Japanese IP tanks

Emily Nicol
Chris Scicluna

With little in the way of positive news, it’s been a weak end to the month for the major Asian stock markets, with Hong Kong’s Hang Seng leading the way (currently down about 2.0%) and China’s CSI300 closing down 0.9%. With the yen broadly steady around ¥109.5/$, the TOPIX closed down a more moderate 0.5%, even as new data confirmed the biggest monthly drop in Japanese IP since the last consumption tax hike. Admittedly, that figure was impacted by the super-typhoon, and today’s other Japanese data (e.g. from the labour market and consumer confidence) were somewhat brighter, while anticipation of the forthcoming supplementary budget also provides some comfort (see more detail below).

In the bond markets, the resumption of trading in USTs after the Thanksgiving break saw little excitement, with 10Y yields still close to 1.76%. And JGBs have weakened a touch, with 10Y yields up a little more than 1bp to close to -0.09%, as the BoJ again reduced its purchase range for bonds with maturities of 10-25 years in its monthly plan for December. ACGB yields moved higher too (10Y yields up 3.5bps to around 1.03%) despite some subdued private sector credit numbers. In contrast, ahead of tomorrow’s important but unpredictable SPD leadership election result, euro area govvies are firmer after some disappointing German retail sales numbers. See more on all this below too.

Coming on the back of yesterday’s weak retail sales figures, today’s Japanese IP release also disappointed. In particular, manufacturing output fell a steeper-than-expected 4.2%M/M in October, matching the drop seen in January 2018, which was the steepest since the post-tax hike plunge in April 2014. This left the level of output at its lowest since 2015 and down a whopping 7.4% compared with a year earlier. Looking at the sector breakdown, there were notable declines in production of general machinery (-14½%M/M), autos (-9½%M/M) and production machinery (-6½%M/M). As such, output of capital goods was down a hefty 11.8%M/M in October, more than reversing the increase in September, while production of consumer durables was down for the fourth month out of the past five and by a sizeable 8.3%M/M. In contrast, production of construction goods rose for the first month in three (+0.9%M/M).

The detail of the report suggested that the near-term production outlook remains downbeat too. Indeed, with shipments down more than 4%M/M and inventories up more than 1%M/M, the inventory-shipment ratio jumped in October (+4.7%M/M, +8.0%Y/Y) to the highest level in more than a decade suggesting that production will continue to see significant negative annual growth over coming quarters. Certainly, today’s release suggested that manufacturers remain pessimistic about the near-term outlook, forecasting a further decline in production in November (-1.5%M/M) followed by modest growth in December (1.1%M/M), which would leave output down around 4%Q/Q in Q4, the steepest quarterly contraction since the aftermath of the 2011 quake.

Today’s Japanese data were not all doom and gloom, however, with the latest labour market report showing a notable increase in the number of people employed at the start of Q4. Indeed, employment increased (280k) in October by the largest monthly amount since February, to leave it 620k higher than a year earlier and at a record high of 67.58mn. Admittedly, the monthly profile can be volatile. And with the number of people in the labour force up by a similar amount in October, the unemployment rate was unchanged at 2.4%, just above the near-27-year low reached in July. But while the job-to-applicant ratio also moved sideways last month, at 1.57 it was still the joint-lowest for almost two years with today’s release reporting a further fall in the number of jobs on offer.

This notwithstanding, today’s consumer confidence survey suggested that households were much more upbeat in November. Indeed, the headline sentiment index rose for the second successive month and by 2½pts, the largest monthly increase for more than six years, to 38.5, a five-month high. And the improvement was broad based, with consumers more upbeat about their employment prospects for the first time in six months, while they also (perhaps surprisingly given the recent consumption tax hike) expressed greater willingness to buy durable goods – indeed, the survey’s relevant index rose for the second successive month and by almost 4½pts, albeit still leaving it 7pts lower than a year earlier and therefore supporting our view that consumption growth seems unlikely to accelerate over coming quarters.

