Japan consumption strengths, but outlook uncertain

Emily Nicol
Chris Scicluna

After Friday’s labour market report allayed some of the worst fears about US economic momentum raised earlier in the week by the ISM surveys, the major stock indices in Europe and the US posted significant gains. However, US stock futures are pointing lower today and the gains in the main Asian indices at the start of the week have been relatively modest. Indeed, Japan’s Topix closed effectively unchanged on a day of mixed domestic data, which pointed to strong growth in private spending in the middle of Q3 but weakness ahead (see below). Bond markets, meanwhile, saw little change in Asian time, with yields on USTs close to Friday’s lows (10Y yields below 1.52%) and JGBs likewise (10Y yields edging lower to about -0.23%). Some further weak German factory orders data this morning (detail on this below too) seem unlikely to have shifted the tone in Europe one way or the other.

Looking ahead, politics and geopolitics seems likely to be to the fore this week, with the US and Chinese trade delegations set to meet again on Thursday and Friday while UK and EU Brexit negotiators will also continue discussions to see if a compromise can be found at next week’s Summit. There will also be news from the major central banks with Jay Powell speaking publicly tomorrow and the minutes of the most recent FOMC and ECB Governing Council meetings due on Wednesday and Thursday. And the dataflow brings new figures on US inflation, UK GDP and German industrial output.

Like last week’s retail sales release, today’s BoJ consumption activity index – which provides a more accurate guide to the national accounts measure of consumption – showed a significant boost to spending in August, with further signs of front-loading of spending ahead of the increase in the consumption tax. In particular, the headline index rose 2.9%M/M, the largest monthly increase since March 2014 ahead of the previous consumption tax increase, to leave it 2.6% higher compared with a year earlier.

Within the detail, there was a whopping 12.2%M/M increase in spending on durable goods in August, the most since before the 2014 tax hike. But this still left the index for such items roughly 4% below the pre-2014 tax hike peak. And given notable declines in the previous two months, the average index so far in Q3 for that category was 1.7% lower than the average in Q2. Overall, meanwhile, the headline consumption activity index was trending just 0.1% above the Q2 level. While we would expect to see another strong showing in September, to suggest a solid contribution from household consumption over the third quarter as a whole, the increase in spending last quarter seems likely to be significantly smaller than in the quarter preceding the 2014 tax hike.

Despite the pickup in spending, the Cabinet Office’s composite indicator of business conditions in August, also published overnight, fell short of expectations, leading the government to downwardly revise its assessment of conditions to “worsening”. Indeed, despite a solid contribution from the tax-related boost in retail sales in August, a drop in IP and weak labour market indicators saw the headline coincident index fall 0.4pt to 99.3, the lowest for almost three years. And no doubt reflecting the anticipated hit to demand in light of last week’s consumption tax hike, the leading index fell a steeper 2pts to 91.7, the lowest since November 2009, raising concerns that the likely retrenchment in demand in Q4 will persist through to the start of 2020.

Looking ahead, tomorrow will bring the latest wage figures while Thursday’s Reuters Tankan survey – the first to capture conditions after the tax hike – will be closely watched for insights into the extent of the deterioration in business conditions at the start of Q4. That day will also bring machine orders data for August, as well as goods PPI figures for September. In the markets, the MoF will sell 30Y JGBs on Thursday.

Euro area:
This week brings several notable national data releases from within the euro area with the focus on August industrial sector data from the four largest member states. These kicked off this morning with Germany’s factory orders figures, which suggested that the adverse trend in the sector continues. In particular, total orders declined 0.6%M/M in August following a revised drop of 2.1%M/M the prior month. That left them down a hefty 6.7%Y/Y and at the lowest level since September 2016. In the latest month, the weakness was most acute in domestic orders, down 2.6%M/M, with falls in all categories including a particularly sharp retreat in orders of consumer goods (down 5.7%M/M). In contrast, thanks to growth in the intermediate and consumer categories, foreign orders rose 0.9%M/M, with new bookings from the euro area up 1.5%M/M and those from other countries up 0.4%M/M to provide a welcome hint at a possible turning point for the better.

Looking through the noise, however, on average in the first two months of Q3 total orders were down 1.3% from the average level in Q2 with steep declines in domestic and foreign bookings alike. And while large-scale items accentuate the drop somewhat (excluding such items, orders were trending lower by roughly half the extent so far in Q3), orders look set to have declined over the third quarter as a whole whether or not such bookings are included. Indeed, with survey indicators suggesting more intensified weakness at the end of Q3 (the German manufacturing new orders PMI fell 3½ppts to a decade-low of 38.2), the outlook for production in the fourth quarter looks highly subdued.

Somewhat more positively in today’s data, however, manufacturing turnover reversed the decline the prior month in August, rising 1.3%M/M to suggest that tomorrow’s production release will see a positive growth figure for the first month since May. That, however, will still likely leave production down almost 4%Y/Y and still trending lower over the third quarter as a whole.

