Morning comment: Japan spending, China CPI & French IP

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Wall Street made further gains yesterday (the S&P500 closed up 0.4% with the NASDAQ up 0.9%), while a more dovish set of Fed minutes saw USTs rally to push 10Y yields back below 2.70% and the dollar weaken to touch its lowest level in trade-weighted terms since mid-October. However, despite the positive tone to the conclusion of yesterday’s extended US-China trade talks, Asian equity markets were largely in the red today. While the Japanese dataflow was broadly positive, with further evidence of a positive fourth quarter for private consumption growth and an improved BoJ regional report (detail below), a stronger yen back through 108/$ conspired to see the TOPIX retreat 0.85% on the day. And while CNY appreciated to a five-month high against the dollar, Chinese equities fell too, albeit only modestly (CSI300 down 0.2%) as the latest inflation figures surprised on the downside. Consistent with the softer market tone, oil prices fell back, with Brent crude back below $61pb, European equities have opened lower and euro govvies (except BTPs) have opened higher, and US equity futures point to negative payback later today.

Looking ahead to the rest of the day, Fed Chair Powell will have an opportunity to further clarify his position on the policy outlook when he speaks publicly in Washington DC. Before then, the account of the ECB’s December policy meeting might provide further colour on the debate on the Governing Council about the recent weakening of the euro area dataflow, which resumed this morning with a downside surprise to the latest French IP figures. And the UK Parliament will continue to debate Brexit while Labour Party leader Corbyn will also give a speech on the matter. But while Parliament is now moving to try to wrest control on the policy from the Government, we should expect more heat than light today.

Japan:
Just like many other Japanese spending and activity figures for November, today’s BoJ consumption activity index – which as an indicator of private consumption is bettered only by the less timely Cabinet Office synthetic consumption index – reported some payback for the post-natural disaster rebound in October. In particular, the BoJ’s real travel-adjusted index – which is constructed using both demand- and supply-side indicators and removes the net spending of tourists – fell 0.6%M/M in November to leave it up just 0.4%Y/Y. And the decline was broad-based, with the durable goods component down more than 1%M/M, while the non-durable goods and services indices were roughly ½% lower on the month. Nevertheless, with October’s outturn revised notably higher – the travel-adjusted headline index is now estimated to have risen 1.2%M/M that month – the level of spending on average in the first two months of the quarter was 0.8% higher than the average in Q3, signalling solid growth in the national accounts measure of private consumption in Q4.

Trade figures for the first twenty days of December, meanwhile, were on the soft side, with the value of exports posting the first year-on-year decline (-1.5%) for ten months. There was also a marked moderation in import growth over the same period, down almost 8ppts to 5%Y/Y. Admittedly, the weakness last month likely reflected weaker prices, not least of oil. And we will have to wait until the full trade report is published on 23 January for information on trade volumes. But against the backdrop of a slowing global economy heading into year-end, and today’s BoJ Regional Economic Report highlighting some concerns about falling orders from overseas, we continue to expect net exports to have provided a further modest drag on Japan’s GDP growth in Q4.

Overall, however, Japanese data continue to point to a rebound in GDP growth in Q4. And this was the underlying message from the BoJ’s latest quarterly Sakura Regional Economic Report, which showed all nine regions considering their economies to have been either expanding or recovering over the past three months. Perhaps unsurprisingly, the Hokkaido and Chugoku regions – both impacted by natural disasters in the third quarter – revised up their assessments of economic activity, in part boosted by progress in the restoration and reconstruction efforts. So, consistent with the message of Governor Kuroda’s latest speech today, when the Policy Board meets later this month the BoJ will likely maintain its view that the economy will continue to expand moderately, albeit emphasising downside risks to the outlook. And with risks to the inflation outlook also skewed to the downside, given its policy commitment to achieving its 2% inflation target, the BoJ will leave its current policy stance intact.

Euro area:
While yesterday’s labour market data were surprisingly better than the consensus view with a drop in the headline rate to a ten-year low of 7.9% in November, on average the euro area economic data continue to come in significantly weaker than expectations. That trend continued this morning with the latest French industrial production data, which – like the German figures released earlier this week – showed a significant drop in production in the middle of Q4 reversing the increase in October. In particular, manufacturing output fell 1.4%M/M in November having risen by the same amount the previous month, with declines in production of consumer, intermediate and capital goods alike. Energy output also dropped 1.4%M/M but construction rose at the same rate to leave total IP down 1.3%M/M after rising 1.3%M/M in October to be down 2.1%Y/Y, the weakest annual rate in four years. With a calendar effect having likely weighed on output in November, we expect to see a rebound in December. Nevertheless, the decline in November left the average level of production in the first two months of Q4 down 0.5% on the average in Q3, pointing to a negative contribution to GDP growth from the sector in the final quarter.

