Retail rebound in Germany & Japan

Emily Nicol
Chris Scicluna

Despite some better economic data from the region, following declines in the US at the end of last week, most Asian equity markets have started the week in reverse gear. In Japan, where a very strong retail sales report for August was negated by some more weak IP figures (detail below), the Topix started the week with a drop of 1.0%. And while China’s PMIs beat expectations and the US Treasury played down a Bloomberg report from Friday that it was discussing ways to limit US portfolio inflows into China, the CSI300 closed down 0.9%. US stock futures are, however, pointing higher this morning.

In the bond markets, UST yields remain within the lower half of the range of the past few days, with 2Y yields still below 1.65% and 10Y yields below 1.70%. The JGB curve steepened, however, as the BoJ increased its purchases in the 1-3Y maturity zone but again cut its purchases in the 3-5Y zone. Euro area govvie yields are higher this morning (e.g. yields on 10Y Bunds up more than 1bp to -0.565 following some stronger-than-expected German retail sales figures. But Gilts are a touch firmer (10Y yields at 0.49%) as pressures on PM Johnson for alleged misconduct continue to rise. Ahead of tomorrow’s RBA policy decision, where a rate cut is possible but no done deal, with ACGBs have made significant losses in the past hour with 10Y yields up 7bps to back above 1.00% despite data showing the weakest growth in housing credit growth since records began in the 1970s.

Looking ahead, tomorrow brings Japan’s long-awaited consumption tax hike and a key BoJ Tankan survey that might have a significant bearing on whether the BoJ cuts its policy rate at the end of next month. And at the back end of the week, the focus will be very much on the US dataflow, with the September labour market report coming on Friday. Another week of turbulence for UK politics is also in store.

It will be an eventful week in Japan, with tomorrow bringing the long-awaited increase in the consumption tax rate, by 2ppts to 10%. Quite how far the economy contracts in its aftermath remains to be seen, with many offsetting measures – including lower rates on certain items and the abolition of public school fees for early years education – likely to limit the impact to some extent. However, there will be payback for purchases of some items brought forward ahead of the hike.

Indeed, today’s retail sales figures signalled a clear tax-hike-related jump in demand ahead of the consumption tax hike, while better weather at the start of the month and calendar effects also provided a more favourable backdrop in August. In particular, total sales rose 4.8%M/M, the steepest monthly increase since the pre-tax hike surge in March 2013, to leave them 2% higher than a year ago, the strongest annual rate since last October. Within the detail, the pickup was widespread, with a more than 5½%M/M rise in sales of general merchandise, an 8%M/M increase in clothing sales – the most since the post-2011 quake rebound – and a near-17½%M/M rise in sales of household appliances – the most since the pre-2014 tax hike surge. Given the weakness in July, however, retail sales were on average in the first two months of Q3 just 0.1% higher than the average in Q2. But September should also see a further boost to demand, and therefore suggest a solid contribution from household consumption to GDP growth in Q3.

In contrast, however, today’s industrial production release illustrated the significant struggles facing Japanese manufacturers even ahead of the consumption tax hike. In particular, total output declined a larger-than-expected 1.2%M/M in August, largely reversing the increase in July to leave the level of output down a sizeable 4.7%Y/Y, the steepest annual drop since May 2015. Admittedly, the sectoral detail of the report was mixed. In particular, production of electrical machinery was down 4½%M/M, while production machinery output declined more than 2½%M/M, and production of autos fell ½%M/M. In contrast, output of electronic parts and devices was up 4½%M/M, while ICT equipment production rose 10½%M/M (albeit this series is particularly volatile).

Overall, total production was on average so far in Q3 almost 1% lower than the average in Q2. And the detail of the report suggested the near-term outlook remain weak too. For example, despite moving sideways in August, the level of inventories remained close to the 10½-year high reached in July. As such, with shipments having fallen last month, the inventory-shipment ratio rose to a more than decade high in August. So, while we might well see a boost to output from last-minute demand ahead of October’s tax hike, the METI’s forecast for growth of 1.9%M/M looks to typically overly optimistic. And this would still leave manufacturing output down over the third quarter as whole.

