Stock indices soar with huge sector rotation on vaccine news, USTs sink
While markets were already in a ‘risk-on’ mood following the weekend’s US election developments, yesterday’s news from Pfizer and BioNTech provided an immediate feel-good factor, not least in pandemic-stricken Europe. The firms announced that trials presently indicated their candidate vaccine was more than 90% effective at preventing coronavirus – labelled an extraordinary result by leading infectious diseases experts and boding well for competing vaccines that use a similar technology. The vaccine will be subject to continuing trials – including tests for safety – and there remain questions about the longevity and nature of the immunity offered. But the very promising news caused the Stoxx60 to surge 6.4% on Monday, with double-digits gains seen in the energy, aerospace and banking sectors.
In the US, the DJI had increased by over 5½% at one point. But late comments by Senate Majority leader McConnell – who again called for a smaller fiscal stimulus – saw the advance pared to 3%. The gains were led by double-digit price growth for the likes of American Express, JP Morgan, Boeing and Disney. Of course, Pfizer was a beneficiary too with its stock rising 7.7%. But as investors moved back into stocks that suffered during the pandemic, they moved out of those that had benefited from the ‘stay-at-home’ economy. The big technology stocks were under particular downward pressure, so that the Nasdaq actually closed down 1.5% and the broader S&P500 increased just 1.2% – the latter about in line with where futures had been trading prior to Pfizer’s announcement.
In the bond market the 10-year US Treasury yield surged as much as 16bps to 0.96%, surpassing the US Election Day high, before falling back to 0.91% as US equities came off their highs. Unsurprisingly crude oil was also a major beneficiary, rising to $41/bbl before settling back a dollar lower. In the FX markets, the US dollar surged against the euro and yen – a boon for Japan’s MoF which had been getting increasingly uncomfortable about recent exchange rate developments – but was little changed against the Antipodean currencies, with Australia and New Zealand both standing to benefit significantly if they can re-open their borders to international tourism.
Since the Wall Street close US equity futures have drifted a little lower still. However, stock markets have generally rallied across the Asia-Pacific region, with the exception of China and South Korea where markets were weighed down by the weakness in technology. In Japan the TOPIX increased 1.1%, helped by both a weaker yen and the arrival of the long-expected news that PM Suga had ordered the compilation of a third supplementary budget to help support the economy’s recovery. Chief Cabinet Secretary Kato gave no indication of the likely size of this package, but it seems reasonable to suppose that it will prove to be smaller than the first two supplementary budgets (which were ¥25.7trn and ¥31.9trn respectively). And a little after markets closed, the BoJ announced a special new deposit facility to support the regional banks, with incentives to strengthen their financial foundations (e.g. via mergers and/or acquisitions) – see details below.
Elsewhere, Australian markets were supported by further signs of a lift in business and consumer confidence and the Government’s announcement of a 3-month extension to the JobKeeper wage subsidy programme, albeit paid at a lower rate. Weighing on stocks was a rise in Aussie bond yields with the 10Y ACG yield increasing 15bps to a more than 1-month high of 0.92%.
BoJ announces new Special Deposit Facility to assist regional banks
A short time ago the BoJ announced that at a regular meeting the Board had decided to introduce a “Special Deposit Facility to Enhance the Resilience of the Regional Financial System” – a measure that seeks to chime with a key policy objective of Prime Minister Suga. According to the BoJ statement, the new facility aims to encourage regional financial institutions' initiatives to strengthen their long-term business foundations and thus financial stability, while at the same time allowing them to support households and business impacted by the pandemic. According to the BoJ the facility will be a 3-year temporary measure (for FY20-22) and will pay an extra 0.1% interest on current account balances held by qualifying regional banks and shinkin banks (i.e. in addition to the tiered remuneration in the Complementary Deposit Facility). Those institutions wishing to have their excess reserve balances additionally remunerated will need to submit a plan of their "Initiatives to Strengthen Business Foundations" to the BoJ in advance and periodically report the progress to the BoJ.
To be eligible to receive the additional remuneration banks need to have met one of two tests. First, they need to have reduced their overhead costs (excluding depreciation) by a proportion of gross profits (excluding realized gains/losses on bond-holdings, gains/losses from investment trusts due to cancellations, and interest income paid in the Special Deposit Facility). This ratio is required to decline by 1% or more in FY20, 3% or more in FY21 and 4% or more in FY22. Second, for those banks that cannot meet this test – perhaps due to pressures on profits caused by the economic impact of the pandemic – they can still become eligible for the remuneration by reducing their overhead costs. In this case banks need to reduce their overhead costs by 2% or more in FY20, 4% or more in FY21, and 6% or more in FY22.
