PMI for the sector declining to 51.5, the lowest in two and a half years. And consistent with those downbeat readings, this morning’s German industrial production figures for November were also very disappointing, revealing a drop in output of 1.9%M/M, the third successive decline and the steepest since August 2014. All major output components fell, with production of consumer goods and energy production retreating the most, by 4.1%M/M and 3.1%M/M respectively.

While certain special factors such as logistical disruptions due to low water levels in the Rhine and calendar effects are likely to have exacerbated the decline, underlying momentum in Germany’s manufacturing sector appears very weak. Indeed, German business confidence has declined very significantly since the start of 2018 reflecting among other things a notable softening in demand from abroad and challenges in the auto sector. Against that backdrop, production levels have been on a clear downward trajectory: following a drop of 1.7%Q/Q in Q3, today’s figures suggest that we are on track for a similar 1.5%Q/Q decline in IP in Q4. So, while yesterday’s firm retail sales data suggests that German GDP is still likely to rise in the final quarter after its drop in Q3, today’s IP data suggest that the rebound is likely to be modest at best.

Looking ahead, the European Commission’s economic sentiment survey results for December are due later this morning and seem bound to compound the negative tone. With the flash euro area consumer confidence index having dropped to a twenty-two-month low, and the composite PMI having fallen1.6pts from November to the lowest level in more than four years, we expect the headline euro area economic sentiment index to decline for a twelfth successive month to the lowest level since March 2017 or earlier. 

In the markets, Germany will sell 2030 inflation-linked bonds.

The only UK economic data release of note today will be the Halifax house price figures for December. Recent indicators from the housing market suggest that momentum weakened further towards the end of the year, e.g. the Nationwide survey suggested that the average price fell in December to leave the annual rate down at just 0.5%Y/Y, the slowest pace in five years. We expect to see a similar slowdown reflected in this morning’s Halifax figures too.

Before MPs restart their Brexit debate later this week, events in the House of Commons will be worth watching too as MPs look set to vote on a proposed amendment to the Finance Bill that seeks to constrain fiscal policy in the event of a no-deal Brexit. Most notably, a vote in favour of the amendment could help to crystallise a majority among MPs that could then act in numerous further votes over coming weeks to help prevent the UK leaving without a deal, at a minimum by forcing the government to request an extension of the Article 50 notice. Indeed, given the evidence of a majority against a no-deal Brexit, we continue to attach only a small probability to the UK leaving the EU at end-March without a deal.

In the US, the December NFIB small business sentiment survey and November JOLTS job openings figures are set to be released today alongside October consumer credit data. But the scheduled trade report for November is set to be postponed due to the federal government shutdown. Meanwhile, President Trump is set to make a prime-time TV address to talk border security and the government shutdown. In the markets, the Treasury will sell 3Y Notes. 

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