US equity market surrenders gains, Asia and Europe weaker today
At face value, it might have looked that some of this week’s pandemic-induced worries faded for a while yesterday. While European equities had mostly closed slightly in the red, the S&P500 was up over 2% just 90 minutes from the close as sentiment was lifted by a slightly larger-than-expected rebound in US GDP, better jobless claims figures, President Trump’s talk of “a very big package” of post-election fiscal stimulus, and the ECB’s clear signal of impending further stimulus for the euro area, which among other things gave BTPs another boost. The recovery in risk sentiment drove the 10Y Treasury yield as high as 0.84%, before settling slightly lower, while the Greenback made gains against the yen as well as the euro.
Unfortunately a late slump saw the S&P500 pare its end of day gain to just 1.2%, with that price action foreshadowing what was to follow. After Wall Street closed a bevy of tech sector reports beat on Q3 earnings, including reports from the likes of Apple, Amazon, Twitter and Facebook, but created significant concern for investors with aspects of the detail or forward guidance (indeed, Apple stock fell over 4% in post-market trade, as iPhone sales missed and the company declined to offer forward guidance, while Twitter fell more than 17%). As a result, equity futures quickly fell 1%, largely erasing Thursday’s gains, and have weakened further since – S&P minis are currently down more than 2% – not helped by the US reporting a record 86k new coronavirus cases.
Against that background Asian equity markets were left with nowhere else to go but lower. On a busy day for Japanese economic data, the Topix fell 2.0% despite a larger than expected gain in IP in September, not helped by a re-strengthening of the yen back towards ¥/$104. Stocks have fallen more than 2.0% in South Korea and more than 1½% in Hong Kong. Even China cast aside its recent resilience, with the CSI300 declining more than 1%. And European stocks have opened lower this morning too, unsurprisingly shrugging off news of stronger-than-expected GDP reports from France and Spain, which are now bound to be followed by renewed weakness in Q4. Curiously again, European govvies have again ignored events in the stock markets and are weaker across the board this morning following yesterday’s gains.
Japan’s industrial output continues to recover in September, firms forecast further growth ahead
On a busy day for domestic data, the main economic news in Japan today was the preliminary IP report for September. Analysts were expecting a solid lift in output given favourable indications from already-released export data and improving sentiment in business surveys. As it happens, while continuing to come off a very weak base, the report confirmed a fourth consecutive lift in activity during the month and one that was larger than the market had expected. And perhaps more importantly, there appears to be some optimism amongst manufacturers that further recovery was likely in October and – to a lesser extent – in November. Whether that forecast gets overtaken by events remains to be seen.
Turning to the key aggregates, total production rose 4.0%M/M in September, causing the annual decline in output to narrow to 9.0%Y/Y from 13.3%Y/Y in August. As a result, output increased 8.8%Q/Q in Q3 – the most on record, but coming after a shocking 16.9%Q/Q decline in Q2 to leave a large gap still to close. Shipments rose a similar 3.8%M/M but were still down 9.9%Y/Y. This resulted in a modest 0.3%M/M decline in inventories – the sixth consecutive fall – which were also down 5.5%Y/Y. The inventory-shipments ratio fell 3.7%M/M – the fourth consecutive decline – but was still up 7.5%Y/Y. Further growth in shipments will be required over coming months to lessen the drag that inventory levels would otherwise have on production.
In the detail, as in previous months, and following exceptionally heavy declines during the first wave of the pandemic, a further 12.1%M/M increase in the production of consumer durables was the key driver of overall growth in output. Indeed, output of these goods is now down just 3.2%Y/Y, after being down by more than half in May. By contrast, production of non-durable consumer goods increased just 1.8%M/M in September. But with production of these items have shown much greater resilience in Q2, output was down just 2.6%Y/Y. The news regarding capital goods was again much less positive, no doubt reflecting continued business reticence to invest in a climate of great uncertainty. While output of these goods did increase 2.6%M/M in September, production was still down 22.4%Y/Y. And once transportation goods are excluded, output increased only 0.7%M/M in September and was down 23.8%Y/Y. Production of construction goods increased just 0.3%M/M and so remained down 9.7%Y/Y – about in line with other construction-related data.