Turning to inflation, today’s flash Tokyo CPI figures for November offered no major surprises. Admittedly, the increase in headline inflation was a touch firmer than expected, rising 0.4ppt to 0.8%Y/Y (0.6%Y/Y adjusted for the impact of the consumption tax hike and government policy measures). But this principally reflected stronger fresh food price inflation (up 6.3ppts to 4.8%Y/Y, a thirteen-month high). Indeed, when stripping out that component, the BoJ’s forecast core CPI measure rose just 0.1ppt to 0.5%Y/Y (0.3%Y/Y on an adjusted basis). And when also excluding energy prices (which were down by a smaller 1.3%Y/Y in November), the BoJ’s preferred core inflation measure was unchanged at 0.7%Y/Y (0.5%Y/Y adjusted), underscoring still extremely subdued underlying price pressures in Japan. So, while nationwide inflation might also edge higher over coming months on the back of higher food and energy prices, we maintain our view the BoJ’s forecast core CPI rate will unlikely rise above ½%Y/Y for the foreseeable future.

Euro area:
This morning’s German retail sales data were much weaker than expected, with a drop of 1.9%M/M in October, the worst reading so far this year, to leave the annual rate down at just 0.7%Y/Y, the weakest in six months. This series is notoriously volatile, and we certainly shouldn’t place too much weight on one month’s figure. However, the latest drop followed two months of effectively flat sales. And so, it left the level of retail sales in October similarly 1.9% below the Q3 average. So, while the November ifo business survey reported that retailers expect improved sales over the festive period, and retail sales account for less than half of total consumption, this morning’s data are suggestive of a slowdown in German consumer spending in Q4.

Looking ahead, the main euro area data focus later this morning will be the flash inflation estimates for November. With German, French and Spanish figures having posted increases of 0.3ppt on the EU-harmonised measure, to 1.2%Y/Y, 1.2%Y/Y and 0.5%Y/Y respectively, we now expect a slightly firmer uptick in the euro area’s headline CPI rate by 0.3ppt from October’s near-three-year low to 0.9%Y/Y. The increase will in part reflect a softer pace of decline in energy inflation. However, we also anticipate a modest increase in core inflation, by 0.1ppt to a seven-month high of 1.2%Y/Y, nevertheless still consistent with subdued underlying price pressures.

Today will also bring euro area unemployment figures for October, which are expected to show that the headline rate moved sideways at the eleven-year low of 7.5%. November’s labour market data from Germany – where all recent job growth has come from the public sector as businesses have faced up to the weak demand environment – will also be published.

Looking ahead to the weekend, tomorrow afternoon will see Germany’s Social Democrat Party (SPD) announce the outcome of its leadership contest, an event that could have a significant bearing on the future of the government coalition (GroKo) in which it is the junior partner with Merkel’s CDU/CSU alliance. If, as expected, the party membership elect Finance Minister Olaf Scholz and his running mate Klara Geywitz, the GroKo should last the remainder of its term until 2021. But if – as the party’s youth wing hopes – Scholz and Geywitz lose out to their opponents, Norbert Walter-Borjans (former Finance Minister of North Rhine-Westphalia) and left-leaning GroKo critic Saskia Esken, then doubts about the coalition’s future – and that of German politics – will dominate the start of next week.

Perhaps unsurprisingly given the dire choices on offer to voters at the forthcoming general election, the latest GfK survey results suggested that UK consumers remain downbeat. The headline survey indicator remained unchanged in November at -14, matching the lowest reading in more than six years. And within the detail, the sub-indices related to assessments of individuals’ personal financial situation and the general economic situation were little different to last month. That’s also true of the survey measure for the climate for making major purchases, although the 1pt decline to 0 left it at the lowest level since June.

Against this backdrop, the Bank of England’s lending figures for October due later this morning might well show a further slowdown in consumer credit growth at the start of Q4. Demand for mortgage lending might well have moderated too, which would be broadly consistent with the UK Finance figures published earlier in the week, showing a fall in the number of mortgage approvals in October to their lowest for seven months.

Today’s Australian private sector credit data showed that overall credit growth remained subdued at the start of Q4. Indeed, while there was a further modest increase in the monthly flow of credit in October, this left the year-on-year rate of growth moderating 0.2ppt to 2.5%, the softest pace for 9½ years.

Within the detail, the monthly flow of housing loans picked up slightly (up 0.1ppt to 0.3%M/M), consistent with the return of life to the housing market, although the respective annual growth rate moderated 0.1ppt to 3.0%Y/Y. However, consumer credit remained weak in October, recording the thirteenth consecutive monthly decline (-0.6%M/M), to leave the amount of personal loans down 4.7%Y/Y, the steepest such decline for more than a decade. And disconcertingly, there was a weakening in business lending for the first month since January 2017 (albeit down just 0.1%M/M), to leave the annual rate of growth in this component (+2.7%Y/Y) at its weakest since 2014.

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