German retail sales fall almost 10% in December

Chris Scicluna

Asian equities rebound after soft start as disappointing Chinese PMI data countered by PBoC liquidity injection
Risk aversion remained very much in evidence on Friday as the regulatory attention attracted by trading in the likes of GameStop continued to underpin concerns about valuations and as bond yields rose regardless amidst firmer-than-expected US inflation and wages data. The S&P500 closed down 1.9%, bringing its loss for the week to 3.3%, with the DJI and Nasdaq down similarly. The VIX closed above 30 for a third consecutive day. However, after falling to as low as 1.00% on Thursday, the 10Y UST closed the week at 1.07% after trading as high as 1.10% intraday. A volatile day for the greenback eventually delivered modest gains against most counterparts, driven by both higher bond yields and risk-related demand.

US equity futures opened substantially weaker today following weekend news of softer PMI readings in China, especially in the service sector (more on these below). Indeed, S&P minis had been down more than 1% in early trade, weighing on Asian markets too. However, as we write, US equity futures are slightly firmer than Friday’s close, even with today’s Caixin manufacturing PMI confirming the weaker picture offered in the official data. The turnaround in fortunes appears to stem from the PBoC’s supply of net liquidity to the market today, which has seen the overnight repo rate decline by more than 50bps from last week’s 5-year high and also contributed to a weaker yuan.

As a result, after a mixed start, equity markets have rallied strongly across the Asia-Pacific region. Despite expectations that PM Suga will this week extend for about one month the state of emergency for major metropolitan areas, including Tokyo, Osaka and Nagoya, Japan’s TOPIX closed up 1.2%, with the final manufacturing PMI exhibiting a welcome degree of resilience in January. Similarly, in mainland China the CSI300 advanced 1.1% despite the disappointing PMI news. Stocks rose by 2½% or more in both South Korea and Hong Kong, but by just 0.8% in Australia despite a slew of positive economic data. In bond markets, yields continued to a march higher in both Australia and New Zealand, with 10Y rates in the former back to levels last sustained a year ago and rates in the latter now up 70bps from the September low. Meanwhile, in commodity markets silver futures have jumped almost 9% today, with retail investor buying apparently spreading beyond shorted stocks.

Japan’s manufacturing PMI proves resilient in January; services PMI and consumer spending data the likely highlights of a quiet week ahead
The most important economic report in Japan today was the final manufacturing PMI for January, which continued to point to a degree of resilience early in the New Year. Indeed, the headline index was revised up 0.1pts to a final reading of 49.8, leaving it just 0.2pts below the final December reading. In the detail, the output index was revised up 0.5pts to 49.2 and the employment index was revised up 0.1pts to 48.7, but remain down 0.8pts and 1.4pts compared with their respective December readings. The new orders index was revised down 0.5pts to 50.1, but this remains the highest reading since December 2018. Meanwhile, doubtless reflecting developments in coronavirus cases overseas, the new export orders index was revised down 0.6pts to a 4-month low of 48.2 – now also down 0.4pts from its December reading. However, the output prices index was unrevised at 51.1, which is the highest reading since May 2019. In other news, Japan’s auto manufacturers reported a 6.8%Y/Y increase in sales in January, very similar to the 7.4%Y/Y lift reported a month earlier.

The remainder of this week’s Japanese diary is sparsely populated. Following tomorrow’s monetary base statistics for January, Wednesday seems likely to bring news of a downward revision to the services PMI in January – already down 2pts from December in the preliminary release – which will flow through to the composite PMI. BoJ Deputy Governor Wakatabe is also scheduled to given an online speech on Wednesday, which may give some further insight into what to expect from the review of monetary policy that is presently underway. On Friday, most interest will centre on the BoJ and MIC measures of consumer spending for December, which will likely point to a decline in activity in light of pandemic-related restrictions on trading hours. The Cabinet Office will also release its business conditions indices for December.