Looking ahead, today will bring the release of the account of the ECB’s December meeting when it confirmed the end of its net asset purchases while revising down its economic outlook, but in our view remained overoptimistic about prospects for both GDP and inflation. Italian retail sales figures for November are also scheduled for release. Bank of France Governor De Galhau will speak publicly on the euro area economic outlook. And in the markets, France will sell 10Y, 15Y and 30Y bonds.

UK:
Reports from major retailers have painted a mixed picture of activity on the High Street over the festive period. While a number of major retailers announced disappointing Christmas sales results, this morning’s report from Tesco was more positive, showing the UK’s largest supermarket chain increased its Christmas like-for-like sales by 2.2%Y/Y while John Lewis department store sales were up a respectable 1% during the seven weeks to 5 January. But overall High Street activity appears weak. Today’s Retail Sales Monitor survey from the BRC, an industry body, suggested that December results were the weakest in ten years, with sales flat on a total basis, and down 0.7%Y/Y on a like-for-like basis. Looking through the monthly volatility, total sales growth remained positive, but eased from 0.8%3M/Y to 0.5%3M/Y, with food sales still up 0.6%3M/Y but – in a further sign that households are cutting back on non-essentials – non-food sales down 1.2%3M/Y. If we ignore the spring results which were distorted by the timing of Easter, the weak pace of sales was last seen around the Brexit referendum in mid-2016. With no shortage of risks to the UK economic outlook, and Brexit uncertainty acute, there are plenty of reasons for consumers to remain cautious over coming months and quarters. And while higher wage growth might eventually provide some encouragement to spend a little extra, that is unlikely to give much more breathing space for many struggling retailers who are fighting to maintain profits.

Of course, after Parliament’s moves over the past couple of days to wrest back a degree of control over Brexit from the Government – notably with defeats for the Government on two votes – today will see MPs continue to debate Theresa May’s deal. While amendments are being tabled to try to ease concerns among the pro-Brexit Tories and Labour MPs alike, it still seems highly unlikely that May will gain endorsement for the crux of her deal on Tuesday, with plenty of uncertainty over how she will respond. And we expect things to be no clearer after today’s further events in the House of Commons, while the speech of Labour leader Corbyn also seems unlikely to see him take a more constructive stance. Given the latest events, we reaffirm our view that there is only a minimal probability of a no-deal Brexit. And we attach roughly equal probabilities to the likelihoods that (i) May’s ‘Blind Brexit’ deal (or a variant thereof) will eventually be adopted or (ii) the Article 50 notice will be eventually revoked. There is, of course, a significant and increasing probability of an extension of Article 50 as a stepping stone to either scenario, perhaps to facilitate a second referendum or general election, too.

US:
With the dataflow disrupted by the government shutdown, the usual weekly claims are the only top-tier data due. But among several Fed policymakers due to speak today, Chair Powell will address the Economic Club of Washington DC, providing an opportunity to repeat his more dovish message expressed last Friday and also represented in yesterday’s Fed minutes. In the markets, the Treasury will sell 30Y Notes.

China:
The Chinese economic data-flow resumed today with December’s inflation figures, which surprised on the downside. With the consumer prices on average flat on the month, the headline annual CPI rate dropped 0.3ppt to a six-month low of 1.9%Y/Y, with the drop principally caused by lower global oil prices as auto fuel prices fell almost 10%M/M and 0.5%Y/Y having risen 12.6%Y/Y the previous month. Food inflation was unchanged at 2.5%Y/Y while core inflation (excluding food and energy) was unchanged at 1.8%Y/Y for a third successive month. Services prices were unchanged on the month leaving the respective annual inflation rate also unchanged at its two-year low of 2.1%Y/Y for a fourth consecutive month.

Meanwhile, tallying with signals from the PMIs, producer prices fell 1.0%M/M to leave the respective annual inflation rate slowing sharply, down 1.8ppts from November to just 0.9%Y/Y, the lowest since September 2016, with weakening of price pressures in all major categories bar consumer durables. Inflation of raw materials slowed 3.8ppts to 0.8%Y/Y, with prices of manufactured items also rising 0.8%Y/Y, down 1.4ppts from November and also the lowest in more than two years. Steel price inflation fell back into negative territory for the first time in two and a half years. Looking ahead, base effects and developments in global oil and commodity markets could well see annual producer price inflation slip back into negative territory to represent a disinflationary impulse for the rest of the world. However, the stability in the core CPI inflation measure suggests that annual consumer price inflation should remain relatively close to the December level, which of course is well below the PBoC’s 3.0%Y/Y target and thus provides room for manoeuvre for policymakers to provide more stimulus should they so wish.

 

 

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