Looking ahead, tomorrow will bring the most noteworthy economic release of the week, with the BoJ’s Q3 Tankan survey. In line with the most recent Reuters Tankan survey, we expect to see a further notable drop in the headline manufacturing index from +7 in Q2 to its lowest since 2013, while the non-manufacturing index might well fall (from +16) to its lowest since the post-2014 tax hike. The following day will also bring a further section of the Tankan survey with firms’ specific forecasts for inflation and their own output prices.

Both of these surveys will play a key role in the BoJ’s decision process at the end-October Policy Board meeting when it is due to ‘re-examine economic and price developments’ taking account of increased downside risks to the economic outlook in light of the consumption tax hike. In this respect, today’s Summary of Opinions from September’s meeting received some attention, although they offered little additional insight into near-term policy. Admittedly, news reports focussed on one member’s comment that given signs that the inflation momentum has already been lost, a cut in the short-term policy interest rate is appropriate. But this member was likely Gōshi Kataoka, who has long been calling for such a policy move. Overall, today’s release merely reiterated the message from September’s policy statement and Kuroda’s post-meeting press conference, suggesting that there was no preconception to near-term policy ahead of October’s ‘re-examination’, with most members assessing all policy options to be on the table.

Euro area:
After last week’s very downbeat economic survey results, this week has got off to a much better start as far as euro area economic data are concerned with the latest German retail sales figures providing a significant upside surprise. In particular, sales rose 0.5%M/M in August after a revised drop of -0.8%M/M the prior month. The updated figure for July was a much better performance than originally thought (the initial estimate was for a drop of 2.1%M/M). And the decent showing in August left sales up 3.2%Y/Y with the average level for the first two months of Q3 about 0.4% higher than that of Q2. And while the retail sales figures don’t always provide a reliable guide to overall private consumption, with auto sales also looking firmer this quarter, household spending does appear to have provided supported to overall GDP growth once again in Q3.

Looking ahead, German labour market figures for September are due later this morning, as are euro area jobless numbers for August. These latter data are expected to confirm that the rate of unemployment remained at the lowest since mid-2008, but that the pace of decline has continued to moderate against the backdrop of the broader economic slowdown. Today will also bring flash September inflation releases from Germany, Italy and Spain, which are likely to show that inflation pressures remained very subdued in line with the downside surprise in Friday’s French figures.

The aggregate flash CPI estimate for the euro area is due tomorrow and – notwithstanding the possibility of surprises today – seems likely to show that, despite the recent jump in the oil price, headline inflation fell below 1%Y/Y for the first time since November 2016. While core inflation might well tick higher to 1.0%Y/Y, this would continue to signal very weak underlying price pressures.

Tomorrow will also bring the final manufacturing PMI for September, which seems highly likely to confirm the extremely disappointing flash release that showed the headline index declining 1.4pts to 45.6, the lowest in more than seven years. Final services and composite indices are due on Thursday and similarly expected to align with the preliminary readings, which reported a notable deterioration in the services sector. As such, in line with flash, the euro area composite PMI likely fell 1.5pts in September – the most since December – to just 50.4, the lowest since June 2013 and a level suggesting that economic growth has all but come to a halt. Thursday will also bring retail sales figures for August, which are expected to reverse some of the decline recorded at the start of Q3, which – given today’s German figures – will largely be revised away.

In politics, this evening will bring a key meeting of Italy’s new Cabinet to discuss its draft budget for 2020. The Cabinet will seek to be compliant with EU rules while avoiding the automatic increase in VAT that is built into current legislation. Perhaps unsurprisingly, new Finance Minister Gualtieri suggested on the weekend that the authorities will target a slightly higher deficit than the 2.1% of GDP currently agreed with the European Commission. Given Italy’s protracted economic weakness, and the more constructive approach of the new Government compared to its predecessor with respect to the country’s membership of the single currency, we would expect the EU to be relatively forgiving of the looser fiscal stance.

Finally, euro area monetary policymakers set to speak publicly this week include Bundesbank President Weidman tomorrow, ECB Vice President De Guindos and dovish Finnish Governor Rehn on Thursday. And, in the markets, Germany will sell 5Y Bunds on Wednesday, while France and Spain will sell bonds with various maturities on Thursday.

