Morning comment: Soft data fail to upset the market mood

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Following some ups and downs over the course of the day, a broadly positive mood was maintained on Wall Street yesterday with the S&P500 closing up almost 0.5%, marking the fifth consecutive daily gain. That came despite a brief setback after Jay Powell stated that the Fed balance sheet in the future will be ‘substantially smaller than it is now’. But, like last Friday, his main message was that policy is not on a pre-set path, that the Fed can be patient not least as inflation expectations are well anchored, and policymakers are alive to risks not least those from abroad – points that were reinforced yesterday by comments from other FOMC members including Vice Chair Clarida. Nevertheless, USTs weakened through the day, with 10Y yields peaking at 2.74% later in the day and the dollar strengthened.

Following the trend in US equity markets, the main Asian stock indices also made gains today to conclude their best week since November. In particular, with the positive mood around the US-China talks maintained on reports that Vice Premier Liu He will visit Washington DC at the end of the month for a further round of discussions, China’s CSI300 closed up 0.7% and the Chinese yuan appreciated again to 6.75/$ for the first time since July. Elsewhere, ahead of Monday’s Japanese national holiday, the Topix closed up 0.5% despite some softer economic data (see below).

Following the trend, European equity markets opened higher this morning. But core government bonds are also a touch firmer, while this morning’s Spanish IP figures having mirrored the dire German and French numbers released earlier this week. In the UK, Brexit noise persists ahead of Tuesday’s parliamentary vote – where Theresa May currently risks defeat by a record margin for any UK government (with the current record losing margin of 166 dating back to 1924) – and November’s monthly UK GDP data will provide mild distraction. But not least given Jay Powell’s message that well-behaved inflation gives the Fed scope to be patient in determining the next steps for policy, the most notable new data will be the US December CPI report.

Japan:
Ahead of Monday’s national holiday, the final Japanese economic data of the weak came in on the soft side of expectations. Consistent with the more downbeat message from certain other Japanese sentiment indicators this week, December’s Economy Watchers survey was, at face value, very disappointing, as heightened concerns about the global economic outlook and financial market conditions appeared to weigh on confidence. In particular, the overall current conditions index fell a much steeper-than-expected 3pts to 48.0, its lowest reading since July. And the weakness was broad-based, with the business-related index down 2.7pts to 47.3, the lowest level for 2½ years, while the household-related index fell 3pts to 47.6, a three-month low. And the forward-looking components provided little comfort either, with the overall conditions index down 3.7pts (the steepest monthly drop since June 2016) to 48.5 (also its lowest reading since mid-2016). Admittedly, when smoothing out the monthly volatility, the survey still pointed to a pickup in economic activity in the fourth quarter, with the headline index rising 1.5pts to 49.5, the strongest quarterly reading in a year, and a further modest improvement in the first quarter of this year too.

The MIC’s latest household spending and income report was also, on first impressions, a soft one, with total household spending down a steeper-than-expected 0.6%Y/Y in November. Adjusting for seasonal effects, however, the message was more positive, with spending up for the second successive month and by 1.1%M/M. Admittedly, when excluding the more volatile items such as housing and auto sales, core spending edged lower in November (-0.4%M/M) but this was likely payback for the strength seen in October. Indeed, on average in the first two months of Q4, core spending was 1.6% higher than the Q3 average. So, while this index more recently has been an unreliable predictor of the national accounts measure of consumption, it echoes the message from other spending-related indicators suggesting a bounce back in household expenditure in Q4 after the drop in the third quarter. Elsewhere in the survey, consistent with this week’s more positive labour earnings figures, real disposable incomes for workers’ households posted the first year-on-year increase for five months, with growth of 0.3%Y/Y a marked improvement on the decline of 2.4%Y/Y in the previous month and well above the average drop of almost 1%Y/Y so far this year.

Euro area:
The week’s euro area data-flow comes to an end later this morning with Italian industrial production figures for November. The figures for Germany and France released earlier this week were dire, with declines of more than 1%M/M leaving the annual rates for both countries at their weakest for four years. And the Spanish numbers released earlier this morning were similarly weak, with production on a seasonally adjusted basis down 1.5%M/M and 2.6%Y/Y, the biggest annual drop since 2013. We expect to see a similar result for Italy, which would suggest that overall euro area IP also declined about 1½%M/M in November.

Bucking the trend of recent French economic confidence indicators, however, the Bank of France’s December business sentiment survey, just released, pointed to an improvement in the industrial sector towards year-end, with the respective index rising 2pts to a three-month high of 103 in the final month of last year. That tallies with our expectation of a rebound in output last month after the steep drop in November. But while today’s survey suggested that new orders in the sector picked up too, it also pointed to weaker output in January. Meanwhile, the Bank of France report suggested that services sector sentiment remained firm, with the respective index unchanged at 102 for a sixth consecutive month, despite weakness in hospitality no doubt related to the Gilets Jaunes unrest. And construction firms were reportedly still upbeat, with the respective index stable at 105 in line with its average in 2018. Overall, therefore, the Bank of France judged that its survey was consistent with French GDP growth in Q4 of 0.2%Q/Q – bang in line with our own forecast.

In the markets, Italy will sell 3Y, 7Y and 30Y bonds today.

UK:
This morning brings monthly UK GDP figures for November. We expect to see a small increase of in economic output of 0.1%M/M, unchanged from October. Among the major output components, the pace of growth in services activity is also expected to be 0.1%M/M, while industrial production and construction output should also post small increases. Meanwhile, trade figures, also for November, are likely to show small decline in the deficit to below £3.0bn from £3.3bn previously.

US:
December’s US consumer price report is due later today. The CPI is expected to have declined 0.1%M/M to leave the annual rate down 0.3ppt at 1.9%Y/Y. However, that is likely due to a drop in fuel prices, so that core CPI is expected to rise 0.2%M/M for the third successive month to leave the annual core rate unchanged at 2.2%Y/Y for the fourth month out of the past five. The release of the Treasury’s monthly budget statement, however, has been postponed due to the government shutdown. 

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