Tomorrow will also bring equivalent Spanish figures, followed on Thursday by French and Italian IP data. The latest goods trade reports for August are also due from Germany (Thursday) and France (Tuesday). And the end of the week will also bring final September inflation figures from Germany and Spain, which are expected to align with the flash estimates that showed the respective headline harmonised CPI rates decline 0.1ppt to 0.9%Y/Y and 0.2ppt to 0.2%Y/Y.

Elsewhere, the account from the ECB’s September Governing Council meeting (Thursday) will be of interest with respect to the split in opinions on last month’s stimulus package. Meanwhile, Council members Constâncio, Lane and Hernández de Cos are due to speak on Tuesday, while Banca d’Italia’s Panetta – the proposed candidate to replace outgoing ECB Executive Board member Cœuré later this year – will speak in Rome on Wednesday. In the markets, Germany will sell index-linked bonds tomorrow.

Brexit will inevitably remain centre-stage this week as talks continue between the UK and EU at different levels of seniority to determine whether there is scope for a deal to be reached at the forthcoming EU Summit on 17-18 October. However, at this stage the EU is clearly unable to accept Johnson’s proposals, not least due to the veto on Northern Irish regulatory alignment with the EU provided to the Northern Irish Assembly, as well as the requirement for the re-establishment of customs checks on good shipments between Northern Ireland and the Irish Republic. So, the UK Government will need to shift its position and present acceptable new legal text by the end of the week to keep open the possibility of an agreement at the Summit. If not, although a further Summit later in the month would not be ruled out, the focus on 17-18 October would shift to preparing for either a no-deal scenario or a further Article 50 extension.

If, as we expect, no agreement is reached on 17-18 October, the UK’s anti-no-deal legislation (the recently approved Benn Act) would demand that Boris Johnson write formally to the EU to request an Article 50 extension. And a legal case at the Court of Session (Scotland’s highest civil court) will continue this week to determine the consequences if Boris Johnson did not write that letter. Johnson has repeatedly stated publicly that he would not send such a letter. But Government documents submitted to the court on Friday contradicted those statements by specifying that he would in fact do so if necessary. At the same time, however, an aide of Johnson suggested that the Government might simultaneously also seek to frustrate the application for an extension (e.g. via diplomatic means to try to encourage another member state to veto the EU’s agreement to such a request) in order to try to achieve a no-deal Brexit. So, the case in the Court of Session will rule on the consequences for Johnson (which in theory could include a custodial sentence) if he did indeed frustrate the application for an extension. It will also rule on whether, if Johnson failed to write the letter seeking the extension, a court could do so automatically on his behalf. But whoever loses the case seems bound to appeal to the UK’s Supreme Court next week.

Data-wise, the most notable UK release will be the August production figures, including GDP, on Thursday. With some car plants missing their usual maintenance shutdowns that month, manufacturing output might post a second monthly gain. However, we expect output in services and construction to decline, and so also expect a small drop of 0.1%M/M in GDP. Given the rise of 0.3%M/M in July, however, that would still leave overall economic output on track for a modest gain in Q3 following the fall of 0.2%Q/Q in Q2. The August trade data, however, seem likely to show a widening in the deficit and ongoing weakness in exports. Other releases due this week include the September BRC retail sales survey and Q2 unit labour cost data (both tomorrow) and the September RICS housing survey (Thursday).

Meanwhile, tomorrow will see BoE Governor Carney, Chief Economist Haldane and external MPC member Tenreyro speak publicly. But given the focus of their respects events, none of them seems likely to comment explicitly on the BoE monetary policy outlook. Finally, in the bond market, the DMO will sell 2036 index-linked Gilts tomorrow.

In the US, the data highlights will focus on inflation with the September CPI report due on Thursday, as well as PPI and import/export price figures for the same month due tomorrow and Friday respectively. New sentiment indices will come from the NFIB small business survey for September (due tomorrow) and the preliminary University of Michigan consumer confidence survey for October (Friday). Other releases of note include August consumer credit numbers (today), the JOLTS job report and wholesale trade and inventories figures for the same month (Wednesday), the usual weekly jobless claims figures (Thursday) and the September federal budget statement (specific date of release to be announced).

Meanwhile, further insights into Fed policy might emerge on Wednesday when the minutes of the September FOMC meeting are released. And there will be several Fed policymakers speaking publicly over the course of the week including Chair Powell, who will give a speech at the annual conference of the National Association of Business Economists tomorrow and will also participate in a Kansas City Fed event on Wednesday. In the markets, the Treasury will sell 3Y notes (tomorrow) and 10Y notes on Wednesday and 30Y bonds on Thursday.

After a quiet start to the week in Australia, tomorrow will bring the latest NAB business sentiment survey for September, followed on Wednesday by the Westpac consumer confidence indicators for October. Both are expected to report that sentiment remained subdued at the turn of the quarter. Tuesday will also bring the latest monthly job advertisement figures for September, while August housing loans data are due on Thursday.


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