Japan’s Economy Watchers cautiously upbeat; bank lending growth slows
Today the Cabinet Office released its Economy Watchers Survey for October, which provided broadly upbeat news about conditions last month. After improving sharply in September, this month the survey pointed to another large lift in sentiment regarding the recent performance of the economy. Indeed, the headline current conditions DI recorded its 6th consecutive increase, rising a much stronger-than-expected 5.2pts to 54.5 – the highest reading since January 2014.
Encouragingly, sentiment improved substantially across both the household and business sectors, with the former index rising 4.8pts to 55.1 and the latter index up 5.6pts to 53.0. Within corporate sector the largest improvement was evident in the previously lagging non-manufacturing sector, consistent with a more optimistic assessment of household retail demand. Looking ahead, and sounding an important note of caution, it appears that respondents were doubtful that much of the recent improvement would be sustained. The overall expectations index increased a much more modest and weaker-than-expected 0.8pts to 49.1 – albeit the best reading since November 2018. And while the overall household- and corporate-based expectations indices increased modestly, confidence was in fact slightly weaker amongst manufacturers than a month earlier – the latter perhaps reflecting news of surging coronavirus cases offshore.
In other economic news, the BoJ reported that total new bank lending declined 0.2%M/M in October, causing annual growth to slow to 6.2%Y/Y from 6.4%Y/Y previously. Lending by the major city banks – which had increased sharply at the onset of the pandemic, as firms sought to bolster liquidity – fell by a further 0.4%M/M, causing annual growth to slow 0.6ppts to 6.7%Y/Y. By contrast, new lending by the regional banks was unchanged during the month, causing growth to slow fractionally to 5.2%Y/Y. On the other side of the ledger, after reaching a record high last month, growth in bank deposits eased only fractionally to 9.0%Y/Y, suggesting ongoing precautionary behaviour by households.
UK redundancies in record jump ahead of government wage subsidy U-turn
Had the UK government not signalled to firms that its Job Retention Scheme was to be brought to an end last month – a policy that was subsequently reversed in the face of the all-too-predictable second wave of pandemic – today’s labour market report might not have been quite so grim. But for many firms, the repeated messages that the wage subsidies would be replaced with a less generous scheme clearly encouraged them to press ahead with job cuts.
This morning’s data showed that redundancies rose a record 181k in the three months to September to a series high of 314k, thus beating the previous high recorded in the aftermath of the Global Financial Crisis in 2009. In addition, the unemployment rate in the three months to September rose a steeper-than-expected 0.7ppt from the prior quarter to 4.8%, 0.9ppt above the level a year earlier. The employment rate fell 0.6ppt in the three months to September from the previous quarter to 75.3%, 0.8ppt below the level a year earlier. And more timely data suggest that the number of people in work continued to decline last month, with 33k fewer people in payrolled employment than in September leaving the number down 782k from March.
More positively, at least the claimant count – which includes those working on low incomes or hours as well as those who are not working – dropped slightly in October to 2.6mn, with the equivalent rate down 0.1ppt to 7.3%. The latest vacancy data also continued to improve, with the total of 525k in the three months to October up 146km from the previous quarter but still down 278k from a year earlier. In addition, with the return of some workers from furlough, and thus an increase in total hours worked (up a record 9.9% in the three months to September), annual growth in employee pay also improved. Growth in average weekly earnings in the three months to September rose 1.2ppts to 1.3%Y/Y to be up 0.5%3M/Y in real terms. And, excluding bonuses, growth in earnings rose 1.0ppt to 1.9%3M/Y. Of course, pay growth continued to vary significantly by sector. The public sector saw strong growth in total pay, up 3.7%3M/Y. In contrast, negative growth continued to be registered in construction, wholesaling, retailing, hospitality and manufacturing.
Record jump in French unemployment but manufacturing maintains uptrend
French unemployment also increased more rapidly than expected in Q3, with the number of unemployed people on the ILO measure up a record 628k to 2.7mn. As a result, the equivalent unemployment rate leapt 1.9ppts from Q2 to 9.0%, to be 0.9ppt above the pre-Covid level in Q419. That, however, followed a misleading decline of 0.7ppt in Q2, which reflected the large number of workers not looking for work due to the pandemic. Indeed, data released previously showed that private payroll employment rose by 1.8%, or 344.4k, in Q3. Following 491.6k net job losses in Q1 and a further 158.4k net job losses in Q2, however, it was still down 214k (or 1.1%) from a year earlier at a level equivalent to that seen two years ago.
