Asian markets mixed as US equity futures backtrack on earlier gain
While Wall Street was initially weighed by coronavirus worries and a rise in initial jobless claims, the prospect of new Congressional fiscal stimulus talks appeared to lift sentiment later on, with a rise in technology stocks helping to deliver a 0.4% gain in the S&P500 and an even larger 0.9% rally in the Nasdaq. Unfortunately, that positivity evaporated soon after Wall Street closed once Treasury Secretary Mnuchin released a letter that he had sent to the Fed seeking to expire some of the Fed’s emergency lending facilities on 31 December and so allowing the return of $455bn of unallocated funds. A short statement from the Fed made clear that it would prefer to retain the full suite of its current emergency facilities, implicitly arguing that any new fiscal measures should be funded with additional money rather than savings elsewhere.
So, as we write S&P futures are down about 0.5% and the 10Y Treasury yield is down from the New York close near 0.83%. Futures were even weaker at one point after California announced new restrictions in response to growing coronavirus cases (a month-long 10pm-5am curfew on nonessential work and gathering, effective tomorrow, which will affect the vast majority of its population). Meanwhile, the US election saga continued with the state of Georgia’s recount favouring Biden by more than 12,000 votes. The state will likely certify the result today after a legal challenge to certification was thrown out of court.
In Europe, perhaps unsurprisingly, yesterday evening’s tele-summit inevitably failed resolve the impasse on the EU budget and recovery funds – given the huge amount of money at stake for the obstreperous Hungary and Poland (about 11% of GDP for each of them from the recovery funds alone), however, we continue to expect them to fall in line next month. And the news from the Brexit talks this morning also suggests no breakthrough yet, with EU ambassadors reportedly briefed that the UK has yet to make meaningful concessions on the key outstanding issues of the level paying-field, governance and fish.
Against that background, much like yesterday, equity markets have had a mixed session in the Asia-Pacific region. In Japan the TOPIX closed with a minimal 0.1% gain, even as the November PMI report took a backward step (more below). In coronavirus news, Chief Cabinet Secretary Kato reassured investors that a state of emergency was not presently required. And while Kato emphasised that maximum caution was needed to avoid the virus spreading, the Foreign Ministers of Japan and China are expected to discuss the resumption of business travel when they meet next week. In Australia the ASX200 closed down 0.1% even as retail sales were revealed to have rebounded in October and as the state of South Australia said that it would cut short its planned 6-day lockdown amid signs that its recent cluster of coronavirus cases was under control. However, ACG yields moved slightly lower in line with the Treasury market. In other Asian market news, clearly concerned about the strength of the baht, the BoT announced that it would ease restrictions on capital outflows by the end of this month, including a substantial increase in limits for individual and institutional investment in foreign equities. The BoT also said that it would allow foreign equities to trade in Thailand without limits.
No surprises in Japan as lower food and energy prices drag inflation to 4-year low
As is usually the case, today’s national CPI contained a very similar message to the earlier-reported advance CPI for the Tokyo region, with this month’s outcome dominated by lower prices for food and energy. After adjusting for seasonality, the headline CPI index declined 0.4%M/M in October – an outcome that was in line with market expectations. And with the annual calculation no longer impacted by the first round effect of last year’s hike in the consumption tax or the partially-offsetting introduction of free higher education, annual inflation fell to -0.4%Y/Y from 0.0%Y/Y previously – the lowest reading since September 2016. Fresh food prices fell 3.8%M/M in October – moderating their annual increase to 5.1%Y/Y – resulting in a 0.5%M/M decline in overall food prices. Meanwhile, energy prices fell 1.5%M/M – petroleum, gas and electricity prices all moved lower – extending their annual decline to 5.7%Y/Y.
Given those movements, the core index forecast by the BoJ, which excludes only fresh food prices from the CPI, fell 0.2%M/M causing annual inflation on this measure to weaken a further 0.4ppts to -0.7%Y/Y (also in line with market expectations). The narrower measure of core prices preferred by the BoJ – which excludes both fresh food and energy – was unchanged in the month, causing annual inflation to weaken 0.2ppts to -0.2%Y/Y (rounding 0.1ppts above market expectations, but essentially unchanged from last month after taking account of the removal of the impact of the consumption tax hike). The narrower measure of core prices used in many other countries, which excludes all food and energy prices, fell 0.1%M/M, causing annual inflation on this measure to weaken 0.1ppt to -0.4%Y/Y.
In the detail, goods prices increased 0.1%M/M in October after excluding the impact of lower fresh food prices, but were unchanged from a year earlier. Industrial product prices increased 0.3%M/M but were down 0.3%Y/Y due to a 7.8%Y/Y decline in the price of petroleum (non-energy industrial goods prices increased 0.8%Y/Y). Services prices were unchanged during the month but declined 0.8%Y/Y. Reflecting the Government’s latest industry subsidy, the prices of meals outside the home fell 2.0%M/M, while the extension of the ‘Go-to-Travel’ campaign to Tokyo contributed to a further 6.0%M/M decline in hotel charges (now down 37%Y/Y). Naturally both the Government and BoJ are far more concerned with supporting a recovery in the real economy than about the impact of those policies on short-term developments in inflation, but current inflation readings clearly won’t help to lift inflation expectations to levels consistent with policymakers’ longer-term objectives.
