Japan's labour market report disappoints ahead of US payrolls

Emily Nicol

Despite a weaker session in European and US equities yesterday, Asian markets were more mixed today. Most notably, China’s CSI300 made steady gains throughout the day to close 1.7% higher, as Markit’s manufacturing PMI contrasted with the downbeat tone of yesterday’s ‘official’ PMI survey, signalling a stronger pace of expansion at the start of Q4 with the headline index rising the highest since 2016. Taiwan’s TAIEX (up 0.4%) was given a boost by the fastest GDP growth for five quarters in Q3, while South Korea’s KOSPI also closed 0.8% higher. In contrast, Japan’s TOPIX was unchanged from the previous day, with the latest Japanese data signalling a softer labour market, a sharp post-tax-hike decline in spending and still very weak business conditions in the manufacturing sector (see more details below).

Asia Pacific bond markets followed the global trend higher overnight, with Japan’s 10Y JGB yields down a sizeable 4bps to -0.19%, with a similar decline in 10Y ACGBs to 1.09%, despite a more positive housing market report. Of course, global markets will no doubt take direction later today in response to the US labour market report and manufacturing ISM, for further signs of slowdown heading into the fourth quarter.

There was little to cheer in the Japanese economic figures published overnight, with perhaps most notably September’s labour market report raising some concerns about the near-term employment outlook. In particular, the number of people in employment fell for the first month in four in September (50k), with the number of employees declining for the second successive month and by a steeper 260k. While the weakness was broad based, there was however a notable increase in employment of catering and accommodation staff, likely reflecting a pickup in demand ahead of the Rugby World Cup. Indeed, while employment was still up more than 500k compared with a year earlier – nevertheless a much softer pace of growth compared with 2018 – this was more than fully accounted for by non-regular employees, of which more than a third reflected temporary staff. Furthermore, with the number of people joining the labour force having increased in September, the unemployment rate was up 0.2ppt at 2.4%, a four-month high.

To some extent the pickup in unemployment tallies with the softer job-to-applicant ratio of late, which fell further at the end of Q3 to 1.57, the lowest since November 2017. This reflected a drop in the number of new job offers – the 3½%M/M decline was the steepest since the Great East Japan Earthquake in March 2011 – to leave total job offers down almost 2% compared with a year earlier and the lowest for more than two years. And the prospect for near-term jobs growth will likely be further hampered by the subdued economic outlook, not least associated with the anticipated slump in demand in Q4 after October’s consumption tax hike.

The latest vehicle sales figures certainly offered a particularly gloomy insight into spending on big-ticket items at the start of Q4. In particular, vehicle sales were down a whopping 26.4%Y/Y in October, the steepest annual drop since mid-2011 in the aftermath of the 2011-quake and more than double the drop immediately after the 2014 consumption tax hike, possibly reflecting the more challenging external environment currently facing manufacturers globally.

Indeed, today’s final manufacturing PMI survey offered little hope of turnaround in the manufacturing sector over coming months. Indeed, the headline index was revised slightly lower (0.1pt) to 48.4, the lowest since June 2016. There was a more substantial downwards revision to the output component too, by 0.7pt to 48.0, a seven-month low and the tenth consecutive contractionary reading. And despite a similar upwards revision to the new orders PMI, it was still down more than 2pts on the month at 45.1, the weakest for almost 3½ years. Other details implied a surprising pickup in employment in the sector in October – the relevant index rose to a six-month high of 51.6 – but further pricing weakness, with the output price PMI declining to 49.4, the fifth successive below-50 reading.

This main data focus in the UK today will also be the manufacturing PMI survey for October. Despite a modest pickup in September, the headline index remained below the key-50 mark for the fifth consecutive month. And while the risk of a no-deal Brexit at the end of the month was eventually effectively taken off the table, persistent political uncertainty and soft global demand will have continued to hamper conditions in the sector, with the headline index likely to have remained firmly in contractionary territory at the start of Q4.

Of course, most attention will be on the US, with top-tier releases including October’s labour market report and manufacturing ISM. The increase in non-farm payrolls at the start of Q4 is also expected to be much softer than of late, with a forecast increase of 95k likely to see the unemployment rate nudged slightly higher to 3.6%. And while the headline manufacturing ISM is expected to largely reverse September’s decline it is still expected to remain in contractionary territory for the third consecutive month. This afternoon will also bring the latest construction spending and vehicle sales data. A number of Fed Governors will also be in action, including Vice Chair Williams, Clarida, Quarles, Kaplan and Daly.

In Australia, there were further signs that the housing market had a reached a turning point, with the latest CoreLogic house price index rising for the fourth consecutive month in October and by 1.4%M/M, the largest monthly increase since June 2015. And the improvement was widespread, with further notable increases in Sydney (1.4%M/M) and Melbourne (1.8%M/M). This left sales up more than 3½%3M/3M, with increases of more than 5%3M/3M in Sydney and Melbourne, the leave the annual pace of decline moderating 1.9ppts to just 2.4%Y/Y.


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