With financial markets in China, Korea and Taiwan closed for the Lunar New Year holiday, it was inevitably a quieter end to the week for Asian bourses. Moreover, with the WHO having decided not to judge China’s coronavirus a global health emergency, at least for the time being, today provided an opportunity for investors to regain their poise after yesterday’s bout of risk aversion. So, those major stock markets that were open recorded a mix of modest gains and losses. Most notably, however, while Japan’s flash PMIs suggested recovery following the economic retrenchment after October’s consumption tax hike, the TOPIX could merely tread water, closing unchanged on the day.
In the bond markets, USTs reversed some of yesterday’s gains, with 10Y yields currently up to 1.75%, having troughed below 1.72% yesterday afternoon. European govvies have also similarly opened weaker. But while Japan’s latest inflation data broadly aligned with expectations and the yen depreciated somewhat, JGBs played catch up with yesterday’s events in Western markets, with 10Y yields down about 1bp to close to -0.03% for the first time in more than a fortnight. ACGBs also made modest gains, and broadly ignored the weak Aussie flash PMIs.
The flash PMIs will dominate the remainder of today’s dataflow. The euro area figures, due shortly, look set to show only limited improvement from December – while Germany’s composite PMI rose to its highest since August, from France’s fell back to its lowest since September. But the UK’s are likely to be the most important, with scope to have a significant bearing on the BoE’s monetary policy decision next week.
At face value, today’s Japanese inflation figures looked more encouraging than of late, offering some tentative support to the BoJ’s view that there is at least some upwards momentum in prices. Indeed, the annual rate of headline CPI increased a slightly stronger-than-expected 0.3ppt in December to 0.8%Y/Y, an eight-month high. When excluding the impact of the consumption tax hike and government education policies, headline inflation rose to 0.5%Y/Y, the highest since July.
However, the improvement in the latest month in part reflected higher fresh food prices (up 2.2ppt to 2.3%Y/Y). So when excluding such items, the BoJ’s forecast measure of core CPI rose a slightly softer 0.2ppt to 0.7%Y/Y (and 0.4%Y/Y when excluding the tax hike and government policies). Moreover, with energy inflation providing much of the remaining boost, the BoJ’s preferred new core CPI measure, which excludes fresh foods and energy, rose just 0.1ppt to 0.9%Y/Y in December. And when excluding the tax and other policy effects, this measure of core inflation was unchanged at 0.6%Y/Y.
Other sources of modest upwards pressure on inflation in December were hotel room charges, mobile phone handsets (the strongest year-on-year increase since May 2018) and golf clubs. But all of these items have been particularly volatile over recent months. And so, overall, no significant uptrend in underlying price pressures was discernible in today’s figures. Indeed, services inflation still remained very subdued at 0.2%Y/Y, while non-energy industrial goods inflation moved sideways at 2.1%Y/Y.
While energy inflation might well provide further modest support over the near term, risks to the inflation outlook remain skewed to the downside. Not least given the contraction in the economy in the final quarter of 2019 and likely subdued recovery, the output gap is likely to narrow further over coming quarters. And the introduction of free higher education fees from April will further weigh on inflation in the spring. Indeed, December’s outturn might well prove to be the peak for the time being, with our forecast for core inflation (excluding fresh foods) to move sideways through to April and then fall back below ½%Y/Y, where it will remain for the foreseeable future.
The flash Japanese PMIs pointed to recovery from the post-consumption tax drop in activity in Q4. The headline manufacturing PMI rose 0.9pt from December to 49.3, suggesting continued contraction in the sector but at the softest pace since August. Encouragingly, the detail reported a big rise of more than 2pts in the output index – the most in more than three years – to a twelve-month high of 49.3. And the new export orders index jumped more than 3pts to 50.1, the best reading since November 2018. The index for total new orders was also improved, albeit not quite so stellar (up 0.9pt to a five-month high of 47.6). But a jump in the employment index of more than 1pt to 52.0, the highest since April, pointed to more positivity in the sector.
The flash services PMIs were even more encouraging, with the business activity index rising 2.7pts – the most in almost five years – to 52.1, the highest since September before the consumption tax went up. Within the detail, the services new orders PMI rose 1.7pts to 53.3, the best since March. And the survey also suggested the biggest rise in jobs in the sector since May. So, looking at the manufacturing and services together, the composite PMI rose 2.5pts – the most in almost six years – to 51.1, the best since September and above the average for the first nine months of last year before consumption tax hike pushed the economy into reverse. And the composite new orders index rose 1.4pts, the most in 21 months, to 51.4, the best since May.
Ahead of the release of the euro area flash PMIs at 9am GMT, there was a welcome upwards surprise to Germany’s flash PMIs, which saw the manufacturing index rise 1.5pts in January to 45.2. Admittedly, this was still firmly in contractionary territory, but it was nevertheless the highest reading since last February. There was a similar improvement in the services PMI, which at 54.2 was the strongest for five months to suggest that the sector remains resilient to the weaknesses in manufacturing. As such, the headline composite PMI increased 0.9pt to 51.1, its highest since August and comfortably above the average through H219. And encouragingly, firms reported the first positive growth in new orders for seven months, and at the fastest pace since October 2018.
In contrast, however, France’s flash PMIs suggested no meaningful improvement in economic conditions at the start of the year. While the manufacturing PMI rose 0.6pt, at 51.0 it still fell short of November’s level and was close to the Q4 average. And the services PMI appeared to show strains from recent industrial unrest falling 0.7pt to 51.7, the lowest since September. As such, France’s composite PMI slipped 0.5pt to 51.5, similarly a four-month low.
Overall, therefore, the euro area figures seem likely to come in close to December’s levels. Last month, the euro area services PMI rose to a four-month high (52.8) to suggest steady growth in the sector. But the equivalent index for manufacturing (46.3) fell back below the average for the second half of the year, and thus close to the bottom of the range of the past seven years. That saw the composite PMI rise 0.3pt to 50.9, the highest since August but still consistent with a slowdown in economic growth over the fourth quarter as a whole.
The flash UK PMIs could be key to next week’s BoE rate decision. Reflecting the much-improved optimism reported in the CBI industrial trends survey earlier this week, the headline manufacturing PMI is expected to have risen, albeit to a level still consistent with contraction. The expectation is also for an improvement in the (far more important) services index, which would push the UK’s composite PMI back up from 49.3 in December to above 50 for the first time since August. The Bloomberg consensus forecast for the composite PMI of 50.7, however, would take it above last year’s average, albeit still one of the weakest readings since the Global Financial Crisis. And so, it might fail to prevent a rate cut at the next MPC meeting.
Today will also bring the market flash US PMIs for January, which are expected to show the composite PMI moving broadly sideways close to the 52.7 level – an eight-month high – reached in December. The Bloomberg consensus forecast for the manufacturing PMI is for no change at an expansionary 52.4, above the average last year. And the services PMI is expected to edge up slightly to 53.0, which would be the highest since July.
The preliminary Australian CBA PMIs for January were undeniably weak, although the short track record (the series only started in May 2016) calls for significant caution in their interpretation and explains the minimal market impact. Nevertheless, it’s worth noting that the composite PMI fell 1pt to reach a series low of 48.6, suggesting contraction in the economy at the start of the year. The weakness in manufacturing was relatively limited, with the respective PMI down 0.1pt to 49.1, nevertheless still a series low. But the services PMI fell a larger 0.9pt to 48.9, also a series low. Within the detail, output reportedly fell the most on the series while a sharp increase reported in supplier delivery times seemingly reflected the disruptive impact of the bushfires. But the survey indices for new orders and employment were consistent with growth and suggested optimism about the outlook.