Japan’s flash PMIs take a step back, pandemic worries likely at play
Today’s other important Japanese economic news concerned the flash PMIs for November – released a day earlier than that for other major countries due to this coming Monday’s local national holiday. Disappointingly – but perhaps not too surprisingly – the composite PMI output index declined 1.0pts to 47.0, thus bringing to an end the uptrend that had emerged from the April low. Moreover, unfortunately, the more forward-looking composite new orders index declined by an even greater 1.7pts to 46.1, so more than undoing the encouraging improvement seen in September and leaving the index almost 3pts beneath its historic average. The composite output prices index also declining, falling 0.8pts to a 3-month low of 48.8.
The largest contribution to the weakening of the composite index came from the services sector, which may well reflect renewed concerns about the pandemic in light of sharply rising case number both at home and abroad (albeit that Japan’s case numbers remain very low compared to other major countries). The headline business activity index declined 1.0pt to 46.7 in November, thus coming in slightly below where it had stood back in September. Disconcertingly, the new orders index slumped 2.5pts to 45.3, leaving it barely about the August reading. Similarly, the business expectations index fell 3.4pts to 53.3, thus completely erasing last month’s gain. The employment index also declined to a 3-month low. The news on inflation was no better, with the input prices index falling 0.5pts to 48.8 and the output prices index falling 0.3pts to 48.9.
Conditions proved somewhat more resilient in the factory sector, although the headline manufacturing PMI still fell 0.4pts to 48.3. In the detail, the output index declined 1pt to 47.6. Moreover, probably reflecting pandemic developments in the US and Europe, the new export orders index declined 1.8pts to 48.8 (albeit still 1.5pts firmer than in September). Domestic conditions appear to have been less affected, with the new orders index falling just 0.1pt from last month’s 15-month high to 47.6. The inflation news from the factory sector was sharply weaker, however, with the input prices index falling 1.0pts to 51.0 and the output prices index falling an even greater 1.9pts to a 5-month low of 48.5.
UK retail sales up again as consumers start Christmas shopping early
UK retail sales continue to beat expectations. While a decline had been widely anticipated, sales rose for a sixth successive month in October and by a firm 1.2%M/M to be up 5.8%Y/Y and 6.7% above February’s pre-pandemic level. Within the detail, there was further solid growth in sales at household goods stores (3.2%M/M) and department stores (3.1%M/M) as well in non-store (i.e. largely online) retailing (6.4%M/M), with the ONS reporting feedback from retailers that many households had started Christmas shopping early this year – echoing the assessment made earlier this week by the Bank of France when reporting its own survey of French retail sales.
Of the major categories of sales, only food (-0.3%M/M), clothing (-1.2%M/M) and sales at petrol stations (-0.2%M/M) fell last month. And only sales of clothing (-13.8%) and auto fuel (-8.8%) remain down on February’s pre-pandemic level, as consumers continue to buy more goods with the money saved that would otherwise be spent on services. Reflecting the trend for online shopping, meanwhile, non-store sales were up almost 45% from February.
Looking ahead, however, the closure of non-essential retailing in England from early November, as well as the likelihood of payback for early Christmas shopping, means that the remainder of Q4 could well be significantly softer for sales. Indeed, Springboard’s footfall index was down 56%Y/Y in the week ending 15 November, and it would be no surprise to see sales drop this month back well below the pre-pandemic level. But the drop in sales will be nowhere near as steep as those seen during the first lockdown, e.g. when sales fell 18%M/M in April, as consumers exploit new ways to purchase goods (e.g. via click-and-collect services). And while the steady rise in joblessness will also likely weigh on spending into the New Year, retail sales look set to rebound back above the pre-pandemic level and stay there as soon as the English High Street reopens.
Euro area consumer confidence set to drop as pandemic intensified
After yesterday evening’s EU leaders’ teleconference predictably failed to resolve the impasse over the forthcoming 7-year budget and recovery fund – we expect this to be sorted at the next summit on 10 December - the week’s euro area dataflow concludes today with the Commission’s flash estimate of consumer confidence in November. Due to the rising second wave of the pandemic, this indicator fell in October to its lowest level since May. And given that the spread of Covid-19 continued to intensify over the first half of this month, placing significant pressure on health services and forcing many member states to increase the stringency of restrictions on activity, a further fall in November seems inevitably. Other data to be published include Italian industrial orders and sales figures for September. And we will also hear once again from ECB President Lagarde and Vice President de Guindos.
China’s benchmark lending rates unchanged as expected
Today the PBoC announced that the 1-year and 5-year prime lending rates – which provide the respective benchmark for new loans to businesses and households – would remain at 3.85% and 4.65% respectively. This outcome was expected, especially following the decision earlier this week to maintain the Medium-term Lending Facility Rate at 2.95%. Indeed, these rates have been unchanged since they cut in April, with the PBoC clearly satisfied with how the economy is recovering in the wake of the pandemic.
Australian retail sales rebound as restrictions begin to ease in the state of Victoria
Today the ABS released its preliminary estimate of retail sales for October, based on data provided by businesses that make up about 80% of total turnover. Those data indicated that spending increase 1.6%M/M, more than erasing the 1.1%M/M decline in September to leave spending up 7.3%Y/Y – growth that continues to reflect the diversion of consumer spending towards goods and away from the services that sit outside the retail sector. Not surprisingly, growth was led by the state of Victoria, where the reopening of stores saw spending rebound 5.2%M/M. Even with that growth, spending in Victoria remained down 5.7%Y/Y, with spending outside Victoria up 11.9%Y/Y. The re-opening in Victoria also meant that cafes, restaurants and takeaway food services were at the forefront of growth. Spending on household goods retailing was reported to be relatively unchanged, thus maintaining the considerable strength reported during the pandemic (spending was up more than 16%Y/Y in September).