China’s official PMIs soften in January, especially in the service sector; Caixin manufacturing PMI confirms softer picture
Over the weekend, China released its official PMI readings for January. The closely-watched manufacturing PMI fell 0.6pts to 51.3, marking the second consecutive decline since the index reached a more than 3-year high in November. This outcome, which was slightly below market expectations, was driven by less expansionary readings at both large and medium-sized firms, more than offsetting a slight improvement reported by small firms (the index for the latter group remaining below 50, nonetheless). The key activity sub-components all weakened somewhat, with the output index down 0.6pts to 53.5, the new orders index down 1.3pts to 53.6 and the new export orders index down 1.1pts to a 5-month low of 50.2. In addition, the employment index fell 1.2pts to 48.6. Less buoyant activity has also resulted in some softening of the survey’s pricing indicators. After hitting a 3-year high in December, the input prices and output prices indices decreased 0.9pts and 1.7pts respectively. The deterioration in the output index might in part reflect power outages in several manufacturing-focused provinces (including Hunan, Jiangxi and Zhejiang), while the weakening in the new orders index might be related to the timing of the LNY holiday.

Equally noteworthy this month, however, was a very marked decline in fortunes in the non-manufacturing sector, where the headline PMI fell 2.7pts to a 10-month low of 52.4. This outcome, which was far below market expectations, probably reflects the influence of pandemic-containment measures and reduced activity associated with what, by usual standards, is likely to be a very subdued LNY holiday period (officials expect travel to be well down on normal levels). Given this result, the composite PMI output index fell 2.3pts to 52.8 – still indicating economic expansion, but at the slowest pace since March last year. In the non-manufacturing detail, the new orders index fell 3.2pts to 48.7. Excluding last February, when local coronavirus cases were at their height, this is the lowest reading since April 2016. Similarly, the business expectations index slumped 5.5pts to 55.1, marking the second lowest reading on record. Unsurprisingly, therefore, the output prices index fell 0.9pts to 51.4, reversing the strengthening trend observed in recent months.

Today China’s Caixin manufacturing PMI – capturing activity in the private SME sector – confirmed the softer picture in the weekend’s official PMI data. The Caixin headline index fell 1.5pts to a 7-month low of 51.5 – now only slightly the historic average – with the output index down a notable 2.9pts to a 9-month low of 52.5. The new orders index fell 2.4pts to 52.2 and the new export orders index slumped 4.4pts to a 7-month low of 47.4. Looking out over the remainder of the week, the only report of note is Wednesday’s Caixin services PMI report for January, which will presumably echo the sharp slowdown in the official series.

German retail sales down near 10%M/M in December; euro area GDP and inflation data ahead
While Germany’s Q4 GDP figures, released on Friday, flagged the broad resilience of the economy to the intensification of the pandemic, data released this morning highlighted the marked impact of the closure of non-essential stores from 16 December on retail sales. In particular, the volume of retail turnover dropped 9.6%M/M last month. Given the strength of sales over prior months, however, that left retail turnover down just 0.2%3M/3M and up 1.5%Y/Y. Nevertheless, given the more significant weakness of spending on services, household consumption will still have contracted in Q4, an impact offset by growth in construction investment and net exports. Looking ahead, this morning will bring the release of the euro area unemployment rate for December, which is expected to remain unchanged at 8.3%. January new car registrations data for Italy and Spain are also due today after the French figures showed a relatively soft start to the year (down 5.85%Y/Y following a decline of about one quarter in 2020). The final manufacturing PMIs are also due this morning ahead of the services figures on Wednesday.

After some positive surprises last week, this week’s euro area main data focus will be on the remaining Q4 GDP and flash January inflation data. In particular, euro area and Italian GDP figures are due tomorrow, with French inflation numbers to be published tomorrow ahead of the euro area and Italian reports on Wednesday. Following Friday’s better than expected GDP data for Germany, France, Spain and Belgium, we expect GDP for the euro area as a whole to have contracted by around 1.0%Q/Q in the final quarter of last year to be down 5.4%Y/Y. Much will depend on the Italian data, however, for which the consensus expectation is for a drop of about 2.5%Q/Q. An extreme number out of Ireland could also skew the outturn significantly. Meanwhile, euro area inflation is certain to move firmly out of negative territory in January after the German and Spanish HICP rates jumped by more than 2ppts and 1ppt respectively. We now forecast that euro area headline inflation will rise 0.9ppt to 0.6%Y/Y, with the core measure also increasing 0.9ppt to 1.1%Y/Y.

