Morning comment: A mixed bag of data from Japan, China & Australia

Chris Scicluna
Emily Nicol
Mantas Vanagas

Wall Street quickly erased its opening gains yesterday and proceeded to move lower, as investors perhaps reflected on the double-digit rebound in US stocks already seen this year. The S&P500 eventually closed down 0.6%, albeit having been down as much as 1.3% during the early afternoon. Credit spreads moved slightly wider and US Treasuries unwound Friday’s moves, taking the 10-year yield back down to 2.72%, while the US dollar was slightly firmer. And Asian markets today largely followed that lead from the US, with bourses somewhat weaker in most countries.

One exception was China, where the equity market was firmer (the CSI300 closed up 0.6%) after the Government predictably lowered its GDP growth target for this year but also announced limited fiscal stimulus to help support growth. By contrast, Japan’s TOPIX closed down 0.5% (the same rate of decline as Korea's KOSPI) despite an improved service sector PMI reading in February which offered only modest comfort following the steady recent stream of weak data – indeed a credible report suggested that the BoJ will next week revise down its assessment IP and exports. In Australia, stocks were also slightly weaker, and government bond yields lower, as the latest economic data pointed to the likelihood of a soft GDP report tomorrow but the RBA left monetary policy – and much of its post-meeting statement – unchanged.

The domestic focus in Japan today was on the release of the service sector and composite PMIs for February, which provided a modicum of relief from last week’s especially disappointing dataflow. In contrast with the marked deterioration recorded in the headline manufacturing PMI, the headline services PMI rose 0.7pt to 52.3 in February, thus returning to a level last visited in November. Within the detail, of particular note was a surprising 2.4pt rise in the new orders index to 54.5, marking the highest reading since May 2013. Elsewhere in the survey, the business expectations index edged up just 0.2pt to 56.1 while the employment index rose 0.7pt to a 6-month high of 51.7. And in some good news for the BoJ, the output price index edged up for a fourth consecutive month by 0.1pt to 52.4 – the highest reading since July last year. In addition, the input price index rebounded 1.0pts to a 3-month high of 54.6. However, given the scale of the deterioration in the manufacturing output PMI, the headline composite PMI index still fell 0.2pt to 50.7, thus revisiting the cyclical low reached in September last year. And that meant that, so far in Q1, the composite PMI is on track for its weakest showing since Q316. With respect to inflation, the composite output price index was steady at 52.2 but the input price index rose 0.3pt to 55.3, thus erasing most of the decline recorded last month.

The key focus in China today has been on the start of the National People’s Congress in Beijing, during which Premier Li Keqiang presented the Government’s so-called “Work Report” outlining the Government’s key objectives for this year. Li announced that the Government’s GDP growth target would be a range of “6.0-6.5%”, down from the target of “about 6.5%” adopted in 2018 – a downward revision that had been widely mooted by analysts even though it represents the weakest rate targeted to-date. The Government is also targeting a surveyed urban unemployment rate of “around 5.5%” and an unchanged CPI inflation target of “around 3%” (remember that CPI inflation was just 1.7%Y/Y at the start of the year with the core rate at 1.9%Y/Y). Other targets include a stable “macro leverage ratio”, “better structured exports and imports”, reduced energy intensity and associated reductions in pollution, and reduced levels of poverty.

Recognising the current headwinds facing the economy – both from the current US-China trade dispute and domestic structural challenges – Li announced that there would be additional targeted macro policy support to stimulate growth, mainly from a “proactive fiscal policy with greater intensity”. In particular, Li announced a fiscal package of “nearly CNY2tn” to help boost businesses, including cuts to VAT for manufacturing, transport and construction, and reductions in social insurance contributions. This would raise the targeted budget deficit to 2.8% of GDP from 2.6% of GDP last year. Monetary policy will remain “prudent”, and “refrain from using a deluge of stimulus policies”, with the Government seeking growth in M2 and aggregate financing that is in line with nominal GDP growth. This leaves scope for a further reduction in the reserve requirement ratio, at least for smaller banks to support private and small firms. On the micro side, as usual the government plans to “deepen reforms in key sectors”, including capital markets, and continue investment in infrastructure.

Turning to the day’s Chinese economic data, while Friday’s Caixin manufacturing PMI for February had contradicted the earlier-reported weakening in the official manufacturing PMI, the Caixin services confirmed earlier indications that conditions had deteriorated in the services sector in February. The headline index fell 2.5pts to a 4-month low of 51.1. Most of the sub-indices were also weaker, with the new orders index declining 1.7pts to 50.9, the new export orders index falling 2.8pts to 51.0 and the future activity index falling 0.4pt to 56.6. The output prices index bucked the trend, rising 0.6pt to 50.8. Combining these results with those from the manufacturing sector, the headline composite PMI fell 0.2pt to 50.7, thus remaining just above the October low.

Euro area:
Today brings euro area retail sales figures for January and the final services and composite PMIs for February. With the German figures released on Friday having shown solid growth in January – the 3.3%M/M increase was the strongest since October 2016 and more than fully reversed the decline in December – euro area retail sales also seem likely to show a rebound following a notable drop (-1.6%M/M) in December. The final services PMIs for February, meanwhile, are expected to see the euro area index align with its flash estimate of 52.3, up 0.9pt to a three-month high. So, with the final manufacturing output PMI revised marginally higher from the flash estimate in February, the euro area composite PMI is also likely to be confirmed at a three-month high. The Italian services and composite PMIs, however, are expected to point to continued contraction in Q1. And the final release of Italian Q4 GDP, also out today, is likely to confirm that the economy was in technical recession throughout the second half of last year with output contracting 0.2%Q/Q in Q4. In the markets, finally, Germany will sell 2026 bonds.