Looking ahead, METI’s assessment remains that output is “picking up”, and that assessment is supported by the results of this month’s survey of manufacturers’ near-term expectations. According to the survey, firms expect output to have increased 4.5%M/M in October – better than the 2.9%M/M forecast made last month – with further growth of 1.2%M/M forecast for November. At face value, assuming no historical revisions, firms’ forecasts imply that Q4 could deliver a similar increase in output as that seen in Q3, albeit this would still leave output down on where it stood in Q1. But firms’ forecasts are typically over-optimistic, so an increase of closer to 5%Q/Q would seem more likely at this stage. And with coronavirus cases rising sharply in many countries – perhaps leading to new restrictions on a wider scale – unfortunately the outlook could yet darken considerably into year-end.
Japan’s unemployment rate steady in September but job-to-applicant ratio declines
Today also brought the release of the MIC’s household-based Labour Force Survey for September, together with the MHLW’s suite of indicators measuring job applications and vacancies. The former survey revealed a small 40k decline in employment – the first fall since the slump that occurred in April – but leaving the annual decline in employment steady at -1.1%Y/Y for a fifth consecutive month. However, with the labour force also declining by a similar 50k, the unemployment rate remained steady at 3.0% – a more positive outcome than the market had expected. Not surprisingly, the largest job loss over the last 12 months has occurred in the hospitality sector (480k), while employment also fell notably in the manufacturing sector (390k). Those losses have been partially offset by gains in employment in the health, finance and IT sectors – again an unsurprising result given the distribution effects of the pandemic.
Meanwhile the MHLW reported that the job-to-applicant ratio fell a further 0.1ppts to 1.03 in September – a level last seen in December 2013. The number of job offers fell just 0.1%M/M but remained down 25.5%Y/Y, reflecting the very steep pandemic-induced declines seen earlier in the year. The number of new job offers increased 4.9%M/M – a second consecutive increase – but was still down 17.3%Y/Y. The still soft state of the labour market was reflected in yesterday’s Cabinet Office consumer confidence survey, which reported a disappointingly small 0.9pt improvement in the headline confidence index in October. And within that survey, the employment index was still more than 12pts weaker than in February and exerted the greatest drag on sentiment.
Japanese housing starts and construction orders remain soft in September
In other activity-related news, the number of housing starts again nudged lower to an annualised 0.815m in September, leaving them down a greater-than-expected 9.9%Y/Y. This continues the weakening trend that has been evident in the wake of last year’s consumption tax hike and subsequently exacerbated by the economic impact of the pandemic. In a similar vein, the MLIT’s survey of Japan’s 50 largest contractors reported a 10.6%Y/Y decline in construction orders in September.
Tokyo CPI dips more than expected on weaker food prices, core prices steady as expected
Turning to inflation news, today also saw the release of the advance CPI for the Tokyo area for October – the first month in which annual inflation is no longer impacted by the first round effect of last year’s hike in the consumption tax and the partially-offsetting introduction of free higher education. After adjusting for seasonality, the headline CPI index declined 0.4%M/M, reflecting lower prices for food and energy, causing annual inflation to fall to -0.3%Y/Y from 0.2%Y/Y previously. This outcome was 0.2ppts weaker than market expectations, with all of the surprise accounted for by greater-than-expected weakness in non-core factors – specifically food. Fresh food prices fell 3.9%M/M in October – moderating their annual increase to 3.3%Y/Y – resulting in a 0.6%M/M decline in overall food prices. Energy prices fell 2.2%M/M – petroleum, gas and electricity prices all moved lower – and so were down 5.6%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 0.3ppts to -0.5%Y/Y – an outcome that was 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 on this measure to weaken 0.2ppts to -0.2%Y/Y – also as expected, and consistent with little more than the removal of the impact of the consumption tax hike. And the even narrower measure of core prices used in many other countries, which excludes all food and energy prices, was also steady in the month, causing annual inflation on this measure to weaken 0.1ppt to -0.3%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 0.4%M/M but were still up just 0.7%Y/Y. Services prices increased 0.1%M/M but declined 0.8%Y/Y – the latter unchanged from September. With Tokyo residents now able to participate in the Government’s ‘Go-to-Travel’ subsidies, hotel charges fell a further 6.0%M/M in October and so were down 37.1%Y/Y.