Following Friday’s report of moderate further expansion in German industrial production
in September, today’s equivalent data from France confirmed ongoing growth too. In particular, French manufacturing output rose 2.2%M/M that month to be down 6.0%Y/Y and 5.5% below February’s pre-pandemic level, thus now reversing more than 85% of the initial peak-to-trough decline. Within the detail, production of transport equipment (including autos) accelerated 8.8%M/M, albeit remaining 12.1% below February’s level. And production of machinery and equipment rose 3.1%M/M to be down 6.7% from the pre-lockdown level. However, French construction fell a steep 8.4%M/M to be down 7.0% from February’s level. Nevertheless, over Q3 as a whole, French construction activity leapt 40.1%Q/Q while manufacturing was up 22.7%Q/Q, with transport equipment output up a whopping 58.3%Q/Q. The equivalent Italian data will be released shortly.
China’s inflation remains soft despite recovering economy as pork prices fall
While China’s economy is experiencing a solid recovery in activity, once again the latest round of monthly inflation data has proved weaker than expected. The headline CPI fell 0.3%M/M in October, which combined with base effects meant that annual inflation fell by a steep 1.2ppts to 0.5%Y/Y – the lowest reading since October 2009 and 0.3ppt below market expectations. However, all of the decline in annual inflation could be attributed to food prices, where inflation eased to 2.2%Y/Y from 7.9%Y/Y previously. Of particular note, pork prices fell 7.0%M/M, causing annual inflation to slump to -2.8%Y/Y from 25.5%Y/Y previously. Non-food prices increased 0.1%M/M – the third consecutive month of positive growth – but this simply left these prices unchanged from a year earlier. The core CPI – ex food and energy – also increased 0.1%M/M, but this left annual inflation at the 10-year low of 0.5%Y/Y for a fourth consecutive month.
Meanwhile, the inflation pipeline was also more subdued than the market had expected with the PPI output index unchanged in October and so falling 2.1%Y/Y for a second consecutive month. The PPI for consumer goods again fell 0.1%M/M, resulting in an annual decline in prices of 0.5%Y/Y too – the weakest reading since January 2016. As with the CPI, the weakness during the month was led by a decline in food prices. Prices for durable consumer goods were steady in the month but still down 1.8%Y/Y.
Aussie business conditions improve further but firms still cautious
With coronavirus back under control and monetary and fiscal policy providing substantial support to the economy, Australian business sentiment improved in October. The NAB Business Survey headline confidence index increased 9pts to +5, marking the highest reading since May 2019. And the closely-watched business conditions index edged up to +1, which was the highest reading since last December but still about 5pts below the historic average. In the detail the trading activity index increased to the highest level since April 2019. However, the capex intentions index was steady at -4 and the employment index improved only fractionally to -5, indicating continued caution about the economic outlook. The inflation news remain weak, with firms reporting a 0.1% decline in average selling prices over the past three months – now negative for 7 of the last 8 months. Labour costs were reported to have increased 0.4% over that period – the first positive reading since February but still a soft result by historic standards.
In other news, the ANZ-Roy Morgan consumer confidence index jumped 3.2pts to 103.1 last week. This marked the 10th consecutive lift in confidence which is now at the highest level seen since the first week of March. Consumers were more positive about recent developments in their financial situation and, encouragingly, this caused a very sharp lift in intentions to purchase major household items, with the relevant index also rising to its highest level since early March.
Kiwi retail spending surges in October as pandemic restrictions lifted
With Auckland moving to the lowest pandemic alert level on 8 October, Kiwi consumers celebrated with some concerted retail therapy in October. Overall retail spending surged 8.8%M/M – this following a 5.4%M/M lift in September – to be up 9.4%Y/Y. Core spending – which excludes fuel and auto purchases – increased an even stronger 9.3%M/M and 11.2%Y/Y. The strongest gains were seen in the apparel and hospitality sectors, though spending in the former was up just 2.3%Y/Y despite rising 15.1%M/M – an underperformance that reflects the continued closure of the border to foreign tourists.
US data flow remains light today ahead of Veterans’ Day holiday
The only economic reports due in the US today are the NFIB survey of small business optimism for October – which last month had seen confidence recover to almost pre-pandemic levels – and the JOLTS survey for September.