Confidence slipped back at the start of the year

Emily Nicol
Chris Scicluna

Overview:
After yesterday’s bout of risk aversion triggered by concerns related to the spread of the new Chinese coronavirus, suggestions that this need not be a rerun of the SARS outbreak seem to have settled markets, which saw a revival of sentiment in Asia today. So, most of the major Asian stock indices rebounded today, with Hong Kong’s Hang Seng – which was worst hit yesterday – among the strongest performers (up 1.3% on the day). While the latest Japanese economic data confirmed a soft end to last year for department store sales and the government revised down its assessment of business investment, the Topix closed up 0.5%, fully reversing yesterday’s drop.

Despite the firmer showing for stocks, however, the major bond markets were unimpressed, e.g. with yields on 10Y USTs up only about 1bp to 1.78%, thus still a couple of bps down from this time yesterday. JGBs posted a mix of modest gains and losses across the curve. And while the latest Australian monthly consumer confidence survey was perhaps not quite as bad as might have been feared, ACGBs caught up with yesterday’s moves in the other major markets as yields dropped 3-5bps across the curve and the market-implied probability of an RBA rate cut early next month edged further above 50%.

In Europe, stock markets have opened higher and most euro area govvies are a touch weaker despite a softer French business survey this morning. But BTPs are significantly weaker (10Y yields so far up 5bps to 1.42%) on reports that Foreign Affairs Minister Luigi Di Maio could announce his resignation as leader of the populist Five Star Movement later today, in anticipation of a bad showing for the party in regional elections due on Sunday. If so, that move would seem likely further to destabilise the coalition government. And it could thus move Italy closer to an early general election, which would seem bound to bring the League’s Salvini back to power.

Japan:
The overnight release of Japan’s latest department store sales data offered the first insight into household spending in December. On the whole, these suggested a disappointing end to last year, with the year-on-year decline in like-for-like nationwide store sales moderating only slightly to -5%Y/Y. But there was a steeper pace of decline in sales of household goods (-6½%Y/Y) compared with November, while clothing sales remained weak (-8.2%Y/Y) as unseasonably warm weather seemingly weighed on retailing in the second half of the month. The annual drop in department store sales in Tokyo was less pronounced, likely supported by a reported pickup in sales to foreign visitors in the second half of the month.

Of course, department store sales account for only a fraction of total household expenditure. So, while today’s release supports our view that consumption contracted in Q4, the pace of decline is likely to be much smaller than that implied by such sales – indeed, the Cabinet Office’s synthetic consumption index (published on Monday) suggested that expenditure was on track for a drop of almost 2½%Q/Q in Q4, which would leave it down a little more than 1% compared with a year earlier, a significantly smaller pullback than that registered after the tax hike in 2014.

Elsewhere, the Japanese government left its overall economic assessment unchanged in the Cabinet Office’s latest monthly report, judging that the economy is recovering at a moderate pace while weakness in manufacturing is increasing. But it also flagged increased concerns about business investment. Indeed, while December’s report had merely cited weakness in machinery investment, the government now assesses that there is weakness in ‘some components’ of business investment. Overall, however, the government still judged total business investment to be increasing at a moderate pace, broadly in line with the assessment in the BoJ’s latest Outlook Report.

Euro area:
While yesterday’s ZEW survey suggested a significant rebound in optimism among market analysts about the euro area outlook at the start of the year, the business surveys usually offer a more reliable guide to economic activity. And the latest French business confidence survey – the first guide to the economic climate in January in the euro area’s second largest member state – suggested a slight softening of sentiment at the start of the year. In particular, the headline business climate index fell 1pt from a downwardly-revised reading for December to an eleven-month low of 104.0, suggestive of continued albeit relatively tepid economic growth. The deterioration was principally associated with retail and wholesale activity, while the business climate in services and construction was judged to be stable. And although conditions in manufacturing were assessed to have improved, this partly reflected the fact that the survey’s assessment of conditions in the sector in December was revised down to suggest a soft end to 2019. Meanwhile, the INSEE employment climate index deteriorated to an eight-month low, but at 105.2 this was still consistent with job growth.

Overall, the slight weakening in the INSEE business climate indicators should not come as a surprise in light of the ongoing dispute between unions and government over Macron’s pension reform proposals. Indeed, while public transport workers returned to work at the start of this week after six weeks of strikes, energy workers yesterday cut electricity supplies to parts of the Paris suburbs. And with the Council of Ministers set to discuss the final legal text of the reforms on Friday, the CGT union has called for protests across the country over the remainder of this week. Disruption looks set to continue for a while yet.

UK:
Today will bring further economic data for the Bank of England to chew as it considers the case for a rate cut at next week’s MPC meeting. In particular, the CBI’s latest industrial trends survey will provide an update on manufacturing conditions at the start of the year. While businesses are expected to be somewhat less downbeat about the outlook, the survey is also expected to show a further notable decline in new orders in January suggesting that production is likely to remain subdued at best. This morning will also see the release of December’s public finance figures, from which additional information might be inferred about the firmness of economic activity at year-end.

Australia:
In Australia, the overnight release of the Westpac monthly consumer confidence survey unsurprisingly saw sentiment slip back at the start of the year. But the 1.8% drop in the headline index to 93.4 was arguably smaller than expected, nevertheless still representing the second-lowest reading since mid-2015. Westpac also noted that the timing of this survey – conducted during the one week this month where there was widespread rain, which perhaps temporarily dampened somewhat the pessimism associated with the bushfires – likely limited the decline. Overall, the survey remained consistent with still subdued consumer spending at the turn of the year. And with households more downbeat about prospects for the economy over the coming twelve months – the relevant index fell 5.4% in January to 84.8, a 4½-year low and down 11½% compared with a year earlier – prospects for a recovery in consumption in the near term appear to remain limited.

Meanwhile, ahead of tomorrow’s ABS labour market report, today’s DEWR release of monthly skilled vacancy figures made for more positive reading than of late. In particular, vacancies rose for the first month in twelve in December (0.6%M/M), with the decline in November also revised away, boosted in part by an increase in community and personal services workers. Admittedly, this still left overall job vacancies down a sizeable 7.8%Y/Y. There was a double-digit annual decline in New South Wales. And job advertisements at the national level were still down compared with a year earlier for all eight occupational groups, with the steepest declines recorded for machinery operators (-14.2%Y/Y), sales workers (-12.3%Y/Y) and labourers (-11.8%).

US:
In the US, today will bring existing home sales figures for December, along with the FHFA house price index for November and the Chicago Fed national activity index for December.

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