French and Spanish Q3 GDP significantly beat expectations ahead of euro area data
Ahead of the release of the equivalent figures for the euro area, Germany and Italy later this morning, French and Spanish Q3 GDP data significantly beat expectations. In particular, French growth of 18.2%Q/Q followed a slightly revised 13.7%Q/Q drop in Q2. As a result, French GDP was down ‘just’ 4.3%Y/Y in Q3, having been down a whopping 18.9%Y/Y in Q2. With the end of last year having seen a very modest dip, French GDP was also therefore ‘only’ a touch more than 4% below the pre-pandemic level in Q419. In Spain, which was worst hit of all member states in the first half of the year, GDP rose 16.7%Q/Q to be down a still steep 8.7%Y/Y. The figures suggest that we should anticipate upside surprises in the releases from the euro area (with growth well above 10%Q/Q likely, compared to the ECB’s baseline forecast of 8.4%Q/Q) and other member states. But while that might also leave euro area GDP down about 4% from the pre-pandemic level, Q4 now seems bound to see a significant setback, with the revival in the spread of Covid-19 and reimposition of restrictions raising the likelihood of a negative print this quarter.
The detail of the French Q3 report showed vigorous growth in all major components of demand. Household consumption leapt 17.3%Q/Q to be down only 2.1%Y/Y. Household spending on manufactured goods was particularly strong, rising by 38.9%Q/Q to be up 4.2%Y/Y. But while consumer spending on services rose 20.2%Q/Q it was still down 5.0%Y/Y as demand for face-to-face services remained well below pre-pandemic levels. Total capex similarly jumped 23.3%Q/Q, but was still down 5.1%Y/Y. And government spending was up 15.1% to be up 0.4%Y/Y. Trade also saw rapid growth and contributed positively to GDP growth in net terms, with exports (up 23.2%Q/Q but still down 15.2%Y/Y) stronger than imports (up 16.0%Q/Q but down 9.9%Y/Y).
French inflation unchanged at zero in October ahead of euro area figures
Ahead of the release of the preliminary euro area inflation figures for October later this morning, the flash French data left inflation on both EU and national measures unchanged at 0.0%Y/Y. Yesterday saw the EU-harmonised measure of German inflation fall 0.1ppt to a new five-year low of -0.5%Y/Y, with the softness seemingly emanating from core items. And Spanish inflation on the same measure dropped a steeper-than-expected 0.4ppt to a four-year low of -1.0%Y/Y due principally to lower prices of electricity and phone services. So, there remains the possibility of further declines in the euro area figures for headline and core inflation from -0.3%Y/Y and 0.2%Y/Y respectively in September. The Italian figures, however, seem likely to post an increase as the impact of delayed summer sales falls out of the calculation.
US economy rebounds strongly in Q3; sentiment, labour cost & inflation data ahead today
On Thursday we learned that the US economy expanded a record 33.1%AR in Q3 – slightly above market expectations – a result made less impressive by the scale of the contraction in the previous two quarters (activity has still recovered less than two-thirds of this year’s losses). Private consumption increased nearly 41%AR, while residential investment rebounded an even greater 59%AR. Business investment increased just over 20%AR, with a very strong increase in equipment investment partially offset by further declines in spending on structures and intellectual property. Inventory building contributed to growth, but as expect net exports and government consumption acted as a drag. The day’s other US data was mixed with pending home sales reporting a surprise 2.2%M/M decline in September (still up nearly 22%Y/Y) whereas initial jobless claims fell to a 7-month low of 751k.
