Following moderate gains in European and US equity markets yesterday (the S&P500 closed up ½%), the main Asian-Pacific equity markets today advanced for a second day. China led the way (CSI300 up about 3%, the most in a month) on news of domestic policy stimulus, as the Ministry of Finance announced a relaxation of regulations related to the funding of infrastructure projects by local governments via special bonds for major projects. That more than outweighed concerns related to the trade war, after Trump stated in an interview on CNBC that he would impose 25% tariffs on the remaining $300bn of additional imports from China if XI Jinping failed to meet him at the Osaka G20 summit at the end of the month.
Elsewhere, markets were largely more restrained, e.g. the Topix closed up 0.5% on a quiet day for Japanese economic data. The only new release was another downbeat tool orders report - which showed a further decline in May to the lowest level since January 2017, with domestic orders down 32%Y/Y and foreign orders down 24%Y/Y – ahead of tomorrow’s far more comprehensive overall machine orders report. But as Australia’s markets reopened from yesterday’s national holiday, the ASX 200 gained 1.6% to close at a new post-GFC high despite a rather mixed NAB business survey (detail below) as ACGBs made further modest gains (10Y yields dropped back close to 1.45%, within sight again of the record low). Elsewhere in the bond markets, having made losses yesterday, USTs were little changed, but JGB yields caught up with the global mood, edging slightly higher (10Y yields up almost 1bp through -0.12%).
Forex markets were also largely little changed. While CNY was a touch firmer despite recent talk from the authorities suggestive of benign neglect, the euro and yen traded within yesterday’s ranges against the dollar, and sterling was broadly stable having weakened more than ½ cent yesterday on the back of the dire UK GDP report. Looking ahead, the UK’s labour market report will probably be today’s most notable new data release, with second-tier data from the US and no further notable data due from the euro area.
We have already seen the only noteworthy release from the euro area, with the Bank of France’s latest business survey suggesting that conditions remained broadly stable in May. Admittedly, the headline indicator for industrial sector sentiment was a touch weaker than expected, moving sideways at 99, the lowest level since October 2016 and still just below the long-term average. While manufacturers reported a pickup in production last month – with the chemicals, IT and electronic sectors seemingly particularly buoyant – they expect IP to remain little changed in June. This was the assessment of services and construction firms too. So, the headline survey indices for services and construction were also unchanged at 100 and 105 respectively, with the former representing the lowest level since July 2017. This notwithstanding, the Bank of France still expected GDP growth to remain unchanged this quarter at 0.3%Q/Q, a pace that matches our own forecast.
Following yesterday’s aforementioned downside surprise to GDP – which raised the likelihood of a negative print for Q2 as a whole – and with recent surveys having perhaps unsurprisingly signalled a loss of momentum in the UK’s labour market, today’s official labour market figures will be of interest. Following the marked drop in the number of people employed in February and March, the headline employment figure in April might well report the first decline on a three-month basis since October 2017. This notwithstanding, the headline unemployment rate is expected to remain unchanged at 3.8%. Average wage growth, meanwhile, is likely to edge lower to an eight-month low of 3.0%3M/Y.
Elsewhere, MPC members Ben Broadbent and Michael Saunders will appear before the Treasury Select Committee for their respective reappointment hearings, while Silvana Tenreyro will speak at a conference in Lisbon.
In the US, meanwhile, today’s release of the NFIB’s small business optimism survey is expected to see the headline indicator fall back towards the bottom of the recent range. The latest PPI figures for May will also be watched ahead of Wednesday’s CPI release. While gasoline prices rose last month, the increase was within the seasonal norm. And with prices of other goods seemingly well contained, producer prices likely rose 0.2%M/M, to leave the annual rate moderating 0.2ppt to 2.0%Y/Y. In the markets, the US Treasury will sell 3Y notes.
The economics focus today was on the NAB’s monthly business survey for May. In terms of business confidence, today’s survey was somewhat more positive with firms seemingly taking encouragement from the surprise election victory by the incumbent Liberal-National Party and the associated prospect of tax cuts, as well as the outlook for easier monetary policy – indeed, the relevant indicator rose 7pts to +7, an eight-month high. But this boost might well prove temporary.
Certainly, the NAB survey suggested that business conditions continued to deteriorate in May, with the relevant index declining a further 3pts to 1, its lowest reading since September 2014 and well below the long-run average. And the associated trading and profitability indices fell to their lowest levels for five years too. Furthermore, the forward-looking indicators weakened again in May – the orders component fell to its lowest level since 2014 and recorded its fifth negative reading out of the past five – suggesting that a turnaround in business conditions over the near term seems highly unlikely. Once again, within the survey detail, the retail sector stood out for its weakness, with the household spending mood seemingly still contaminated by the adverse trend in the housing market.