Musical chairs at the ECB

Emily Nicol
Chris Scicluna

Against the backdrop of ongoing noise surrounding his call with Ukraine’s President, yesterday’s news-flow on Trump’s trade wars was nevertheless more positive. He suggested that a trade deal with China is moving “closer and closer” and sees “a good chance” of it happening, while he also signed a limited deal with PM Shinzo Abe that, among other things, should avoid new tariffs on Japanese autos. The tone in US markets, therefore, improved, with the S&P500 closing up 0.6% to mark its first meaningful gain in more than a week.

But on a day with little substantive economic news from the region, Asian-Pacific stocks were mixed, with the Topix closing up just 0.2%, the Hang Seng little changed and China’s CSI300 down 0.8%. US equity futures, however, are pointing down. And having made losses yesterday, USTs have moved higher in Asian time, with 10Y yields currently close to 1.70%, a touch below their level this time yesterday.

With the exception of the very long end, however, JGBs made losses across the curve. For example, 5Y yields were up about 2bps from yesterday’s record low to just above -0.38%. This followed the BoJ’s decision to cut, in its scheduled rinban operation, the amount of JGBs bought at the 5-10Y zone for the fourth time in six weeks. Nevertheless, for the second time this week, BoJ Governor Kuroda spoke publicly, and underscored that the downside risks to the inflation outlook are high, thus meriting persistent monetary easing. Elsewhere, having opened lower, ACGBs made modest gains as the latest Aussie vacancy data pointed to a softening labour market (see below).

In Europe, government bonds are little changed so far this morning following further news yesterday of musical chairs at the top of the ECB. Nevertheless, like yesterday’s equivalent report from France, the latest German consumer confidence survey provided a welcome upside surprise. In the UK, meanwhile, where political crisis deepens, the latest car production numbers were, predictably, again very weak. (See more on all this below too.)

Euro area:
The turnover at the top of the ECB continues. Ahead of Mario Draghi’s replacement by Christine Lagarde at the start of November, yesterday saw Sabine Lautenschläger announce her resignation as a member of the Executive Board more than two years before the end of her term. Since taking up her post in 2014, Lautenschläger was repeatedly one of the most hawkish members on the Governing Council, advocating the clichéd Bundesbank view and, as such, opposing the latest round of QE. She’ll be replaced by another German, and probably another woman too. Claudia Buch, the current Bundesbank Vice President, would likely be one candidate who would also conform to type by following the traditional German line. But Isabel Schnabel, Financial Economics Professor at the University of Bonn and member of Germany’s Council of Economic Experts, who has been a constructive advocate of euro area reform and recently defended ECB policy against cheap shots from German politicians, would be a more imaginative choice of replacement.

Meanwhile, Fabio Panetta, Senior Deputy Governor at the Banca d’Italia and a familiar face on the G7, G20 and BIS circuit, is set to replace Benoît Cœuré on the Executive Board at the end of the year. While Cœuré was another dissenter to the latest round of ECB QE, Panetta can be expected to be a supporter of open–ended asset purchases, for as long as core inflation is expected to remain sub-target. (ECB President Draghi will give an opening address today at the start of the ESRB’s two-day annual conference.)

Meanwhile, with respect to economic data, we have already seen the release of Germany’s GfK consumer confidence survey. And in marked contrast to the country’s downbeat business sentiment surveys earlier this week, this suggested that households expect a turn for the better at the start of Q4. Contrasting with the anticipated fall, the headline index was forecast to rise 0.2pt to 9.9 in October, a four-month high, nevertheless still well below its level a year earlier. The detail for September was somewhat mixed too. While there was a modest improvement in households’ assessment of the economic outlook, the survey’s relevant index still recorded the second-lowest reading since the start of 2013 and was considerably lower than a year earlier. And income expectations fell back again in September. So, while the survey’s component for households’ willingness to buy jumped in September – to an eight-month high – against the backdrop of increased downside risks, a sudden acceleration in consumer spending over coming months seems highly unlikely. We caution, however, that the correlation between this measure of consumer confidence and German private consumption is not at all strong.

Later this morning, the ECB’s latest bank lending figures are due. Despite the slowing momentum implied by recent economic sentiment surveys, these should show another month of growing (if not vigorous) demand from households and businesses alike at the aggregate level. But again, there will be significant variation among the member states, with loan growth most vigorous in Germany and France.

While political noise in the UK continues to rise towards a crescendo, the UK dataflow continues to play second fiddle. But, at face value, today’s UK car production figures for August appeared to offer some relief for manufacturers, with total autos output up 3.3%Y/Y – the first annual increase in fifteen months. Output for the domestic market was up more than 15%Y/Y. But production for the export market (which accounts for roughly 80% of total production) was up just 0.6%Y/Y. And the outturn in August was flattered by the timing of summer shutdowns at certain key car manufacturers, which had been brought forward to April as part of the initial Brexit deadline preparations, as well as base effects following a weak outturn in August 2018 with production hit by several factors including preparation for new EU-wide testing regulations.

Moreover, the increase in August was far from sufficient to offset the marked drop in production in April. Indeed, in the first eight months of the year, the number of cars produced was below 1mn units for the first time since 2014, to leave them down a whopping 17%YTD/Y, the steepest such decline since 2011. And the decline in production for the export market was down an even sharper 18.4%YTD/Y in August, the largest drop since 2009, with production for China down 43.8%YTD/Y, the EU down 13.7%YTD/Y and the US down 9.1%YTD/Y.

Although we still expect car production to provide a modest boost to GDP growth in Q3, today’s release further illustrates the steady downward trend in output from the sector since the Brexit referendum. And with several car manufacturers having indicated their intentions for an additional shutdown around the current end-October Brexit deadline, like the BoE, we expect to see any support in Q3 more than reversed in Q4.

Ahead of next week’s RBA meeting, the overnight release of the ABS quarterly job vacancies figures inevitably merited attention. These disappointed, with the total number of vacancies in the three months to August declining 1.9%Q/Q, below trend growth and the steepest quarterly drop for six years. And with the decline in the three months to May downwardly revised to -1.7%Q/Q, job vacancies were down 1.9%Y/Y, the first annual decline since February 2014. The weakness was somewhat surprising given the ongoing sizeable increases in job vacancies in the public sector (5.9%Q/Q, 14.1%Y/Y). Therefore, the decline was indeed more than fully accounted for by the private sector, with job openings there down 2.7%Q/Q, to leave them down 3½%Y/Y, similarly the largest fall since February 2014. Overall, while the level of vacancies – total at 235.1k and private sector at 211.5k – remains elevated by historical standards, today’s release suggests a further moderation in employment growth over coming months. Against the backdrop of already significant labour market slack, that would seem to add to the case for a further 25bps interest rate cut at the RBA’s 1 October meeting.

In the US, this afternoon will bring the final estimate of Q2 GDP, which is expected to confirm the previous estimate of annualised growth of 2.0%Q/Q. Meanwhile, advance goods trade and inventories figures for August will be closely watched, while pending home sales numbers for the same month are also due. In the markets, the US Treasury will sell 7Y notes.


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