Focus in the first half of the week will no doubt remain on the Conservative Party conference, where populist English nationalism will likely continue to be in full effect, Cabinet ministers will continue to make commitments to big unfunded increases in public expenditure, and Boris Johnson will remain under pressure for a range of issues related to his personal conduct. We do not, however, expect any light to be shone on Johnson’s Brexit policy. Meanwhile, despite suggestions over the weekend that the Scottish National Party is set to back a vote of no confidence in the Government, we doubt that this will go ahead as it would seem to play into Johnson’s hands.

More prosaically, the most notable UK economic data this week will be the September PMIs, with the manufacturing, construction and services surveys due tomorrow, Wednesday and Thursday respectively. Having declined to the lowest level for more than six years in August (47.4) the headline manufacturing index is expected to fall further into contractionary territory in September as downside risks – domestic and external alike – intensified. And with the services PMI expected to have edged slightly lower again (from 50.6 in August), the composite PMI is forecast to fall to 50.0 in September, which would leave the quarterly average in Q3 the lowest since Q412, consistent with contraction in underlying GDP growth.

Ahead of these figures, the final estimate of Q2 GDP is due today, and is expected to confirm that the economy contracted by 0.2%Q/Q. The accompanying balance of payments figures are likely to show the current account deficit narrowing in Q2 on the back of a smaller trade deficit that quarter. This morning will also bring the BoE’s latest bank lending figures for August, along with the Lloyds business barometer for September. Finally, the week will conclude with new car registrations numbers for September on Friday. In the markets, the DMO will sell 20Y Gilts tomorrow.

In the US, there are a number of top-tier releases in the coming week, including September’s manufacturing and non-manufacturing ISMs on Tuesday and Thursday respectively. While the manufacturing survey is expected to signal ongoing weakness in the sector, the non-manufacturing index is likely to point to still-solid expansion at the end of Q3. Tuesday will also bring construction spending and vehicle sales figures, followed on Wednesday by the ADP employment report, on Thursday by factory orders data and on Friday by the full trade numbers. But most focus on Friday will be on the BLS employment report, with non-farm payrolls expected to have increased by 140k in September, slightly below the average for the year so far. As such, the unemployment rate is expected to be unchanged at 3.7%, while average earnings growth is also forecast to be unchanged at 3.2%Y/Y. In terms of Fed speak, various FOMC members are due to appear at conferences throughout the week, including Chair Powell at a ‘Fed listens event’ on Friday. Meanwhile, there are no UST auctions scheduled.

The main event in Australia this week will be the conclusion of the latest RBA policy-setting meeting tomorrow. After the most recent employment report implied still significant amounts of spare capacity in the labour market, and therefore limited upward price pressures in the pipeline, and last week’s speech by RBA Governor Lowe flagged the likelihood of further easing to come, we expect the Policy Board to cut its key cash rate by 25bps to a new record low 0.75%.

With respect to economic data, today’s private sector credit data suggested that little has changed of late, with another increase of 0.2%M/M, in line with the subdued average this year. As such, the annual rate slowed to 2.9%Y/Y, the weakest since 2010. Within the detail, growth in housing loans slowed to a new series low of 3.1%Y/Y, with such loans for investment purposes down on a monthly basis and up just 0.1%Y/Y. Owner-occupier housing loans were up 0.3%M/M and 4.7%Y/Y, the lowest since 2014. Other personal loans were down 3.4%Y/TY. And business loans were up 3.4%Y/Y, wth weakest in more than year.

Meanwhile, tomorrow will also bring building approvals figures for August and the CoreLogic house price index for September. And other noteworthy Aussie releases this week will include August’s trade balance on Thursday and retail sales figures on Friday.

Ahead of the week long national holiday, the economic focus in China overnight was on the latest PMI surveys for September. And the government’s official release suggested little change in underlying conditions at the end of the third quarter. In particular, despite a modest rise on the month, the headline manufacturing index (49.8) remained in contractionary territory for the fifth consecutive month. Admittedly, this contrasted with the private sector Caixin measure, which showed the headline index rising 1pt to 51.4, a nineteen-month high. [But this survey is significantly smaller than the government’s and tends to focus more on SMEs.] Meanwhile, the government’s non-manufacturing PMI edged slightly lower in September, by 0.1pt to 53.7, leaving the quarterly average at its lowest for three years. But, overall, the composite PMI was little changed at 53.1, to leave the quarterly average broadly in line with the outturns in the first two quarters of the year.

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