Today’s docket begins with the personal income and spending report for September, which will make explicit the monthly profile of data already included in quarterly form in Thursday’s national accounts. This includes the core PCE deflator, which rebounded a slightly less than expected 3.5%Q/Q in Q3, indicating that September month might be a little softer than the 0.2%M/M increment markets had expected at the beginning (or that prior months will be revised slightly lower). Growth in personal spending likely prove to have been very robust in September (around 1%M/M), but income growth will be weighed down by declining government transfers. At the same time we will receive the Employment Cost Index for Q3 which – unaffected by compositional changes – will surely have remained subdued given developments in the labour market. The day will end with the release of the Chicago PMI and the final results of the University of Michigan’s consumer survey, both for October. As far as the former is concerned, after surprising with a high reading of 62.4 last month, a somewhat less buoyant reading seems more likely on this occasion.
China’s plenum sets 5-year goals, including focus on innovation, self-reliance and reform
Yesterday saw the conclusion of the 5th plenary session of the 19th Central Committee of the CPC, which had met to discuss draft proposals for China’s next 5-year plan as well as longer-term goals through to 2035. In keeping with previous comments by President Xi, the post-meeting communique put forward a number of high level goals to be achieved over the next 5 years, which were repeated today in a post-plenum press conference. No numerical target was set for growth at this stage – targets will be proposed by the NDRC later – but rather the focus was on the quality and efficiency of development.
The plan calls for achieving: a stronger domestic market, including technological independence and self-reliance; significantly improved innovation capabilities, including building a digital China; advancing the industrial base, including improved industrial chain modernization; a more stable agricultural base; greater coordination of urban and rural development; and significant progress in the construction of a modern economic system, including new steps to reform and open up the economy to promote international co-operation and mutually-beneficial outcomes. And just in case the latter doesn’t work, the plenum also proposed to speed up the modernization of national defence and the armed forces. This plan is viewed as a step towards the long-term goal of achieving ‘socialist modernization’ by 2035.
The proposals discussed at the plenum will now be taken forward to the National People’s Congress, where more specific measures will be voted on next March. In the meantime, the next event in China is tomorrow’s release of the official PMIs for October – the outcome of which will help dictate the tone when markets re-open on Monday.
Australian underlying PPI soft in Q3; private sector credit inches up
Today saw the release of the PPIs for Q3, completing Australia’s suite of quarterly inflation measures. The final demand PPI (excluding exports) increased 0.4%Q/Q, not least due to a 48.7%Q/Q rebound in the price of child care services following the end of the government subsidy in mid-July. Higher prices were also recorded for petroleum and commercial fishing but lower prices were recorded for IT and transport equipment and clothing. Even with this increase the PPI remained down 0.4%Y/Y.
In other news, the RBA reported that private sector credit grew just 0.1%M/M in September, causing annual growth to slow to a decade low of 2.0%Y/Y. Housing credit increased 0.4%M/M – the most since August 2018 – mostly thanks to continued growth in lending to owner occupiers. Indeed, lending to owner occupiers rose 0.5%M/M and 5.4%Y/Y, whereas lending to investors increased just 0.1%M/M and down 0.4%Y/Y. Other forms of consumer credit remained exceptionally weak, with credit personal loans down 0.8%M/M and 12.5%Y/Y. Meanwhile, business lending fell 0.3%M/M in September. This marked a fifth consecutive decline, albeit following a large precautionary lift in lending in March as firms scrambled to secure liquidity. Annual growth in business lending slowed to 2.0%Y/Y from 2.9%Y/Y previously – now a little softer than pre-pandemic levels.
Kiwi consumer confidence improves in October as restrictions lifted
The ANZ consumer confidence index increased 8.7%M/M in October to 108.7 – the highest reading since February but still around 10pts below the long-term average. All components of the index improved this month, with the most notable development being a sharp reduction in pessimism about the near-term outlook for the economy – doubtless reflecting the removal of all restrictions on public gathering during the month after a small outbreak of coronavirus in the community was successfully eliminated. Respondents remained optimistic about the outlook for their family finances – doubtless helped by record lows for mortgage interest rates – and attitudes to buying major household items turned net positive for the first time since June.
While the RBNZ seems very likely to next month announce measures to help banks provide cheap loans to businesses, provided that the economy remains on its currently trajectory, the Bank may not be required to follow this with a negative cash rate in 2021 (contrary to current market pricing). Indeed, given the booming housing market, respected local commentators are already questioning whether the RBNZ may be already overstimulating the economy.