Japan and China's services PMIs consistent with falling activity

Chris Scicluna

Equity markets continue to advance as retail-driven volatility ebbs
The rebound in the US equity market continued yesterday with the S&P500 advancing 1.4% and the Nasdaq gaining 1.6%, arguably supported by earlier reports that the Biden Administration will push ahead with its plans for large-scale fiscal stimulus, going down the budget reconciliation route if bipartisan agreement is not reached. Also boosting sentiment was favourable earnings reports – which continued after hours with both Alphabet and Amazon beating market expectations – and signs that the recent retail-driven volatility has run its course, with the VIX closing below 30 for the first time in four days and GameStop stock falling by a further 60% (nonetheless, Treasury Secretary Yellen confirmed that she plans to convene regulators to examine recent market volatility). Treasury yields increased only modestly, with the 10Y UST ending the day at 1.10%.

The greenback erased intraday gains to close little changed. Although the yen remained close to 105/$, the euro received a small boost as newswires reported late in the afternoon that former ECB President Draghi had been approached to form a new Italian government. Draghi is expected to meet President Mattarella at lunchtime today. Finding common ground with Italy’s political party leaders will not be as simple as steering agreements on the Governing Council. Nevertheless, enthused by the prospect, BTPs have rallied across the curve at the open today, with 10Y yields down about 7bps to 0.58%, the lowest in more than a fortnight.

Against that background, and with Chinese repo rates remaining at around yesterday’s two-week low despite the PBoC draining liquidity today, equity markets continued higher in the Asia-Pacific region, although the gains have been generally smaller than the past two days. Japan’s TOPIX was one of the region’s top performers, gaining 1.3%, with the service sector PMI for January the recipient of a small but welcome upward revision. A speech by BoJ Deputy Governor Wakatabe didn’t cast much light on the likely outcome of the Bank’s current review of monetary policy, but did emphasize that the Bank was not seeking to tighten monetary conditions. In China, the CSI300 edged down 0.3%, weighed down a little as the Caixin services PMI confirmed the weekend’s official data and pointed to a marked softening in the pace of expansion in January.

In the Antipodes, the ASX200 gained 0.9% and yields on ACGBs edged higher as Australia’s private house construction approvals surged to a record high in December. Speaking after yesterday’s surprise decision to extend QE purchases, RBA Governor Lowe said that at present he does not see signs of lax mortgage lending standards, but added that the Bank would be monitoring standards closely. Regarding yesterday’s announcement, he said that, given ongoing bond purchases by other major central banks this year, it is likely that the exchange rate would come under additional upward pressure if the RBA had let its QE programme expire in mid-April – a development that the Bank would prefer not to see given that it remains well short of achieving its inflation and employment goals. Meanwhile, in New Zealand the 10Y yield jumped 11bps to a 9-month high of 1.32% after the RBNZ’s pessimistic judgement of the economic outlook was further undermined by a shock decline in the unemployment rate to 4.9% in Q4. The Kiwi dollar also firmed on the news, with the NZD/AUD cross – followed closely by the RBNZ – rising to a 6-week high.

Japan’s services PMI revised a little higher, but still down 1.6pts in January and consistent with declining activity
The only economic report released in Japan today was the final reading of the Jibun services PMI for January. In a modestly pleasant surprise, the completed survey cast the sector in a slightly firmer light, with the initial 2.0pt decline in the headline business activity index revised up 0.4pts to a final reading of 46.1, albeit still a 5-month low consistent with a drop in services output. In the detail, the new orders index was revised up 0.6pts to 44.9, but was still down 1.5pts for the month. But with firms perhaps beginning to see the potential longer-term benefit from current restrictions on activity, the business expectations index was revised up 1.5pts to 53.5 and so now down just 0.7pts from December. The output prices index was revised up just 0.1pts to 50.6, leaving it down 0.7pts for the month.

Combined with the upward revisions seen in Monday’s manufacturing survey, today’s service sector results meant that the composite PMI output index was revised up 0.4pts to 47.1, albeit leaving it down 1.4pts for the month and at a 4-month low consistent with an economy that has shifted into reverse for the time being. The composite new orders index was revised up 0.3pts to 46.6 – still a 5-month low – and the composite output prices index was revised up 0.3pts to a 3-month high of 49.5.

China’s Caixin services PMI slumps, confirming softer start to 2021
Today’s Caixin services PMI for January confirmed the marked softening in activity reported in the weekend’s official survey to suggest a much softer start to the year for the sector. Indeed, the 4.3pt decline in the headline index to a 9-month low of 52.0 was even larger than recorded by the official services index and the second largest monthly decline on record (beaten only by the 25pt slump seen last February). As with the official index, this outcome, which was far below market expectations, probably reflects the influence of pandemic-containment measures and reduced activity associated with what is expected to be an unusually subdued LNY holiday period. In the detail, the new orders index fell 1.4pts to 53.0 and the employment index fell 1.3pts to 50.8. Combined with the less-pronounced softening in the Caixin manufacturing PMI, today’s results for the services sector yielded a 3.6pt decline in the composite PMI output index to a 9-month low of 52.2 – still consistent with expansion, but at a much slower pace than seen over most of last year.

