Japan’s services PMI revised up, but consumer confidence falls

Chris Scicluna

US Senate run-off races lean to Democrat wins, but final result unlikely to be known with certainty for a while yet
The focus over the past 12 hours or so has inevitably been on the US Senate run-off elections in the state of Georgia that, as opinion polls suggested, have proven to be tight. But, as we write, with more than 98% of the estimated vote reported, it is clear that it’s already one-nil to the Democrats, whose challenger Raphael Warnock has defeated Republican senator Kelly Loeffler with a decisive lead of 1.2ppt, which exceeds the margin required for candidates to request an automatic recount. So, the control of the Senate now depends on the outcome of the other race, where Democrat challenger Jon Ossoff leads Republican candidate David Perdue by a little more than 12,800 votes out of almost 4.4 million in total. While that represents a lead of just 0.3ppt, the promising news for Democrats is that much of the outstanding vote to be counted appears to be in counties around Atlanta where they have so far performed very well.

Counting of the remaining in-person and absentee ballots will continue today, while the outcome of provisional votes and votes from overseas and the military will not be known until the end of the week. If Ossoff makes it two-nil to the Democrats after all votes are counted, they will gain control of the Senate, clearing the way for an increase in fiscal policy stimulus (starting with extra pandemic relief payments to households). Thereafter, at least until the mid-term elections, the Democrats would also be in a much stronger position to advance Biden’s domestic policy agenda (e.g. repealing the Trump tax cuts, boosting IT infrastructure and policies to combat climate change), as well as to confirm President-elect Biden’s nominees to his Cabinet and any future nominations to the likes of the Supreme Court and the Fed. Should Ossoff’s lead be overturned, however, the Republicans would retain control of the Senate by 51 to 49, providing a check on the Democratic policy agenda.

Yesterday, with both the ISM manufacturing index and auto sales figures beating market expectations, Wall Street partially rebounded from Monday’s sell-off. The S&P500 gained 0.7%, led by a rally in energy stocks – WTI crude trading above $50/bbl for the first time since February last year – and with solid gains in the materials and industrials sector too. In addition, with investors perhaps sensing a Democratic win in the run-off elections, the yield on 10Y USTs already increased 3bps to 0.95%, the 5-30s curve steepened to a level last seen four years ago and the greenback set news lows. And the sell-off in the Treasury market and the greenback continued during the Asian session as the results from the Senate run-offs favoured the Democratic challengers. As we write, S&P500 futures are down a relatively modest 0.3% but NASDAQ futures are down 2%. And strikingly, the prospect of more expansive fiscal policy has seen the 10Y UST yield increase a further 5bps to sit above 1.0% for the first time since March last year.

In the Asia-Pacific, where the dataflow was mostly centred on the final service sector PMI reports for December, equity markets have been mixed today despite the overnight rebound on Wall Street. In Japan, the TOPIX rose 0.3% following a welcome upward revision to the services PMI and as the MoF stressed the need for stability in the yen. China’s CSI300 also continued its winning start to the year, rising 0.9% despite the Caixin services PMI softening in December. But stocks fell 0.8% in South Korea while Australia’s ASX200 fell 1.1% as the Aussie dollar firmed to the highest level since April 2018 and ACGBs saw significant losses, with 10Y yields rising to 1.06%. Meanwhile, the prospect of a Democrat-controlled US Senate has given a boost to European equities this morning, while European govvies have largely followed USTs lower.

Japan’s services PMI revised up in December, but consumer confidence declines
The final results of the Jibun services PMI cast this sector in a slightly firmer light. The preliminary 0.6pt decline in the headline business activity index was largely revised away, with the final reading down just 0.1pt to 47.7. In the detail, the new orders index was revised up 0.7pts to 46.4 while the outstanding business index was revised up a considerable 1.7pts to 48.0. A note of caution continued to be sounded by the business expectations index, although the final 1.2pt decline to 54.2 was less than half as large as indicated in the preliminary survey. Similarly, the output prices index was revised up 1.0pts to 48.9, leaving it just 0.4pts below the November reading. Combined with the upward revisions seen in the manufacturing survey at the beginning of the week, today’s results meant that the composite PMI output index was revised up 0.5pts to 48.5 – up 0.4pts from November and the highest reading since January. The composite new orders index was revised up 0.7pts to 47.5 – just below the recent October high – and the composite output prices index was revised up 0.9pts to 49.3, leaving it little changed from November.

