UK GDP up in October despite the burgeoning 2nd wave of Covid

Chris Scicluna

Sterling slips and Gilts firm after leaders put back Brexit decision to Sunday
Sterling is currently down about 1 cent against the euro and about 1½ cents against the USD from yesterday’s highs (currently close to 0.908/€ and $1.331) to below its levels this time yesterday, and Gilts have made further gains (10Y yields are currently down about 3bps to below 0.23%) after last night’s Brussels dinner between Commission President von der Leyen and UK PM Johnson concluded with no evidence of progress. While, according to von der Leyen, they had “a lively and interesting discussion” and “gained a clear understanding of each other´s positions”, they acknowledged that they “remain far apart”.

So, von der Leyen and Johnson agreed that the negotiation teams should immediately reconvene, and set a new target to “come to a decision by the end of the weekend”. That would leave business with little more than a fortnight to prepare for the substantive but as yet still unclear changes that will govern roughly half of all UK trade from the start of January. An agreement – that would see the EU make concessions on the economically unimportant but politically sensitive issue of fish, to allow Johnson to give ground on the more technical but also more economically substantive issues related to the level playing field – is still possible. But while the negotiations might yet pass beyond Sunday’s new deadline in an attempt to find a compromise, it remains to be seen whether the politics will allow such a deal to happen. And if it doesn’t, sterling and gilt yields will have plenty further to fall.

Equity markets mostly slightly lower in Asia after tech selling hits Wall St
After opening in the black, a sell-off in the tech sector – which left the Nasdaq with a 1.9% loss – saw the S&P500 yesterday recede 0.8% from its previous day’s record high. The filing of an antitrust case against Facebook by federal and state officials helped to drive the tech-related weakness, together with a broker report questioning Tesla’s lofty valuation. Meanwhile, renewed doubts about the proximity of additional fiscal stimulus contributed to the broader pullback in stocks, which also saw both Treasuries and the greenback move off the session lows. So far today, US equity futures have since moved sideways but USTs are a touch firmer again, after the US reported more than 3,000 coronavirus deaths – the worst day since the pandemic began.

Against that backdrop, Asia-Pacific equities generally lost ground today, albeit with no more than modest losses in most major markets. Indeed, Japan’s TOPIX was down just 0.2%, even as daily new coronavirus cases surpassed 2,800 for the first time, with the MoF’s Business Outlook Survey pointing to a somewhat more positive mood in the corporate sector (see more on this and today’s other Japanese data). Moreover, after falling over the first three days of this week, including a 1.3% decline yesterday, China’s CSI300 was little changed. Meanwhile, ahead of today’s main event – the lunchtime announcements of further policy easing from the ECB – euro area govvies are a touch firmer (10YBund yields down almost 1bp to -0.615%) but euro area stocks appear little changed so far.

All eyes on the ECB as PEPP purchases and TLTRO support will be extended
Today’s principle focus will be the long-awaited announcement from the ECB of its latest monetary policy initiatives. Information from the published account of the last policy meeting in October, as well as repeated public commentary from various Governing Council members (both hawks and doves), have made clear that the PEPP purchases and TLTRO funding operations will be the main tools to be adjusted today. The influential Executive Board members Lane and Schnabel have suggested that the Governing Council will look to extend the current level of monetary accommodation to better match the duration of the pandemic, rather than increase the amount of current accommodation. But with the euro having appreciated almost 4% against the US dollar since Lagarde signalled at the last meeting that further easing will be on its way today, the ECB will not want to disappoint.

So, while we should not expect an acceleration in the current pace of PEPP purchases (roughly €15bn per week), we look for them to be extended as far as June 2022 (i.e. beyond the current consensus of end-2021). Such an extension would seem to merit an increase in the PEPP purchase envelope of up to €650bn (compared to the current consensus of €500bn), although the Governing Council would also then emphasise that the resulting €2.0trn envelope might not be used in full. In addition, the regular €20bn per month Asset Purchase Programme, which has been augmented by an additional envelope of €120bn to the end of this year, might be expected to continue into 2021. And the Governing Council could also announce further quarterly TLTRO-iii operations beyond next March, perhaps also into 2022, and extend the period beyond next June during which the minimum interest rate of -1.0% will be applied to all TLTRO-iii loans. Adjustments to other policy tools, including the tiering multiplier and collateral rules, cannot be ruled out. However, we certainly do not expect any changes to the ECB’s main policy interest rates.