Following a rebound in January when end of season discounting helped to stir activity on the high street, UK retailers seem to have struggled to attract customers in February. The BRC Retail Sales monitor, released overnight, reported total sales growth of only 0.5%Y/Y last month, down from 2.2%Y/Y in January and significantly below the average rate of 1.2%Y/Y in 2018. And on a like-for-like basis, the growth rate of -0.1%Y/Y represented a fourth decline in the last six months. The BRC suggested that economic uncertainty related to Brexit has started to affect consumer spending more significantly than of late, and it was only thanks to support from tight conditions in the labour market – firm growth in wages and employment – that we have not seen a more significant slowdown.

Among the details of the BRC survey, the weakness was again predominantly seen in non-food sales – which posted a third consecutive decline of 0.4%3M/Y – while spending on food remained more resilient with an increase of 2.4%3M/Y, unchanged from the previous month. Going forward, we expect that growth in the retail sector will remain subdued at least until there is more clarity on how the Brexit process is going to evolve. As such, we think that compared to the 0.4-0.6%Q/Q pace seen last year, household consumption growth will have slowed significantly in Q1 and will remain subdued in Q2 too.

Looking ahead, after Friday’s manufacturing PMI and yesterday’s construction PMI – both of which were disappointingly weak – February’s PMIs continue today with the services and composite indices expected similarly to paint a downbeat picture of current economic conditions. Indeed, there is a non-negligible chance that the services PMI will slip into contractionary territory for the first time since the 2016 referendum. And therefore the composite PMI might also fall from an already lacklustre 50.3 in January to below 50 for the first time since July 2016. In addition, new car registrations figures for February are also due today, while BoE Governor Carney is set later on to appear before a House of Lords Committee.

In the US, today will bring the non-manufacturing ISM for February, which is expected to report a moderate improvement from the six-month low of 56.7 reached in January, which was likely in part due to the government shutdown. New home sales figures for December – expected to slip back after a surge of 16.9% in November – are also due along with the final services and composite PMIs for January and the federal monthly budget statement for the same month.

Another reasonably busy day in Australia saw the release of the outcome of the RBA’s latest Board meeting, together with a number of economic reports.

Beginning with the RBA, as widely expected, once again the Bank retained the cash rate at 1.5%. And the concluding paragraph of the post-meeting statement, which summarises the Bank’s stance, was yet again completely unchanged from that issued previously. Amongst other things, that paragraph continues to state that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” This suggests that the Bank continues to expect that the most likely next move will be a policy tightening although, as Governor Lowe had indicated after the meeting last month, the Bank now regards the chances of a rate hike and rate cut as almost evenly balanced (again the post-meeting statement commented only the Bank’s central forecast).

Indeed there were very few changes in the post-meeting statement from that issued in February. The Bank did acknowledge that indicators outside of the labour market point to a slowdown in the economy in the second half of last year – something that seems likely to be confirmed by tomorrow’s national accounts – but the Bank continues to forecast that the Australian economy will grow by “around 3%” this year. According to the Bank, the main domestic uncertainty remains the outlook for consumption spending in the context of presently weak growth in household incomes and falling housing prices in some cities. Meanwhile, the Bank continues to forecast that underlying inflation will pick up gradually over the next couple of years, with the central scenario still for underlying inflation to be 2% this year and 2¼% in 2020. It is worth noting that Governor Lowe will speak tomorrow on the topic “The Housing Market and the Economy” at the AFR Business Summit in Sydney – a speech that is sure to be analysed very closely. 

Turning to the data flow, ahead of tomorrow’s full national accounts, on balance the final partial indicators continued to point to slight downside risks to the RBA’s most recent GDP estimate (2¾%Y/Y for year-end growth in Q418, measured in quarter-point rounded terms). First up, the ABS reported a current account deficit of AUD7.2bn in Q4. While this was narrower than the AUD10.8bn deficit recorded in Q3, and somewhat below market expectations, the volume data indicated that net exports made a 0.2ppt negative contribution to GDP growth. This was slightly more negative than the market had expected, with export volumes falling 0.9%Q/Q while import volumes increased 0.3%Q/Q. However, as was the case last quarter, the government sector remains a source of positive growth. According to the ABS real general government consumption spending rose a further 1.8%Q/Q in Q4, which will make a positive contribution of 0.3ppt to GDP growth. Total real public investment spending rose a modest 0.3%Q/Q, which will make little contribution to growth. It is worth noting that, following the partial reports released over the past two days, the Bloomberg consensus estimate of Q4 GDP growth has moved down to 0.3%Q/Q – the same as that presently estimated for Q3 – which would likely see annual growth decline to about 2½%Y/Y.

In other Aussie news, the weekly ANZ-Roy Morgan consumer confidence index rose 0.7pt to 114.8 last week, leaving it broadly in line with its long-run average. However, the CBA services PMI was revised down 0.6pt from its flash reading to 48.7 in February – a new low for the series (which has been running less than 3 years) and down from 51.0 in January. And after slumping almost 8pts last month, the more volatile and much longer running AiG services PMI edged up a meagre 0.2pt to a still-weak 44.5 in February.

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