Equity market rally interrupted as J&J pauses vaccine research
While the UST market was closed for the Columbus Day holiday, and despite a continued stalemate regarding fiscal stimulus, Wall Street continued on its merry way yesterday, with the S&P500 rising 1.6% to extend its gain from the 23 September trough to over 9%. Tech stocks were especially strong ahead of Amazon’s Prime Day and Apple’s release of its latest iPhone, lifting the Nasdaq by an even larger 2.6% to achieve its best day since April. With that background, unsurprisingly Asian equity markets opened positively on Tuesday. Unfortunately, the opening gains were quickly more than erased after Johnson & Johnson announced that its Covid-19 vaccine study had been temporarily paused after a trial participant experienced an unexplained illness. Subsequently markets have rebounded only partially – S&P mini futures remain down almost ½% – with investors perhaps taking some comfort that the short-lived pause that followed AstraZeneca’s similar announcement last month. USTs are a touch firmer too (10Y yields down a couple of bps.)
As a result, and despite more positive trade data out of China, most bourses across the Asia-Pacific region were little changed today, reporting a mix of small gains and losses (Hong Kong’s market was closed all day due to an approaching typhoon). For example, on a day a little significant domestic economic news, Japan’s Topix rose 0.35%, enough nevertheless to reverse yesterday’s decline. The one notable exception was Australia’s ASX200, which increased more than 1% despite a report by Bloomberg suggesting that China had instructed ports to cease offloading Australian coal. While this is not the first such report – there have been others in the past with no subsequent validation in the data – the news nonetheless led to weakening of the Aussie dollar, exacerbating the impact of the slight risk-off tone that had crept into markets following Johnson & Johnson’s announcement. Meanwhile, given the more downbeat mood, European stock markets have opened lower with the region’s govvies following USTs higher despite a UK labour market report that was arguably not quite as bad as might have been expected.
China’s trade surplus narrows in September as imports rebound
This week’s schedule of Chinese data releases got underway today with the publication of external trade statistics for September. Growth in exports was in line with market expectations with values rising 9.9%Y/Y in dollar terms (8.7%Y/Y in yuan terms). This was up marginally from growth of 9.5%Y/Y in August and – excluding volatility associated with LNY holiday – marks the best outcome in two years. After picking up in August, growth in exports to the US was broadly steady at 20.5%Y/Y. While there was a pick-up in growth in exports to South Korea (14.8%Y/Y) and Vietnam (38.3%Y/Y), there was a notable slowing of growth in exports to Australia (2.5%Y/Y) and the UK (15.8%Y/Y). Given the weakness seen earlier in the year, total exports were still down 0.8%YTD/Y for the first nine months of the year, but growth on this basis should move into positive territory when the October figures are released next month.
The encouraging news this month was an unexpected and sharp recovery in imports, supporting other indicators – such as the service sector PMIs – that suggest that China’s economic recovery is broadening to domestic demand (the September retail sales report will be released next week, together with the GDP report for Q3). Specifically, imports increased 13.2%Y/Y in USD terms (and 11.6%Y/Y in yuan terms), after declining 2.1%Y/Y in August. Of particular note, China’s imports from the US rose 24.7%Y/Y – a timely increase ahead of the US presidential election – so that China’s bilateral trade surplus declined to a 3-month low of $30.8bn. That said, that surplus is still $6bn higher than that averaged through 2019, prior to President Trump concluding the phase one trade deal negotiated at the beginning of this year. And that bilateral surplus explains most of the overall trade surplus for the months which stood at $37.0bn – down from $58.9bn in August. Moreover, China also sharply stepped up its imports from a number of other countries this month, including Germany (17.7%Y/Y), Italy (39.8%Y/Y), Thailand (20.1%Y/Y) and Vietnam (20.6%Y/Y). At the commodity level, there was a strong lift in imports of mechanical and electrical products (19.3%Y/Y vs 1.9%Y/Y previously) and high-tech products (20.8%Y/Y vs 5.0%Y/Y previously).
UK payrolls up slightly, but redundancies up at record rate too
Ahead of the termination of the government’s Job Retention Scheme at the end of this month, and its replacement with support that is far less generous for employers, expectations for today’s UK labour market report were downbeat. So, it was arguably a relief that the ONS reported an uptick in the number of payroll employees in September, up 20k on the month according to early estimates. That, however, left them down a steep 673k since the initial phase of the pandemic in March.
