US election outcome uncalled but incoming counts mostly favouring Biden
With the Fed providing no major surprises following the latest FOMC meeting (see below) the principal focus for markets has remained on the US elections. Counting has continued and the outcome of the vote for the Presidency is still uncalled by any of the major US networks. Indeed, no further states have been called for either candidate, so as things stand it remains the case that Biden has won 253 Electorate College (EC) votes, while Trump has won 214 – both still short of the 270 votes needed to claim victory.
However, despite seeing his lead shrink in Arizona, Biden appears to have made some further progress in his bid for victory (reflected in his lead in the nationwide popular vote, which has now surpassed 4 million). Sadly, this prompted a clearly agitated President Trump to hold a press conference in which he made comments that were even more preposterous than those made previously. Trump said that he had won the election easily “if you count the legal votes”, adding that “If you count the illegal votes, they can try to steal the election from us”. Indeed, without citing any evidence, Trump said there had been “tremendous corruption and fraud”, accusing Democratic voters, vote counters and officials alike. And Trump repeated that he would be taking the fight to Supreme Court to get the result that he is seeking.
Turning to the current state of play, in Pennsylvania (20 EC votes) Trump’s margin has continued to narrow sharply and is now just over 18,000 with roughly 300,000 votes still be counted. The count is progressing – with Biden picking up more than three-quarters of the postal votes – and the outcome here may become clear later today, even though the count will continue into the weekend. Recall that a win for Biden in Pennsylvania would gave him the Presidency regardless of the outcomes elsewhere.
Elsewhere, Trump’s advantage in Georgia (16 EC votes) has declined to less than 1,300 with fewer less than 15,000 votes still to be counted. A recount here seems certain, so the outcome may not be called for weeks. In Nevada (6 EC votes) Biden has slightly stretched his lead to around 11,000 with about 260,000 votes outstanding, with a further update expected in the morning local time. More positively for Trump, while Biden remains ahead in Arizona (11 EC votes), his lead has narrowed further to just over 47,000 with around 285,000 votes uncounted. According to officials, a ‘good indicator’ of the final count is expected by the end of today but counting will continue into the weekend. Trump’s lead in North Carolina (15 EC votes) is unchanged at 72,000 with 95% of the vote counted. Likewise there has been no update in Alaska, where Trump has a healthy lead with 56% of votes counted.
In the Senate race, as things stand the Democrats continue to have a net gain of just one seat. But it now appears possible that both Georgia seats will go to run-off elections on 5 January. Republican David Perdue has a 2ppt lead over the Democrat challenger but his share of the popular vote has nudged fractionally below 50% which – if sustained – would under Georgia law trigger a run-off election between the top two candidates. This would leave open the possibility of these seats eventually going to the Democrats.
Equity rally continues as investors await final count and Trump’s response
After rallying 2.2% on Wednesday, the S&P500 posted a further 2.0% advance yesterday – with the Nasdaq again outperforming with a 2.6% gain – as investors appeared to factor the formation of a government that would be restrained from implementing new taxes or regulations. The risk-on tone saw Treasury yields lift a little from their post-election lows – the 10Y yield rising to 0.77% – with no major reaction to the Fed’s post-FOMC decision and commentary, which proved much as expected. After declining early in European time, the US dollar stabilized.
Since the close, S&P futures have weakened by around ½% (and Nasdaq futures by more than that) as we write – clearly not helped by Trump’s inflammatory comments – and this has weighed somewhat on equity markets across the Asia-Pacific region. In Japan – where stronger-than-expected household spending and labour income data offered positive support (see below) – the TOPIX still managed to increase 0.5%, while Australia’s ASX200 enjoyed a slightly larger advance. However, in China, where investors await tomorrow’s trade report, equity markets are little changed, while a modest loss has been seen in Singapore.
Fed leaves policy settings steady, restates easing bias and the need for fiscal support
Turning to the Fed, as was widely expected, at its latest meeting the FOMC decided to retain its fed funds target range at 0-0.25% and make no changes to its asset purchase programme. And there were no material changes in the post-meeting press statement from that issued after the FOMC’s mid-September meeting, with the committee repeating its pledge to further adjust policy if that is required to achieve its goals.
