Negative price pressures still in the pipeline in Germany

Chris Scicluna
Emily Nicol

Market optimism dissipates as US and European political impasses persist
While a pre-election US fiscal stimulus package still appeared possible if agreement can be reached by the end of today, optimism quickly faded yesterday after House Speaker Pelosi was reported to have told her caucus colleagues that differences remained between the Democrat and White House positions, while Senate Republicans continued to call for a much smaller package. The subsequent risk-off move, which eventually saw the S&P500 record a 1.6% loss, had little impact on the bond market, with investors still seemingly convinced that a fiscal stimulus package will be agreed after the election if not before. However, the US dollar did weaken in concert with the decline in equity prices.

US equity futures have picked up a little since Wall Street closed – the S&P minis rising less than ½% – after a spokesperson for Pelosi reported that there had been some narrowing of differences following the latest round of talks. But while stocks picked up in Korea and, after underperforming yesterday, also in China (where the PBOC predictably left its 1Y and 5Y loan prime rates unchanged), other main markets across Asia generally traded with a negative bias, with the Topix closing down 0.75%. In bond markets, USTs remained broadly unperturbed, as (predictably) did JGBs. But with the RBA’s latest minutes echoing Governor Lowe’s dovish speech of last week and Assistant Governor Kent floating the possibility of bank bill swap rates falling below zero, ACGBs made gains at the short end.

In Europe, where new Covid cases rose about 50% last week and Ireland yesterday evening announced a re-imposition of tough new restrictions on activity – including closure of all non-essential retailing and in-restaurant dining – to last six weeks, govvies have opened a touch firmer with stocks pointing lower. But having weakened yesterday as today’s planned visit to London by EU officials for talks on the post-Brexit FTA was put on ice, sterling is steady as noises on both sides of the Channel suggest that formal negotiations will still likely resume later this week, possibly as soon as tomorrow.

China’s new home price inflation slows in September; existing home price inflation steady
Following on from yesterday’s swathe of Chinese activity indicators, today the NBS released data measuring developments in home prices. According to the NBS, new home prices rose a weaker-than-expected 0.34%M/M in September – the smallest increase since March – causing annual growth to slow 0.2ppt to 4.5%Y/Y. Existing home prices rose a similar 0.27%M/M in September, leaving annual growth at a relatively subdued 2.2%Y/Y. This reflects low rates of inflation in second and third tier cities, as prices in first tier cities rose 7.4%Y/Y – not least due to a 15.7%Y/Y increase in prices in Shenzhen.

China’s benchmark lending rates unchanged for a sixth consecutive month
In other news, as expected following last week’s decision to maintain the Medium-term Lending Facility Rate at 2.95%, 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. These rates, reviewed at around this time each month, have now been unchanged since April, with the PBoC seemingly satisfied with how the economy is recovering in the wake of the pandemic.

Negative price pressures still in the pipeline in Germany
While it will be a relatively quiet day for European economic releases, this morning’s release of German PPI figures suggested that, despite coming in stronger than expected, underlying deflationary pipeline pressures remain to the fore. Indeed, the moderation in the decline in the headline PPI rate (by 0.2ppt to -1.0%Y/Y) in part reflected a smaller drag from energy prices (up 0.6ppt to -3.3%Y/Y). There was also a softer pace of decline in producers’ prices of intermediate goods. In contrast, however, corporate inflation of capital goods eased to its lowest since 2016, as did the annual increase in producer prices of consumer goods, which fell 0.4ppt in September to just 0.1%Y/Y.

Later this morning, euro area balance of payments figures are expected to show a rebound in the current account surplus in August, largely reflecting a much-improved goods trade surplus, while the primary income balance – which in July reported an uncharacteristic deficit – might also provide some support. In the UK, meanwhile, focus will be on external MPC member Vlieghe’s speech on the health of the economy, where he might well be expected to state the case for additional policy action at next month’s meeting.