BoE to leave powder dry with forecasts to be sanguine about UK outlook
This week’s main event in the UK is the BoE’s MPC announcement on Thursday, which will be accompanied by a new Monetary Policy Report featuring updated economic projections. There will be plenty of relevant news for the MPC to digest, not least the UK-EU Trade and Cooperation Agreement (TCA), which avoided the disruption that a no-deal end to the Brexit transition would have caused, but nevertheless imposed significant new barriers to trade. Economic data have pointed to greater resilience in UK GDP than was expected by the MPC in its November projections. And despite persisting restrictions on activity, the relatively swift start to the UK vaccination programme should have bolstered the BoE’s confidence in the growth outlook. Moreover, inflation has seemingly behaved much like the MPC expected. And with the November projections having suggested that inflation would rise close to or above 2%Y/Y by the end of this year, and remain thereabouts over the following couple of years, a reaffirmation of that profile at the coming meeting would point to little need to adjust monetary policy either this week or indeed over the horizon. Expect the MPC to retain its forward guidance, leaving open the possibility of further action if the inflation outlook weakens. But don’t expect to see any explicit mention of negative rates. Data-wise, BoE bank lending data for December are due today along with the final manufacturing PMIs, with the services and construction PMIs due Wednesday and Thursday respectively.

ISM reports and non-farm payrolls the focus in the US this week
Following last week’s FOMC meeting there are plenty of important data ahead this week that will contribute to the next Fed update in March (which will include revised forecasts). The dataflow kicks off today with the release of the ISM manufacturing report for January, the final Markit manufacturing PMI reading for January and the construction spending report for December. As far as the ISM is concerned, Daiwa America Chief Economist Mike Moran notes that indicators tied to the sector have continued to perform well, so he expects only a 1.0pt decline from the elevated reading of 60.5 reached in December. Meanwhile, following tomorrow’s auto sales data for January, Wednesday brings the release of the ISM service report for January, the final Markit services PMI reading for January and the ADP employment report for January. Mike expects the ISM to drop 2.2pts to a still decent 55.5 in January, reflecting the spread of coronavirus and its disproportionate impact on the services sector.

Following last week’s GDP report, the first estimates of labour productivity and unit labour costs for Q4 will be released on Thursday, together with the full factory orders report for December. On Friday, most attention will be centered on the official employment report for January. Mike expects a modest 50k increase in non-farm payrolls – this following a 140k decline in December – and a steady unemployment rate of 6.7%. It is worth noting that the report will also incorporate annual benchmark revisions, which based on preliminary estimates would reduce the level of payrolls by 173k. Friday will also see the release of the full trade balance for December – which should report a smaller deficit than November given the $3bn narrowing already reported in the goods sector – together with consumer credit data for December. Aside from economic data, there is also small number of Fed speaking engagements scattered through the week.

Aussie economic data encouraging ahead of first RBA policy review for 2021
A very busy week ahead for Australia economic data and events began today with a number of economic releases. In housing news, the CoreLogic house price index increased 0.7%M/M in January. While this marked the fourth consecutive increase, annual growth slowed 0.3ppts to 1.7%Y/Y reflecting the fact that prices were rising at an even stronger clip before the pandemic took hold. Meanwhile, the ABS reported that the value of housing loan approvals jumped 8.6%M/M in December to a new record high, with approvals to owner-occupiers up a whopping 38.9%Y/Y and approvals to investors up 10.9%Y/Y. The news from the labour market also remained very encouraging, with the ANZ jobs ads index rising a further 2.3%M/M to be up 5.3%Y/Y and at the highest level since April 2019. In other news, the final Markit manufacturing PMI for January was unrevised at the preliminary reading of 57.2 – the highest reading since December 2016 – and the AiG Performance of Manufacturing Index reading for the combined December/January period was a similarly robust 55.3. Finally, the MI monthly inflation gauge increased 0.2%M/M in January, leaving annual inflation steady at a low 1.5%Y/Y. While the trimmed mean also increased 0.2%M/M, the annual increase was even lower at just 0.2%Y/Y.