In other news, the Cabinet Office consumer confidence index fell 1.9pts to 31.7 in December, marking the lowest reading since August. In the detail, all components of the survey were weaker, with a 2.9pt decline in the employment index and a 1.8pt decline in the overall livelihood index likely reflecting the rising incidence of coronavirus. While the income growth index declined only modestly, the index capturing respondents’ willingness to buy durable goods fell 1.0pt to a 4-month low of 33.8 – over 8pts below the long-term average for this series.

Finally, the BoJ released its latest assessment of the economy’s output gap and potential growth rate. Not surprisingly, the BoJ’s calculation suggests that the output gap remained negative to the tune of 3.3% of GDP in Q3, albeit an improvement on the 4.8% of GDP surplus capacity recorded following the economic slump in Q2. Moreover, given the ongoing decline in average hours worked and slower growth in the capital stock, the Bank now estimates that Japan’s potential growth rate has fallen to zero for the first time since the GFC.

China’s Caixin services PMI comes off the boil in December
The Caixin services PMI fell 1.5pts to 56.3 in December, mirroring the softened reported in the official PMI data at the end of last year. After lifting sharply in November, the new orders index fell 4.3pts to 54.3. However, a more positive note was sounded by the future activity index which increased 0.3pts to 66.7 – the highest reading since April 2011. With the Caixin manufacturing PMI also softening during the month, the composite PMI output price index fell 1.7pts to 55.8 – still the second highest reading in the last decade. The composite output prices index increased 1.2pts to a 4-year high of 53.9, confirming the stronger inflation picture suggested to the official PMI survey.

French CPI surprises on the downside but consumer confidence rebounds
Ahead of the equivalent preliminary German data out later today, this morning’s flash estimate of French inflation in December surprised on the downside, with the headline rate on the EU-harmonised measure dropping 0.2ppt to 0.0%Y/Y, matching September’s four-year low. The detail on the national measure suggested that the latest weakness came from prices of food and manufactured items, with services inflation steady and the pace of decline in energy prices somewhat less marked. In contrast to the French data, the German inflation rate on the EU-harmonised measure is expected to tick up 0.1ppt from November’s series low to -0.6%Y/Y.

The latest French consumer confidence survey, however, surprised on the upside, with a larger-than-expected jump in the headline sentiment index in December of 6pts – the most in any single month this year – to 95, matching the highest level during the pandemic. The improvement within the survey detail – which tallied with last month’s easing of containment measures – was widespread, with the share of households considering it to be a suitable time to make major purchases jumping above the long-run average for the first time since February. Households’ assessment of their future financial situation also rose above the long-run average. And while fears of unemployment remained high by historical standards, they also eased somewhat.

Final European services PMIs to come
Like elsewhere, the final December services and composite PMIs for the euro area, Germany, France and the UK will be published this morning along with first estimates for Italy and Spain for December. The flash euro area services activity PMI rose a substantive 5.6pts to a three-month high of 47.3, to suggest a notable slowing in the pace of decline in the sector. And the preliminary UK services PMI rose to 49.9 helping the composite PMI to rise 1.7pts to 50.7, above the key 50 level to suggest a modest increase in activity.

Politics to remain in focus in the US today; ADP report & FOMC minutes due
The focus in the US over the coming 24 hours will inevitably remain on politics. In addition to the ongoing count of votes in the Senate run-off races in Georgia, a joint session of Congress will convene to formally count and finalize the presidential Electoral College votes that will confirm Joe Biden as President from 20 January. This session seems certain to be elongated by the objections that are expected to be raised by a number of House and Senate Republicans against certifying the results of at least three Biden-won states. But with the Democrats controlling the House, there is virtually no possibility of that chamber accepting an objection, while the Senate will very likely vote similarly given that a large number of Republican senators have already acknowledged Biden’s win and so will vote in line with Democratic senators.

On the data front, the ADP employment report for December might cast some light on what to expect from the official employment data at the end of the week. US factory orders data for November and the final services PMI for December are also due today, while the Fed will release the minutes from last month’s FOMC meeting.

Australia’s services PMI revised down 0.4pts to 57.0 in December
The final CBA services PMI for December was revised down 0.4pts to 57.0 in December, but remained 1.9pts above the final November reading and well above the average for the survey’s relatively short history. Most of the key activity components were revised slightly lower (including the new orders index, which nevertheless still increased 4.7pts to a robust 56.4), whereas the pricing components were revised higher (the output prices index now sitting at a 12-month high of 52.2). With the manufacturing PMI having been also revised down slightly earlier this week, the composite PMI output index was revised down 0.4pts to a final reading of 56.6 – still up 1.7pts from November and more than 4pts above the historic average.

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