Morning comment: Italy, Brexit & Japanese

Chris Scicluna
Mantas Vanagas

While a further sharp rally in China’s equity market had helped boost stocks across the Asian region yesterday, US and European markets failed to pick up the baton with both the S&P500 and Stoxx600 eventually closing down 0.4%. And so, on a day with little new regional data, investors in Asia appear to have been disheartened by that lack of follow-through, with bourses back-tracking sharply across the region, with declines of more than 2½% in Japan (leaving the Topix down about 9% for the year to-date and at its lowest level since September last year), China, Hong Kong and Korea. That price action in Asia has seen US equity futures weaken, the 10-year Treasury yield nudge lower and the yen appreciate against the background of an otherwise slightly firmer US dollar. And with equities inevitably opening lower in Europe too, BTPs are selling off again this morning with the European Commission set to agree today its uncompromising response to yesterday’s insistence by the Italian government that it will stick to its non-compliant budgetary plans.

Another relatively quiet day for economic data in Japan saw the release of the MHLW’s final Monthly Labour Survey results for August, which contained only minor revisions from the preliminary report. Growth in total labour cash earnings (per person) was revised down 0.1ppt to 0.8%Y/Y, with an 8.2%Y/Y decline in volatile bonus payments slightly larger than first estimated. Growth in contracted earnings was confirmed at 1.3%Y/Y – up from 1.1%Y/Y in July and just below the 21-year reached in May. Growth in scheduled earnings (i.e. ordinary time) was similarly confirmed at 1.4%Y/Y but growth in non-scheduled earnings (i.e. overtime) was revised up 0.3ppt to 1.3%Y/Y. Scheduled earnings of part-time workers rose 2.6%Y/Y on a per hour basis – revised down 0.2ppt from the preliminary report but growth in scheduled monthly wages for full-time workers was revised up 0.1ppt to 1.3%Y/Y, matching the this year’s highpoint. Reflecting the revision to the nominal data, real total cash earnings fell a final 0.8%Y/Y in August – 0.1ppt weaker than indicated by the preliminary report. Taking a matched sample of business respondents, growth in total labour cash earnings (per person) was revised up 0.1ppts to 0.9%Y/Y.

Elsewhere in the survey, growth in the number of regular employees was revised up 0.1ppt to 1.4%Y/Y. As is usually the case, revisions have reduced growth in the number of full-time employees, while boosting growth in part time employees. Indeed, growth in full time employees was revised down 0.3ppts to 0.7%Y/Y – now unchanged from July – while growth in the number of part-time employees was revised up 0.7ppt to 3.0%Y/Y, which matches the high recorded earlier this year. Finally, after declining over the prior two months, aggregate hours worked (per person) were reported to have rebounded 1.9%M/M in August and so were up 0.6%Y/Y – 0.2ppt more than estimated in the preliminary report.

Euro area:
Yesterday’s response by the Italian authorities to the Commission’s letter of last week, which had signalled Brussels’ concerns at the “particularly serious non-compliance” with the EU’s fiscal rules, saw Finance Minister Tria in no mood to engineer for a U-turn, instead standing by the provocative 2.4% of GDP 2019 deficit target. So, with the draft budgetary plan’s easing of fiscal policy so blatantly incompatible with Italy’s commitments, the European Commission is set to respond today and again demand revised proposals. Assuming the Commission’s new letter is sent today, Italy will face a three-week deadline to respond.  And if the Italian proposals then still don’t pass muster, the Commission would be likely to launch a formal legal procedure that could theoretically culminate in the levying of fines on the Italian government next year. However, with Brussels and other member states unlikely to want to upset the apple cart before the European Parliament elections at the end of May, and member states likely to prefer to wait for concrete fiscal data for the coming year before agreeing (reluctantly) to issue financial penalties, we would  doubt that the procedure would crystallise before 2020. In the meantime, the Commission will hope that the market response is sufficient to persuade the Italian authorities that it is in their own interests to change direction.

Data-wise, after yesterday saw the Bundesbank raise the prospect of German economic growth having paused in Q3, today will bring the first top-tier euro area release of the week in the shape of the European Commission’s flash estimate of consumer confidence in October. And this also seems unlikely to be particularly cheery. This index has been on a downward trend this year, hitting a sixteen-month low of -2.9 in September, and today’s flash estimate seems likely to show a further modest deterioration this month.

Yesterday’s statement in the House of Commons by Theresa May offered precious little new. While she did admit (to the dissatisfaction of critics of all political stripes) that ‘the option’ of an extension to the implementation period beyond 2020 was now a runner, her demand for a UK-wide customs arrangement with the EU to be included in the legally binding withdrawal agreement will certainly not fly with Brussels, meaning that the Northern Ireland-only backstop would still be required in the Treaty. So, it remains to be seen how she can break the impasse over the Irish border with the EU in a way that can be endorsed by the UK Parliament.

Meanwhile, after Sunday’s special CBI survey highlighted that a striking 80% of businesses have delayed or cancelled investment because of Brexit, today’s regular update of the CBI’s industrial trends survey seems likely to suggest that little has changed in the manufacturing sector over recent months. Indeed, the October monthly survey indices for new orders and selling prices both seem likely to remain close to the bottom of the range of the past couple of years. And the quarterly survey index for business optimism similarly seems likely to remain close to the both of the range of the past two years, albeit above the initial post-referendum reading in July 2016.

Separately, BoE Chief Economist Andy Haldane and, later on, Governor Mark Carney, will both be speaking publicly abroad (in Paris and Toronto respectively). But with the subject matter in both cases related to innovation, there might be no new insights to monetary policy. Meanwhile, in the bond market, the DMO will sell 10Y index-linked Gilts

In the US, it is set to be another quiet day for economic data, with just the Richmond Fed’s October manufacturing survey results due. In addition, the Atlanta Fed’s President Raphael Bostic, who is a voter on the FOMC this year, will speak about the US economy and monetary policy. And the Treasury will sell 2-year FRNs.

The only Aussie economic report today was the weekly ANZ-Roy Morgan consumer confidence survey. The headline index recorded a 7.2pt slump to 112.3 last week – its lowest reading this year – with especially large declines seen in sub-indices measuring perceptions of respondents’ financial situation and attitudes to buying a major appliance. This decline likely reflects reaction to the recent correction in equity markets and perhaps the weaker Australian dollar.


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