Turning to the week ahead, the focus tomorrow will be on the RBA’s first policy announcement for this year. While both the labour market and inflation have proven stronger than the RBA had forecast in November, neither the unemployment rate nor inflation is close to being consistent with meeting the RBA’s mandate. So the RBA will doubtless keep all policy settings unchanged and we do not expect any change in the Bank’s forward guidance either (the Bank’s guidance regarding the yield on the 3Y bond should change later this year if economic conditions continue to improve at a faster-than-expected pace, making a rate hike likely before the end of 2023).

As far as the tone of the Bank’s economic commentary is concerned, we expect that any positivity regarding the recent domestic data flow – which should be reflected in the Bank’s near-term forecasts for the unemployment rate at least – will be countered by apprehension about developments in coronavirus in many of Australia’s trading partners. Governor Lowe will have the opportunity to elaborate on the Bank’s view of the economic outlook when he gives a speech in Canberra on Wednesday and again on Friday when he appears before the House of Representatives Standing Committee on Economics for his regular six-monthly testimony. On Friday, the RBA will also release its updated Statement on Monetary Policy, although the key elements of the outlook – included its updated forecasts for inflation and the unemployment rate – will likely be summarised in the post-meeting statement earlier in the week.

On the data front, tomorrow will also bring the release of the ANZ-Roy Morgan weekly consumer confidence index and the ABS’s weekly indicator of developments in payrolls through to 16 January. On Wednesday, the dwelling approvals report for December will be of interest after private house approvals increased to a 21-year high in November. The final Markit services PMI for January is also released that day. On Thursday, given the preliminary news on merchandise trade, the full trade report for December is likely to report a marked widening of the surplus from the A$5.0bn seen in November, while NAB will publish the quarterly edition of its Business Outlook survey providing additional detail not found in the monthly survey. On Friday, the ABS will release the final estimate of retail sales for December, along with the estimate of retail volumes in Q4. Sales will likely have declined by closed to the 4.2%M/M estimated in the preliminary report – which reflected payback from a very strong November, together with the impact of some restrictions on shopping in parts of Sydney last in the month – but the volume of spending should have increased around 2%Q/Q in Q4.

Labour market and business confidence reports the main NZ focus this week
There were no economic reports released in New Zealand today. The dataflow begins tomorrow with the release of the CoreLogic home price index for January, which will likely continue to point to skyrocketing prices as buyers seek to beat the re-imposition of LVR restrictions. Thereafter, attention will turn to Wednesday’s Q4 labour market report, which will cast further light on how the economy is recovering from the pandemic-driven plunge in activity in Q2. After employment declined 0.8%Q/Q in Q3 – even as output rebounded to above-pandemic levels – Bloomberg’s survey suggests that analysts expect a very slight rebound in Q4 (payrolls-based indicators point to some recovery). But with labour force participation expected to continue to recover towards pre-pandemic levels, the consensus expects the unemployment rate to nonetheless rise 0.3ppts to a 5-year high of 5.6%. Given the re-emergence of slack in the labour market, the Labour Cost Index will likely point to only moderate growth in wage and salary rates. On Thursday, the ANZ will release the preliminary results from its first Business Outlook survey for this year. This closely-watched survey had pointed to a substantial pick-up in key sentiment indices in December – the activity outlook index increased to its highest level since March 2018 – whereas recent PMI readings have been much more subdued. Also on Thursday, the Building Consents report for December will likely continue to point to buoyant conditions in the housing construction sector.

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