The latest vacancy data were also improved – indeed having dropped to a record low of 343k vacancies in the second quarter, vacancies rose a record 144k in Q3 albeit remaining some 332k and a steep 40.5% below their level a year earlier. In addition, with the return of some workers from furlough, and an increase in average hours worked, annual growth in employee pay improved. Average weekly earnings in the three months to August were unchanged compared to a year earlier, having fallen 1.0%3M/Y the prior month. And, excluding bonuses, growth in earnings rose 0.6ppt to 0.8%3M/Y.
Certain other details in the labour market report, however, were discouraging. Redundancies rose a record 114k in the three months to August to 227k, the highest level since the aftermath of the Global Financial Crisis in May-July 2009. The unemployment rate in the three months to August rose a steeper than expected 0.4ppt to 4.5%, with the employment rate down 0.3ppt. And the Claimant Count, which includes those working with low income or hours and those who are not working. increased 1.0%M/M in September to 2.7mn, up 1.5mn from March, with the rate nudging up to 7.6%. With the ONS’s special coronavirus business survey suggesting that 9% of workers – around 3 million workers – are still either fully or partially furloughed, and the revival in the pandemic leading to more stringent local lockdowns and weighing more heavily on spending in face-to-face services, expectations remain for a significant further increase in redundancies and joblessness over coming months.
Australia consumer confidence the best since May
On a relatively quiet day for Australian economic news, the ANZ-Roy Morgan consumer confidence index rose a further 2.0pts to 97.7 last week, marking the highest reading since late May. This is also the sixth consecutive increase, which bodes well for tomorrow’s more widely followed monthly Westpac survey of consumer confidence.
Kiwi house sales surge in September, retail spending rebounds in Q3
The run of strong Kiwi housing data continued today, with REINZ reporting a whopping 37.1%Y/Y lift in house sales in September to the highest level since March 2017 (and the best September since 2006). In addition, the house price index increased a very strong 2.5%M/M, lifting annual growth to 11.1%Y/Y. To date the RBNZ has been sanguine about the apparent strength of the housing market and the implications for the economy and financial stability, notwithstanding the fact that historically the housing market has been one of the best indicators of overall domestic demand. With mortgage rates continuing to hit new record lows – one bank offering a 1-year fixed rate of 1.99% this week – the housing market is likely to remain very robust into the summer. So while the RBNZ seems likely to announce a scheme to support bank lending at next month’s meeting, the performance of the housing market may dampen the RBNZ’s enthusiasm for lowering the cash rate into negative territory.
In other solid Kiwi news, with the economy beginning to re-emerge from a second round of pandemic restrictions, retail spending rebounded 5.4%M/M in September after declining 8.9%M/M in August. As a result, despite those restrictions, spending in Q3 increased a very solid 5.9%Y/Y, led by higher spending on groceries and durable goods.
Drop in German inflation confirmed ahead of ZEW survey
The final German inflation figures for September aligned with the flash estimates, confirming the drop of 0.3ppt in the EU-harmonised measure to -0.4%Y/Y, the lowest since January 2015. The detail on the national measure revealed that lower energy inflation (down 0.8ppt to -7.1%Y/Y) was the principle. Of course, after the temporary VAT cut expires at the end of the year, German inflation will take a step back up, while base effects from past shifts in energy prices will contribute positively in the New Year.
Looking ahead, the ZEW investor survey for October is due later this morning. With signs that momentum in spending in the region has slowed in the face of the renewed pandemic, this could suggest little further improvement in investor optimism about either current or future economic conditions. However, recent stock market gains on the back of expectations of near-term US fiscal stimulus might provide support.
CPI the main data focus in the US today
The principal US data focus today will be the CPI report for September. Over the past couple of months prices have rebounded somewhat as pandemic-induced discounting has faded. But even given the further 0.2%M/M increase in September that Daiwa America’s Mike Moran expects today, core inflation would remain close to the 1.7%Y/Y pace see in August – much too low for the Fed’s liking, especially considering the elevated unemployment rate. The NFIB small business survey will also be released today.