French consumers increasingly optimistic

Emily Nicol
Chris Scicluna

Overview:
Asia’s main equity indices have largely lacked direction today, posting a mix of modest gains and losses (e.g. Japan’s Topix closed up 0.3% but China’s CSI300 closed down 0.4%) with US stock futures drifting too amid a dearth of substantive local news. Certainly, there appeared no cause to do anything but shrug at comments yesterday evening by President Trump that the first-phase trade deal talks are “in the final throes” but that he’s “holding it up because it’s got to be a good deal… We can’t make a deal that’s like, even”.

Ahead of today’s deluge of US data – which includes key durable goods orders, personal spending and jobless claims – and tomorrow’s Thanksgiving holiday – USTs were also uneventful, e.g. with 10Y yields still close to yesterday’s close near 1.74%. JGBs gained for a second day, however, with 10Y yields down about 1bp to about -0.125%. Most excitement in bonds appeared in the Aussie market, with ACGBs rallying after yesterday’s after-dinner speech from RBA Governor Lowe on the central bank’s position on the likely floor to rates and its preferences should asset purchases be required (see below). So, 2Y yields were down about 8bps to back below 0.68% while 10Y yields were down about 6bps close to 1.01%.

In Europe, after another improved French consumer confidence survey (more on this below too), euro area govvies are only slightly firmer this morning (10Y Bund yields just below -0.38%). And while the euro is little changed, sterling has weakened a little further after polls yesterday suggested improvement in the Labour party’s poll ratings and a surge in last-minute voter registrations, increasing somewhat the chances of a hung UK parliament (to which we still however attach a probability of about one third). After Labour leader Corbyn’s poor showing in a one-on-one BBC TV interview last night, however, it remains to be seen how long that improvement might last.

Euro area:
Like yesterday’s German Gfk consumer confidence survey, the latest household survey out of France this morning offered an upwards surprise. In particular, INSEE’s headline sentiment indicator increased 2pts in November, to 106, the highest for almost 2½ years and, remarkably, the second-strongest reading since mid-2007 and a level well above the long-run average. The improvement in part reflected a pickup in households’ expectations of their past and future financial situations, related not least to a perceived recovery in the general economic situation and a further decrease in concerns about the outlook for unemployment. As such, the share of households considering it a suitable time to make major purchases once again increased in November, with the survey’s relevant component rising to its highest since April 2018 and a sizeable 28pts above its trough at the end of last year, suggesting that household consumption should continue to support GDP growth in the final quarter of the year.

This morning will bring Italy’s ISTAT consumer and business sentiment surveys, which are expected to maintain recent trends in November – i.e. with consumer confidence holding up relatively well but business sentiment remaining close to the multi-year low hit in September.

US:
In the US, ahead of tomorrow’s Thanksgiving holiday, it will busy day for economic releases, which will include revised GDP figures for Q3. These are expected to confirm the initial estimate that growth slowed to 1.9%Q/Q annualised from 2.0%Q/Q ann. in Q2. But of more interest will be the preliminary release of durable goods orders data for October, as well as personal income and spending figures – including the closely watched deflators – for the same month. Durable goods orders are expected to remain in the recent subdued range, trending broadly sideways, while real personal spending is expected to be flat. The core PCE deflator – the Fed’s preferred inflation gauge – is expected to move sideways at a sub-target 1.7%Y/Y. Today will also bring weekly jobless claims figures – expected to fall a touch – and the Fed’s latest Beige Book. In the markets, the Treasury will sell 7Y notes.

Australia:
In Australia, ahead of the Q3 GDP estimate due in a week’s time, the data focus today was on the latest construction figures for the third quarter. And these figures came in ahead of expectations, with total construction work completed down a smaller 0.4%Q/Q, the softest pace of decline of the past five quarters. But while the drop in Q2 (2.8%Q/Q) was also not as steep as previously estimated, total construction work was still down a sizeable 7.0%Y/Y, albeit moderating from a decline of 9.8%Y/Y previously. This improvement reflected a notable pickup in public sector work (5.4%Q/Q) for the first quarter in five. In contrast, private sector work done continued to decline, albeit the 2%Q/Q fall implied a slightly smaller drag on GDP growth than the 0.2ppt seen in Q2. But while residential building work done was down a steeper 3.1%Q/Q, 10.6%Y/Y, non-residential work completed rose 4.0%Q/Q, leaving it more than 5% higher than a year earlier.

Most important as far as the markets were concerned, however, was yesterday’s speech from RBA Governor Lowe. Once again, he suggested that GDP growth should continue to pick up and insisted that Australia’s economy remained in a stronger position that many of its peers. But he acknowledged that downside risks also remain to the fore, and gave no reason to shift expectations that further monetary easing will be along again in due course.

Of course, Lowe’s speech was most notable for his comments on unconventional monetary policy, and those remarks resonated in the markets today. While he restated that QE was currently not on the RBA’s agenda, he also again indicated that negative rates were extraordinarily unlikely. Indeed, he intimated that the effective lower bound to cash rate was likely to be 0.25%, at which point – given the RBA’s corridor system – the interest rate paid on surplus balances at the Reserve Bank would be zero. And once rates reached such levels, QE would have to become an option. In that context, addressing recent speculation as to quite what the RBA might buy in such circumstances, he stated that “we have no appetite to undertake outright purchases of private sector assets …[so] if the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds [including state government bonds]”.

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