Ahead of today’s US Thanksgiving holiday, President Trump signed into law the Hong Kong Human Rights and Democracy Act, which threatens Chinese officials with sanctions related to human rights issues in the SAR, and also requires an annual review of its preferential trade treatment. That’s no surprise. But with China’s authorities threatening that the Act will be ‘met with strong countermeasures’, the main Asian equity markets weakened today, albeit not dramatically so.
China’s CSI300 closed down just 0.3%. And even as new data reported the steepest monthly drop in Japanese retail sales since at least the early 1990s (detail below), the Topix closed down just 0.2% while the yen remains weaker than this time yesterday, close to ¥109.5/$. And JGBs made losses, with 10Y yields up a couple of bps to close to -0.10%. Elsewhere, ACGBs made further gains, particularly at the short end of the curve (down 3bps to 0.65%), as the latest quarterly capex survey reported a further decline in private investment in Q3, including the biggest drop in spending on equipment since 2015 (more on this below too).
In the UK, Gilts have made modest gains upon opening, as another business survey has signalled further weakening in the all-important services sector and the latest car production figures were weak too. But sterling’s up about ½ cent to about $1.295 after yesterday evening’s keenly anticipated YouGov MRP model predictions – which successfully forecast the outcome of the 2017 election – suggested that the Conservatives are on track for a majority of 68 seats. Such a margin of victory that would see the UK leave the EU at end January but give Johnson flexibility to soften his redlines in subsequent trade negotiations. Elsewhere in Europe, ahead of the release today of the latest Commission confidence survey and flash German inflation numbers, euro area govvies have also opened a touch firmer.
The main economic focus in Japan overnight was on October’s retail sales release, which offered an initial insight into the retrenchment in demand at the start of Q4 in the aftermath of the 2ppt consumption tax hike that month. And the figures disappointed, with total sales down a whopping 14.4%M/M in October, double the rate of increase seen in September and a steeper pace of decline than seen after the 2014 and 1997 tax hikes (-13.7%M/M). As such, this left the value of sales at the second-lowest level since the Global Financial Crisis and down a hefty 7.1%Y/Y. Within the detail, the weakness was unsurprisingly widespread, with the most significant declines in sales at household appliance stores (-38.9%M/M) and motor vehicle sales (-26.8%M/M), the latter the steepest monthly fall since the series began in 2002. While some of this weakness undoubtedly reflects disruption caused by Typhoon Hagibis, today’s release offers a fairly bleak assessment for household spending at the start of Q4, suggesting that, despite the relatively modest increase in the national accounts measure of private consumption over the third quarter as a whole (0.4%Q/Q) and countless government policies to soften the impact of the higher sales tax on households, the cutback in spending might prove larger than previously anticipated. Unsurprisingly, therefore, investors are increasingly speculating about quite how large the Government’s imminent supplementary budget will prove to be.
Today will bring several releases of note from the euro area, including the European Commission’s economic sentiment indicator (ESI), which arguably provides the most reliable guide to euro area economic activity. While the headline index is expected to have edged slightly higher in November on the back of modest improvements in consumer and business sentiment alike, this would still leave the ESI at its second-lowest reading since early 2015 and, like the flash PMIs, consistent with slowing economic momentum in the fourth quarter. This notwithstanding, the ECB’s latest bank lending figures, also due this morning, are likely to indicate still solid demand for loans from businesses and households alike at the start of Q4.
Meanwhile, ahead of tomorrow’s flash inflation estimate from the euro area, today will bring preliminary CPI figures for November from Germany. We have already seen the Spanish release which, in line with expectations, showed headline inflation on both the national and EU-harmonised measures increasing 0.3ppt in November to 0.4%Y/Y and 0.5%Y/Y respectively. Germany’s harmonised CPI rate is expected to rise 0.2ppt to 1.1%Y/Y. Meanwhile, ECB Chief Economist Philip Lane will speak in Dublin. And, in the markets, Italy will sell 5Y and 10Y bonds.
After last week’s flash PMIs pointed to significant deterioration in conditions in services, today’s CBI survey reported ongoing weakening in sentiment in that all-important sector. Business and professional services, as well as the consumer services sector, reported further declines in confidence, with falling volumes experienced in the three months to November and further drops in activity expected over the coming three months too. Business and professional services firms also reportedly cut employment by the most since May 2017 and (citing heightened uncertainty about the outlook for demand) reduced investment too, and (apart from spending on IT) expect to reduce capex further over the coming year too. Consumer-facing services are neutral about the outlook for business expansion in the year ahead, however, and hence are still willing to recruit and invest. Cost pressures eased in both sub-sectors. But profitability fell at the fastest pace in eight years and is expected to fall at a similarly brisk pace in Q1.
This morning has also seen the release of the Society of Motor Manufacturers and Traders (SMMT) car production figures for October. And given that several manufacturers temporarily closed factories for a few days that month as part of preparations for a no-deal Brexit, these reported a further fall in production compared with a year earlier (- 4%Y/Y) for the sixteenth month out of the past seventeen. While the weakness reportedly in part reflected model changeovers that month, continued weak domestic and overseas demand continued to take its toll – production for the UK market was down a steeper 10.7%Y/Y, while car production for overseas was down 2.6%Y/Y. And so far in 2019, total production was down a hefty 14½%YTD/Y to the weakest level since 2011.
Following yesterday’s subdued construction figures, today saw the Australian Bureau of Statistics publish the latest capex survey for Q3, which came in on the soft side. Indeed, total new capital expenditure declined a further 0.2%Q/Q last quarter, to mark the third consecutive contraction and leave spending down 1.3% compared with a year earlier. Disappointingly, spending on plant and equipment – which feeds directly into the national accounts – declined 3.5%Q/Q, the steepest quarterly decline since 2015, to leave it almost 2½% lower than a year ago. This weakness was in spite of notable improvements in the mining (3.9%Q/Q) and manufacturing (5.4%Q/Q) sectors. And the survey’s estimate of spending on buildings and structures – which is not used in the national accounts – was also more positive, with the 2.7%Q/Q increase largely reversing the decline in Q2, albeit still leaving it down compared with a year earlier (0.3%Y/Y).