Euro inflation to post record monthly jump on one-off factors
While the return of Mario Draghi to try to save Italy from its politicians will be one focus today, the data highlight will undoubtedly be the euro area flash inflation estimates for January, which will likely show a record monthly jump of 1.1ppt in the headline rate to a six-month high of 0.8%Y/Y as well as a steep rise in the core rate to the highest in eleven months. Those increases might well halt recent talk of the possibility of further rate cuts from the ECB. But given the dominant role of one-off factors explaining the rise in inflation this month – notably a reweighting of the inflation basket as well as the reversal of Germany’s VAT cut, the introduction of Germany’s carbon tax, the timing of France’s winter sales, and Spain’s freak snow storms – underlying price pressures will still be muted. And so, the ECB certainly won’t get carried away.

In addition, after a weak start to the year elsewhere in the euro area for new car registrations, German car registration and production figures for the same month are due today. And survey-wise, the final services and composite PMI indices for January will also start coming in shortly. In line with the flash estimate, the euro area services PMI is expected to drop 1.4pts to 45.0 in January, highlighting how the pandemic containment measures continue disproportionately to weigh on that sector. In the UK, the deterioration in the flash services PMI was far more severe, dropping more than 10pts to 38.8, the lowest since May and weakest of all countries to report such indices.

ISM services index and ADP employment report the focus in the US today
With one eye on the official employment report that will be released at the end of this week, the focus in the US today will be on the release of the ISM service sector report for January – especially the employment component – and the ADP employment report for January. Daiwa America Chief Economist Mike Moran expects the headline ISM index 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. The final Markit services PMI reading for January is also due today, but as usual will attract less attention than its much longer-running ISM counterpart (the preliminary report pointing to a surprising 2.7pt lift in the activity index to 57.5).

Aussie dwelling approvals surge to new record high; services PMI revised down but still robust, with employment index at a 20-month high
The positive economic news flow continued in Australia today with the number of dwelling approvals reported to have increased a further 10.9%M/M in December – far surpassing market expectations – lifting annual growth to 22.8%Y//Y. Approvals for apartments – often a source of volatility – increased just 2.3%M/M and were down 19.3%Y/Y (off a high base). By contrast, driven by government stimulus measures and very low interest rates, private house approvals surged 15.8%M/M to a new record high, with annual growth increasing to an eye-watering 55.6%Y/Y. In value terms, approvals for residential buildings increased 19.3%Y/Y, suggesting a slight compositional shift towards cheaper homes. In addition, it is worth noting that the value of approvals for non-residential buildings was down 17.1%Y/Y, so that the value of total approvals for all buildings was up just 3.3%Y/Y – a positive outcome under the circumstances, but reminding that the near-term outlook for the construction sector is less rosy than indicated by the headline housing figures.

In other news, the CBA services PMI for January was revised down just 0.2pts from its flash estimate to a final reading of 55.6 – down 1.4pts from December but still well above the historic average for the series. In the detail, the new orders index was revised up 1.1pts to 55.2, halving the decline reported in the preliminary report. Meanwhile, the employment index was revised up a welcome 0.3pts to 51.9, which is now the highest reading since May 2019.

Kiwi employment rebounds strongly in Q4 confounding RBNZ expectation
The long run of upside surprises in Kiwi economic data continued today with the Household Labour Force Survey pointing to an unexpectedly strong rebound in the labour market in Q4. Employment grew 0.6%Q/Q, far above the fractional increase that the consensus had expected and the RBNZ’s forecast of a further modest decline. With the assistance of modest upward revisions to earlier data, annual employment growth increased to 0.7%Y/Y – a result that reflects the success of the Government’s fiscal response, which has absorbed the balance sheet pain that would otherwise have fallen on the private sector. Given the rebound in employment, the unemployment fell 0.4ppts to 4.9% despite a slight pickup in labour force participation – a far cry from the increase to 5.6% that both the RBNZ and market had predicted. To top off a good report, the Labour Cost Index increased 0.5%Q/Q in Q4 – also a notch firmer than market expectations and the largest increase for a year.

Not surprisingly, today’s news led to a sharp increase in Kiwi bond yields and a lift in the Kiwi dollar, as investors concluded that any further easing of monetary policy is even more unlikely than believed previously. Indeed, if economic data continues on its present course, New Zealand could be one of the first countries to begin retightening monetary policy, albeit probably not until sometime in 2022. In the meantime, the RBNZ – which has badly misread the economy – will doubtless be worried about the inevitable upward pressure on the exchange rate that will occur if the domestic recovery continues to outpace that seen in other key trading partners.

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