Political noise deafening

Chris Scicluna
Emily Nicol

US political noise returned to the fore yesterday, with House Democrats eventually formally initiating impeachment proceedings against Donald Trump after market close while the US President berated China about its trade practices in his speech to the UN General Assembly. US stocks weakened in the course of the day – the S&P500 closed down 0.8%, its biggest decline in a month – and so perhaps unsurprisingly the main Asia-Pacific indices have also fallen back today. But on a relatively quiet day for Japanese economic news, the Topix closed down just 0.2% as the yen gave up some of yesterday’s gain (currently close to ¥107.4/$). Chinese equities have fared somewhat worse, with the CSI300 closing down 0.8% while Hong Kong’s Hang Seng is down more than 1.0%. US equity futures, however, are currently pointing higher.

In the bond markets, having dropped significantly yesterday, UST yields have ticked higher this morning (10Y yields are currently close to 1.65%, about 7bps lower than this time yesterday). After Kuroda’s comments yesterday suggested that a cut in the BoJ’s short-term policy rate would be up for discussion next month, however, JGBs have made further gains across the curve, with 5Y yields down almost 3bps to touch a record low below -0.40% and 2Y yields down to -0.35, just a couple of bps above their all-time low. 10Y yields are also down about 2bps to close to -0.265%. ACGBs gave up only some of their initial gain on the opening (10Y yields are currently near 0.94%, down more than 4bps from this time yesterday) after RBA Governor Lowe’s speech yesterday evening suggested the central bank couldn’t “ignore” the “marked shift” in policy at the other major central banks (see below), not least due to the likely impact on the AUD, and so could well be teeing up for a rate cut next Tuesday.

In Europe, most govvies are also a touch stronger despite a significant upside surprise in the latest French consumer confidence data (more on this below too). Sterling, meanwhile, is broadly stable after appreciating yesterday slightly in the aftermath of the damning UK Supreme Court judgement on Johnson’s Parliament shutdown that, at the margin, reduces further the risks of a no-deal Brexit at end-October. MPs will return to work in Westminster today and continue steadily to up the pressure on the Prime Minister.

In Japan, after last week’s consumer price inflation release saw services inflation decline to its lowest for ten months, today’s services producer price data for August suggested that pipeline pressures in the sector remain very subdued too. In particular, prices were unchanged on the month to leave them up just 0.6%Y/Y, unchanged from July which was the lowest rate since the start of 2017. While there was a modest pickup in inflation of architectural services (up 1.3ppts to 3.1%Y/Y), there were declines in ocean freight transportation costs (down 3.3ppts to -4.3%Y/Y), while prices of advertising and real estate services were lower too. 

Euro area:
In the euro area, we have already seen today’s most noteworthy release with the latest French consumer confidence survey surprising on the upside in September. In particular, the headline index increased for the ninth consecutive month to 104, firmly above its long-run average and the highest since January 2018. And with consumers more upbeat about their future financial situation, and more at ease about the unemployment outlook, the share of households considering it is a suitable time to make major purchases over the coming twelve months increased slightly in September to its highest in sixteen months. Therefore, today’s survey supports our view that household consumption remained supportive to French GDP growth in Q3, and will likely continue to do so in Q4.

Elsewhere, ECB Governing Council members Cœuré and Lautenschläger are due to speak, with both reportedly having objected to the recent decision to resume QE. Meanwhile, in the markets, Germany will sell 10Y Bunds and Italy will sell zero-coupon and index-linked bonds.

After last week’s Australian labour market report saw the market-implied probability for an October rate cut peak at more than 80%, yesterday’s speech by RBA Governor Lowe arguably offered little additional insight into whether a 25bps cut next week was more or less likely. While acknowledging that the RBA had been a bit surprised by the recent slowdown, Lowe also suggested (on more than one occasion) that a gentle turning point had been reached with a modest pickup in growth anticipated over coming quarters. Nevertheless, he also flagged the surprising weakness in household spending over the past year – with negative growth in consumption per capita – despite strong employment growth. And against the backdrop of increasing downside risks from abroad, and monetary easing by other major central banks, it was no surprise that he emphasised that “further monetary easing may well be required”.

Of course, last week's labour market report showed some weakening in full time employment and a tick up in the unemployment rate further away from the RBA’s estimate of the long-run equilibrium level. And while subdued wage growth in part reflects ongoing caps in the public sector, the likely still sizeable spare capacity in the labour market is likely to mean limited upward pressure on wage growth and inflation ahead even if the economy is able to generate slightly firmer economic growth.

As such, Lowe reiterated the message from the RBA's September policy statement that an extended period of low interest rates will be required, while also repeating that the Board will “ease monetary policy further if needed to support …the achievement of the inflation target”. The RBA might prefer to wait until it has another set of quarterly inflation figures (30 October) and updated economic forecasts in November before cutting rates again. But with Lowe also having noted in the Q&A that monetary easing had become less effective at the margin than was previously the case – suggesting the Bank would need to take rates lower than it otherwise might have preferred – on balance there appears a strong case for the RBA to go for a further 25bps cut in the cash rate to 0.75% next week.

Politics will remain the main event in the UK, as Parliament resumes today after its unlawful shutdown by Johnson. And data-wise, after its weak industrial trends survey yesterday, which flagged the likelihood of a drop in manufacturing output in Q4, today will bring the CBI’s distributive trades survey, which will provide an update on retail sector conditions at the end of the third quarter. With the retail sales balance having slumped in August to its lowest since the Global Financial Crisis, tomorrow’s survey is expected to report a modest improvement. That, nevertheless, will still likely point to a sizeable decline in retail sales compared with a year earlier and consistent with a notable slowing in consumption growth over the third quarter as a whole. However, we caution that this survey hasn’t provided a very reliable guide to official retail sales data over recent quarters. And despite the likely downbeat CBI survey and ongoing Brexit uncertainty, today’s UK Finance figures for August are likely to signal still solid consumer credit and mortgage lending growth.

Data-wise, today will bring just new home sales figures for August from the US. In the markets, the Treasury will sell 2Y floating-rate and 5Y fixed-rate bonds.


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