During his post-meeting press conference Chair Powell noted that while the economic recovery had exceeded expectations so far, ongoing monetary and fiscal support was likely to be required to support the recovery. Regarding monetary policy, Powell said that the committee may reach a view at some point that more stimulus was required, but said that at present members were comfortable with the current asset purchase programme. Further fiscal support – which he noted does seem likely no matter the election outcome – was described as essential.
Powell expressed some considerable concern about the spike in coronavirus cases in the US and Europe and stated that getting the virus under control was critical to the economic outlook. However, he did say that the committee perceives the negative tail risks around the outlook to have diminished given advances in the treatment of the virus and progress towards a vaccine. Finally, Powell announced that from the December meeting the full package of Summary of Economic Projections (SEP) materials will be released immediately at the time of the policy decision and the package will include charts illustrating how participants’ views on the balance of risks around the outlook have evolved over time.
US employment report an additional focus today – labour market recovery likely continued
On the data front, today sees the release of the US employment report for October. According to Bloomberg, analysts expect a further 585k increase in non-farm payrolls in October – slightly lower than foreseen at the beginning of the week, perhaps reflecting some disappointment with Wednesday’s ADP employment report and the softening of the employment component in the services ISM. If realized, it would be the smallest increment since the economy began recovering from the 21.8m jobs that evaporated in April. However, Daiwa America’s Mike Moran has been more upbeat, predicting a rise of 900k as the sharp decline in the number of individuals receiving unemployment benefits suggests that many workers were recalled to their previous jobs or found other work. The unemployment rate is likely to have declined, but likely at more than 7½% it would still be more than double the pre-pandemic level.
German IP rises 1.6%M/M in September, disappointing expectations and still down 7.3%Y/Y
A short time ago we learned that Germany’s IP increased a disappointing 1.6%M/M in September. And while growth in August was revised up 0.7ppts to 0.5%M/M, the 7.3%Y/Y decline in September was still deeper than the market had expected. Nevertheless, IP growth in Q3 as a whole of 10.7%Q/Q was not to be sniffed at, with leading indicators and a positive carry-over effect pointing to solid further expansion in Q4.
Within the detail, the energy sector weighed on output during the month – falling 2.5%M/M – but production in the manufacturing and mining sectors increased a somewhat firmer 2.0%M/M. Growth was led by a 3.0%M/M rebound in production of consumer goods – now above year-earlier levels for the first time since January. Production of capital goods increased 2.2%M/M – insufficient to fully unwind the decline in August and leaving output down more than 15%Y/Y. And within that component, while output of autos jumped 10.0%M/M, that followed a slightly larger drop the previous month, and so it was still a little less than 15% below the pre-lockdown level in February. Among other detail, construction output rose 1.5%M/M but that was insufficient to prevent a drop (-2.2%Q/Q) over the third quarter as a whole. And surveys point to a weak Q4 for construction too.
Japan’s labour cash earnings decline 0.9%Y/Y in September – stronger than expected
Since the pandemic struck Japan’s labour cash earnings, measured per worker, have declined on an annual basis, reflecting a steep reduction in hours worked. While today’s preliminary report for October continued to point to an annual decline, that decline was smaller than the market had expected and the least since April – indicative of the general improvement in the economy.
Turning to the details, average labour cash earnings (per employee) declined 0.9%Y/Y in September, compared with an unrevised 1.3%Y/Y decline in August. After accounting for inflation, the decline in real wages was 1.1%Y/Y, compared with 1.4%Y/Y. Average overtime earnings fell a substantial 12.0%Y/Y, but this was less than the 13.5%Y/Y decline reported in August. Overwhelmingly, the decline in earnings continued to reflect a reduction in overtime hours worked, which despite a 2.6M/M increase – the third consecutive monthly improvement – was still down 12.5%Y/Y. Regular earnings increased a modest 0.2%Y/Y in September even though average regular hours worked declined 0.6%Y/Y – the latter nonetheless the strongest result since January.
While total hours worked (per employee) fell 1.5%Y/Y in September, the number of people in regular employment rose 0.1%M/M – the fourth consecutive increase – and was up 0.6%Y/Y. In the detail, the number of full-time employees increased 1.3%Y/Y (down 0.3ppts from last month) but the number of part-time employees fell 1.2%Y/Y (a deterioration of 0.2ppts). We caution that this split is often revised when the final report is released later in the month. Finally, it is worth noting that all of the pick-up in regular employment in September occurred outside of the manufacturing sector, with factory employment unchanged during the month.