The extension of the monetary policy measures will be justified by the ECB’s updated macroeconomic projections. Despite stronger-than-expected growth in Q3, the setback of a likely drop in GDP in Q4 and persistent weakness into Q1 means that full-year GDP forecasts for 2020 and 2021 will be little changed. So, the Q419 level of GDP will still likely not be reached before the second half of 2022. And while inflation will be expected to rise next year due to the end of the German VAT cut and higher energy inflation, the outlook will be weighed by persistent spare capacity and the stronger euro. Indeed, the ECB is likely to project that inflation will remain below its target of below but close to 2% over the horizon to end 2023. And the post-meeting statement will likely again flag concerns about the downside risks posed by exchange rate movements.

UK GDP up in October despite the pandemic’s 2nd wave and rising imports
Against the backdrop of the burgeoning second wave of Covid-19, and a gradual tightening of localised containment measures that month, UK GDP beat expectations by growing for a sixth successive month but by just 0.4%M/M in October. While that left it 23.4% above its April low, it was still 7.9% below the pre-pandemic level in February. Thanks in particular to a rebound in the transport equipment subsector, manufacturing production (up 1.7%M/M) made the largest contribution to growth in October, but was still 4.4% below February’s level. Construction output rose 1.0%M/M to be 6.4% below February’s level. And despite a renewed sharp fall in activity in hospitality, which subtracted 0.4ppt from GDP growth, services output rose 0.2%M/M to be 8.6% below the pre-pandemic level, supported not least by a revival in activity in the healthcare sector.

Meanwhile, due to weaker shipments of goods, total UK exports fell 1.1%M/M in October. But imports rose 0.8%M/M, due not least to increase imports of chemicals and clothing, to increase the trade deficit (ex non-monetary gold) by £0.9bn to £1.6bn. Looking through the monthly volatility, the total trade surplus, excluding non-monetary gold and other precious metals, decreased by £6.5bn to £0.8bn in the three months to October 2020, as imports (up £14.3bn due to a range of items including autos, capital goods and other miscellaneous items) outpaced exports (up £7.8bn, due largely to increased shipments of machinery and transport equipment) a reversal of the trend in the euro area, where exports continue to outpace imports.

Japan’s MoF Business Outlook Survey points to lift in next week’s key Tankan DIs
As far as economic data are concerned, the domestic focus in Japan today was on the MoF’s Business Outlook Survey, which usually provides a good predictor of key indicators in the more widely-followed and comprehensive BoJ Tankan survey – the next instalment of which will be released on Monday. In summary, in common with most other sentiment measures, the MoF survey points to some improvement in business conditions over the past three months, especially in the manufacturing sector. However, on net, only a relatively small percentage of firms expect conditions to improve further over the next two quarters. Moreover, firms’ responses regarding domestic economic conditions were generally weaker than for overall business conditions, indicating that the recovery in external demand is the key driver of the lift in sentiment.

Turning to the key figures, in net terms, around 12% of large firms reported improved conditions in Q4, with improved conditions cited by almost 22% of manufacturers but less than 7% of non-manufacturers. That improvement appears due solely to improved conditions in international markets, probably led by China, as only a net 5% of large firms reported an improvement in domestic economic conditions in Q4, again led by manufacturers. Meanwhile, both medium- and small-sized firms reported a further deterioration in domestic economic conditions in Q4. Looking ahead, on net just 3% of large firms indicated that they expected business conditions to improve in Q1, with even fewer expecting a further improvement in Q2. Moreover, a net 5% of large non-manufacturing firms indicated that they expect domestic economic conditions to weaken in Q1, before improving somewhat in Q2. Despite the economic downturn, the extreme tightness of the labour market prior to the pandemic means that a net 6% of large firms reported labour shortages in Q4, similar to last quarter. That shortage was restricted to non-manufacturers, with manufacturers largely satisfied with staffing levels.

