No news is good news

Emily Nicol
Chris Scicluna

Overview:
Seemingly reassured by the absence of major news on the geopolitical front, and following yesterday’s gains on Wall Street (the S&P500 closed up just ¼% but the NASDAQ rose more than ½%), most major Asian stock indices rebounded today. With the yen also having reversed its appreciation made at the end of the last week (currently close to ¥108.3/$), the Topix opened higher and continued rising in the afternoon session to fully reverse yesterday’s loss, closing up 1.6% on the day. Korea’s KOSPI also erased yesterday’s loss with a rise of almost 1.0% while China’s CSI300 rose 0.75%.

In the bond markets, while some local headlines of Iranian sabre-rattling (suggestions of ‘thirteen retaliation scenarios’ and a ‘historic nightmare’ for the US) have given some support in the past half hour, USTs are still little changed from yesterday’s US close (10Y yields a little less than 1.80%). But JGBs played catch up with events yesterday, with yields opening higher and remaining thereabouts (2Y yields up about 3bps to -0.13%, with 10Y yields up about 1.5bps around -0.02%) despite some softer domestic Japanese economic data. European govvies have also opened a touch weaker ahead of this morning’s flash euro area inflation data, which are bound to report a jump at the end of last year. After last week’s significant downside surprise in the equivalent manufacturing survey, however, today’s principal data focus will be the US non-manufacturing ISM report, which are expected to report a pickup in December.

Japan:
Following yesterday’s downbeat manufacturing PMI survey, today’s final Japanese services PMIs for December provided for disappointing reading too. Indeed, contrasting with the modest increase reported in the flash estimate, the headline business activity index was downwardly revised by 1.2pts to 49.4, leaving it 0.9pt lower than November and the weakest reading for more than three years. And not least given the distortion to activity surrounding October’s consumption tax hike, this left the services PMI in Q4 almost 3pts lower than the Q3 average.

Given the weakness in the manufacturing output PMI (down 1.8pts in December to 47.1), the composite PMI was similarly revised lower from the preliminary release by more than 1pt to 48.6, the lowest for more than 5½ years and marking the third consecutive sub-50 reading. As such, the average composite PMI in Q4 stood at 49.2, a decline of more than 2pts and consistent with contraction in the final quarter of 2019. Of course, given October’s tax hike and the disruption caused by the super-typhoon, the economy was expected to have gone into reverse. But the decline in the composite PMI in Q4 was less than half that seen in the quarter following the 2014 tax hike, suggesting a more modest contraction this time around (GDP declined 1.9%Q/Q in Q214).

Admittedly, risks to the near-term economic outlook remain to the downside – indeed, while there was a modest improvement in the composite new orders PMI (albeit by less than initially estimated) this still implied no growth at the turn of the year. And despite the tax hike, the PMIs showed still subdued price pressures – indeed, the output price PMI fell 1.1pts to 49.4, the lowest since September 2016.

Euro area:
Today will bring several key euro area releases, including the flash CPI estimate for December. The core measure is expected to remain unchanged at 1.3%Y/Y. But higher energy inflation will push the headline rate up 0.3ppt to 1.3%Y/Y, and events in the Middle East and their repercussions for the oil price obviously represent an upside risk to the near-term inflation outlook. This morning will also bring euro area retail sales figures for November. Following yesterday’s German figures – which showed sales increasing by more than 2%M/M – we expect euro area sales to have more than reversed the 0.6%M/M drop recorded in October.

Turning to politics, after the first vote at the weekend, Spain’s parliament is scheduled to vote again today on the establishment of a new minority left-wing coalition government led by the Socialists (PSOE) and also featuring the populist Unidas Podemos. PSOE leader Pedro Sanchez on Sunday won 166 votes, with 165 votes against, 18 abstentions and one MP off sick. As such, he appears on track to win the simple majority required tomorrow to form the new government, although one or two changes of heart (or further cases of illness) could yet upset his plans.

US:
In the US, following last week’s disappointing manufacturing ISM survey for December, a key focus today will be the equivalent non-manufacturing indices. Contrasting with the marked deterioration in the manufacturing survey, the headline non-manufacturing index is expected to have largely reversed the decline seen in November to remain consistent with ongoing expansion. Final trade and durable goods orders figures for November are also due.

Australia:
In Australia, today brought the ANZ job ad figures for December, which appeared to be negatively impacted by the escalation of the bushfire crisis. Indeed, advertisements fell for the third consecutive month and by a sizeable 6.7%M/M – the largest monthly drop since May, which was impacted by public holidays and the election – to their lowest level since April 2016. This left job advertisements down 18.8%Y/Y in December, the steepest annual drop for 6½ years, suggesting a further weakening in employment growth over the near term at least.

Categories : 

Back to research list

Disclaimer

This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.


Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.