Housing starts in focus in the US
In the US, meanwhile, today will bring the latest housing starts figures for September. With the sales of new homes having surged to a fourteen-year high and sentiment among home builders similarly making notable gains over recent months, today’s housing starts figures are expected to have posted another solid increase, with single-family starts possibly moving above the cyclical high reached last December.

RBA Board minutes echo Lowe speech; RBA’s Kent moots BBSW fixings moving below 0% 
Today the RBA released the minutes from this month’s Board meeting. As usual the minutes didn’t provide a great deal of new content, even more so on this occasion given that Governor Lowe had just last week given a detailed speech outlining the Board’s evolving views regarding forward guidance – a speech that pre-empted what would have been new content in the minutes.

As far as future policy changes had been concerned, it was noted that Board members had again discussed the options of reducing the targets for the cash rate and the 3-year yield towards zero, without going negative, and buying government bonds further along the yield curve. As outlined in Lowe’s speech, a key concern for the Board is the interaction between its own policy and monetary policy abroad, in particular the impact of the RBA’s smaller balance sheet expansion on the yield curve and the exchange rate. As was also alluded to in Lowe’s speech, the minutes suggested that members considered it reasonable to expect that with the economy gradually re-opening, further monetary easing would gain more traction than had been the case earlier. At the same time, members also seemed concerned about the messaging effect of lower interest rates on confidence and how lower interest rates would impact those people who rely on interest income. Doubtless the same issues will be discussed again at the next meeting on 3 November. And with the Bank not pushing back against market pricing and commentary, a combination of a 15bps cut in its cash rate and 3-year bond yield targets and an expanded asset purchase programme seems the most likely outcome of those deliberations.

A little earlier in the day, RBA Assistant Governor Kent gave a speech in which he argued that, due to the expanded range of monetary easing measures announced in March, it's no longer possible to summarise the stance of policy by reference to the cash rate target alone. The majority of the speech was devoted to discussing the various interest rate and balance sheet tools that the Bank had deployed during the pandemic and the transmission mechanism through which they impact the economy. While the speech didn’t discuss the policy outlook directly, during the Q&A Kent was reported to have said that it would not be surprising if bank bill swap rates (BBSW) were to pop below 0% – something that would only happen sustainably if the RBA was to reduce the cash rate further.

Aussie consumer confidence continues to trend higher; payrolls decline over the last fortnight
On the data front, the ANZ-Roy Morgan consumer confidence index nudged up a further 0.4pts to 98.1 last week, marking the highest reading since late May. Encouragingly for retailers, the most notable change amongst the key components was a sharp lift in the index measuring consumers’ attitudes to buying major items, which improved to its highest level since late June.

In other news, the ABS released its indicator of payroll jobs and wages, which uses tax data to try to provide a high frequency and timely indicator of the impact of the pandemic on the labour market. In broad terms, previous releases had shown job numbers trending sideways since early July. However, today’s report indicated that the number of payroll jobs fell 0.9% between 19 September and 3 October, with broadly similar declines recorded across all states and territories. As a result, the number of payroll jobs was down 4.1% relative to mid-March – about half of the peak to decline experienced in April – led by a 7.7% decline in Victoria. It will be interesting to see whether today’s softer result is replicated in the next report on 4 November – a development that would suggest some impact from the gradual phasing out of the JobKeeper wage subsidy, which began in late September.

NZIER survey confirms that Kiwi business confidence recovered in Q3
Across the ditch, the NZIER released the latest edition of its long-running quarterly survey of business conditions. In common with the higher-frequency ANZ survey, the NZIER survey cast business sentiment in a less dire light. Whereas a net 37% of firms had experienced a decline in activity in Q2, a net 1% reported that increased activity in Q3. And, while firms still professed to be downbeat about the general business outlook over the next six months – albeit in fewer number than previously – encouraging a net 16% of firms indicated that they planned to increase their headcount in the coming quarter. The construction sector was the most confident of the sectors surveyed, perhaps not surprisingly given record low mortgage rates, booming house prices and the increased infrastructure pipeline created by the government’s economic response to the pandemic.

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