Elsewhere in the survey, respondents also provided their fourth estimate of expected sales, profits and capex for FY20. Firms now forecast that business sales will contract 7.5%Y/Y, compared with 6.8%Y/Y in the previous survey. Manufacturers expect sales to decline of 8.4%Y/Y. Ordinary profits are forecast to slump almost 25%Y/Y in FY20 – fractionally worse than the previous survey – led by a 31%Y/Y decline in profits in the manufacturing sector. Reflecting the contraction in demand and profits, firms forecast that spending on plant and equipment and software will decline 7.6%Y/Y in FY20 – slightly worse than the 6.8%Y/Y decline indicated in the prior survey – led by a forecast 8.6%Y/Y decline in spending in the non-manufacturing sector. This week’s national accounts reported that spending on plant and equipment during the first two quarters of FY20 is already more than 12% below the average recorded in FY19, implying that firms anticipate a slight pickup in capex over the remainder of the fiscal year, which would be consistent with this week’s upbeat machine orders data.

Japan’s goods PPI unchanged in November; Tokyo office vacancies continue to rise
The BoJ’s producer goods price indices for November provided no surprises, with the headline index unchanged during the month and therefore down an as-expected 2.2%Y/Y – 0.1ppts weaker than last month. The PPI for manufactured goods was also steady during the month, with higher prices for non-ferrous metals offset by lower prices for fuel. Final good prices declined 0.2%M/M and 1.6%Y/Y in November, while final consumer goods prices were down 0.2%M/M and 1.8%Y/Y – in both cases exacerbated by a decline in import prices. Meanwhile, measured in yen – which appreciated slightly during the month – import prices increased 0.5%M/M in November, but were still down 10.8%Y/Y (energy prices remained down more than 32%Y/Y and chemicals prices were down 8.6%Y/Y). In other news, the Tokyo office vacancy rate increased a further 0.40ppts to 4.33% in November – the highest level since October 2015 and indicative of the continued fall-out from the economic pandemic, even with economic activity rebounding from its low-point.

November CPI report due in the US today
As far as US data are concerned, most attention today will centre on the CPI report for November. Daiwa America Chief Economist, Mike Moran, thinks that tame food and energy readings will constrain the headline index to a 0.1%M/M gain, but that the reversal of pandemic-related discounting will lead to a 0.2%M/M lift in the core index (the latter leaving annual inflation close to last month’s reading of 1.6%Y/Y). Federal budget data for November is also released today, which Mike expects will point to a monthly deficit of $US200bn – just slightly less than in November last year. Meanwhile, the weekly jobless claims report will be interest to see whether initial claims sustained the lower reading seen last week.

China’s credit growth stabilises at high level in November
While there were no major economic reports released in China today, late yesterday the PBoC released the money and credit aggregates for November which, in summary, continued to indicate robust support for economic growth. Aggregate financing increased CNY2.13trn, which was slightly ahead of market expectations and also a little above the same month last year. As a result, the outstanding stock of aggregate social financing increased 13.6%Y/Y, which was only fractionally weaker than last month. Growth in bank loans also slowed a negligible 0.1ppts to 12.8%Y/Y. Meanwhile, growth in M0 eased 0.1ppts to 10.3%Y/Y, but growth in M2 and M3 increased to 10.0%Y/Y and 10.7%Y/Y respectively.

Kiwi consumption edges higher in November helped by Black Friday sales
Today Statistics New Zealand released the Electronic Card Transactions report for November – a key timely indicator of consumer spending that captures all debit, credit, and charge card transactions with local merchants. Total spending at retail stores edged up 0.1%M/M, building on a 9.0%M/M rebound in October as pandemic-related restrictions were removed. Spending at core stores – excluding fuel and autos – increased 0.6%M/M and was up 3.3%Y/Y. Within the detail, Black Friday discounts drove a 7.8%M/M increase in spending on durables, which was also up 8.5%Y/Y. But after rebounding more than 15%M/M in October, spending on hospitality fell 6.7%M/M and was down 8.3%Y/Y – unsurprisingly, the only category of spending to be lower than a year earlier. 

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