Japan’s household spending rises solidly in September, up 3.7%Q/Q in Q3
In other news, the MIC released its monthly survey of household spending and incomes for September. In contrast to the surprisingly flat retail sales report, MIC’s estimate of total real spending increased a larger-than-expected 3.8%M/M. However, given the stronger lift seen in the same month last year – driven by the impending hike of the consumption tax – spending was down 10.2%Y/Y in September. MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, increased 3.5%M/M but fell 11.9%Y/Y. Given today’s result, the seasonally-adjusted index of total spending increased 3.7%Q/Q in Q3, rebounding somewhat from a 4.6%Q/Q contraction in Q2. The index of core spending increased 3.5%Q/Q following a 3.6%Q/Q decline in Q2. As always we caution that the BoJ’s Consumption Activity Index is a more reliable indicator of the national accounts measure of private consumption, and the September reading will be released on Monday.
Meanwhile, the survey’s measure of workers’ real disposable incomes increased 2.9%Y/Y in September – an improvement on the 0.8%Y/Y increase reported in August. The average propensity to consume was 79.8% – up from 69.8% in August and the highest level since March. However, this is still lower than usually seen in a September month. And so with understandably cautious household’s having saved a good portion of their earlier government pandemic relief payments, there appears to be scope for a pick-up in household spending once worries about the pandemic begin to subside.
RBA SMP contains no surprises following extensive communication earlier this week
Today the RBA released its updated quarterly Statement on Monetary Policy (SMP). While this would normally be an important market event, the significance of today’s report was always likely to be lower than usual given that the RBA had provided a very full account of its views on Tuesday, including an unscheduled press conference. Consistent with Governor Lowe’s comments this week, the SMP states that the Board is not contemplating a further reduction in interest rates, with the Board considering that there is little to be gained from short-term interest rates moving into negative territory (indeed the Board views a negative policy rate as ‘extraordinarily unlikely’). Rather the Board’s focus will be the government bond purchase program. Having regard to the impact of those purchases on the economy and on market functioning, the SMP states that the Board is prepared to undertake additional purchases if required.
As far as the baseline economic forecasts are concerned, as indicated earlier in the week, the RBA expects a rebound in the economy to drive GDP growth to a peak of 6%Y/Y in Q221, before gradually settling back to 4%Y/Y in Q422. These forecasts are based on an assumption of steady monetary policy and an exchange rate of A$/US$0.70 (a TWI of 60). The unemployment rate is expected to peak at 8% at the end of this year – 2ppts lower than forecast previously – before gradually declining to 6% by the end of 2022. Emphasising the uncertainty about the outlook, the RBA illustrates scenarios in which the unemployment rate could end next year at around 9% or 5½%. On the inflation front, the RBA expects the trimmed mean to end this year and next at 1%Y/Y, before rising to 1½%Y/Y by the end of 2022 – still below the lower bound of the Bank’s target for CPI inflation. Indeed, inflation was projected to end the period only slightly higher at 1¾%Y/Y even in the Bank’s upside scenario, emphasising that inflation is unlikely to drive the RBA to raise its cash rate target until late 2023 at the earliest.
RBNZ Survey of Expectations points to lift in inflation expectations, but still below target
The RBNZ’s quarterly Survey of Expectations pointed to a modest lift in the 2-year-ahead inflation expectation to 1.59% in Q4 – the highest since Q1 but still well below the mid-point of the Bank’s 1-3% inflation target. Expectations regarding 2-year ahead wage growth were little changed at 2.18% and so remained well-below pre-pandemic levels. Not surprisingly, monetary conditions were perceived to be easier than at any other time in the survey’s 33 year history.
China’s October trade report to be released tomorrow; will help set market tone on Monday
In addition to any further news on the US election count, the tone that markets exhibits on Monday will be influenced by China’s October trade report, which is released tomorrow. Analysts expect the trade surplus to have widened slightly, with growth in imports expected to have softened somewhat after rebounding very strongly in September. There is no doubt that China’s economy is recovering strongly – the imports data will cast light on how much of that recovery is supporting economic recovery outside of China.