Morning comment: US elections, Japan and Kiwi labour market

Mantas Vanagas
Emily Nicol

Of course, today’s focus was firmly on the outcome from the US mid-term elections. A late rally in US markets yesterday allowed the S&P500 to close up 0.6% and on its highs for the session, which gave Asian equity markets an early lift today. Further support was provided by a rise in US equity futures, with US Treasury yields and the US dollar also moving higher as early election results began to point to the GOP retaining control of the Senate – in line with pre-election polling – and, more surprisingly, left open the possibility of the GOP retaining control of the House of Representatives. However, as the day wore on, and as more results were called, it became increasingly clear that the Democrats would not only regain control of the House, but do so with a solid margin as pre-election polls had suggested. Indeed, at the time of writing the latest results suggests the Democrats have secured a majority with 219 of the 435 seats (up from the 195 seats they currently hold), with 22 seats still to announce. In the Senate, the GOP will have at least 51 of the 100 seats, with votes for 5 more seats yet to be counted.

In response, US equity futures, US Treasury yields and the US dollar all reversed their initial moves (indeed Treasury yields and the US dollar have moved to session lows). Asian equity markets, meanwhile, pared earlier gains to end the day marginally lower, with China’s CSI300 declining a further 0.7% today, while Japan’s TOPIX was down 0.4%. Meanwhile, the kiwi dollar jumped more than 1% as a strong employment report from New Zealand raised the likelihood of a more hawkish tone to this evening’s post-policy meeting press conference.

In Europe, today German IP report underscored the weakness in the economy last quarter, while euro area retail sales figures today are likely to signal a weak performance in Q3 too.

The domestic focus in Japan today was on the household sector with the release of new reports on the performance of consumer spending and labour incomes for the month of September.

Turning first to consumer spending, the BoJ’s Consumption Activity Index, which as an indicator of private consumption spending is bettered only by the slightly less timely Cabinet Official Synthetic Consumption Index, pointed to a somewhat surprising lift in spending in September. The BoJ’s index – which is constructed using both demand- and supply-side indicators – rose 0.3%M/M in real terms in September. Moreover, the BoJ’s index now reports a 0.2%M/M lift in spending in August, rather than the 0.1%M/M decline reported previously, so that annual growth in September rose to a 9-month high of 1.0%Y/Y. According to the BoJ’s data, all of the growth in spending in September was attributable to a rebound in spending on non-durables, while spending on durables and services declined. Meanwhile, the travel-adjusted real index – which conceptually aligns most closely with the national accounts measure of private consumption by removing the (growing) net spending of tourists – also rose 0.3%M/M in September following an upwardly-revised 0.2%M/M lift in August. As a result, this index rose 0.4%Q/Q in Q3 following a 0.6%Q/Q increase in Q2. This outcome contrasts with the Cabinet Office Synthetic Consumption Index, which was pointing to a 0.5%Q/Q decline in spending based on data for the July/August period. We now await the latter’s September reading – possibly released at this end of this week – with particular some interest.

Moving on, news on workers’ incomes was provided by the MHLW’s release of the preliminary Monthly Labour Survey results for September. As always, we caution that the preliminary wage and employment estimates from the Monthly Labour Survey can be subject to substantial revision in due course. Unfortunately, this survey has also been subject to sample changes this year that have introduced additional uncertainty about the actual pace of wages growth in Japan. And Typhoon Jebi and the Hokkaido earthquake are also likely to have impacted this month’s results (certainly the hours worked data appear to have been impacted).

Growth in the headline measure of total labour cash earnings (per person) increased to 1.1%Y/Y from 0.8%Y/Y previously – an outcome that was in line with market expectations. However, taking a matched sample of business respondents, growth in total labour cash earnings (per person) was considerably weaker at just 0.2%Y/Y – down from 0.9%Y/Y in August. The pick-up in headline growth was attributable to the usual volatility in bonus payments. Indeed, bonus payments rose 13.3%Y/Y in September, in sharp contrast to the 8.2%Y/Y decline reported in August. Moreover, somewhat disappointingly, growth in contracted earnings slowed to 0.8%Y/Y from 1.3%Y/Y in August – the slowest growth reported since February. Growth in scheduled earnings (i.e. ordinary time) declined to 0.8%Y/Y from 1.4%Y/Y, while growth in non-scheduled earnings (i.e. overtime) slowed to 0.4%Y/Y from 1.3%Y/Y. The preliminary estimates suggest that scheduled earnings of part-time workers rose 2.1%Y/Y on a per hour basis, down from 2.6%Y/Y in August. Growth in scheduled monthly wages for full-time workers declined to 0.9%Y/Y from 1.3%Y/Y previously. After allowing for inflation, real total cash earnings (per person) fell 0.4%Y/Y in September.

Elsewhere in the survey, the number of regular employees was unchanged in September, causing annual growth to slow to 1.1%Y/Y from 1.3%Y/Y previously. The preliminary estimates suggested that the number of full-time employees rose 1.0%Y/Y, up from 0.7%Y/Y in August. Growth in part-time employment was reported to have slowed to 1.7%Y/Y from 3.0%Y/Y previously. However, given the marked tendency for subsequent revisions to boost part-time employment at the expense of full-time employment, much of that result is likely to be overturned when the final estimates are released. Finally, after rebounding in August, aggregate hours worked (per person) were reported to have slumped 3.0%M/M in September – likely largely due to disruptions caused by Japan’s natural disasters – and so were down 3.3%Y/Y.

Euro area:
While the latest German business survey indicators were consistent with weakening economic momentum in the largest euro area member state and yesterday’s manufacturing orders data signalled a drop in production levels in this sector, this morning’s IP figures were slightly better than might have been expected. Overall output rose by 0.2%M/M in September, and the previous reading for August was revised upwards to growth of 0.1%M/M. However, the figure was flattered by a 2.2%M/M jump in construction, and excluding that effect IP was down 0.2%M/M in September. Capital goods production finally posted an increase following three negative readings previously, but manufacturing as a whole was merely flat as intermediate and consumer goods posted declines. Despite the slightly better tone of September figures, Q3 as a whole was very disappointing, with total output down by nearly 1%Q/Q, which fully reversed the increase of the previous quarter. A drop in car production levels associated with the introduction of new emission standards as well as rising concerns about the global trade outlook certainly played a role. With Germany set to release its first estimate of Q3 GDP data a week today, the outlook appears quite bleak – we think that growth will have dropped to zero last quarter, which would be the lowest reading for three and a half years.

Today will also receive the euro area retail sales release for September, which will provide further insight in household consumption over the third quarter. Indeed, the expected rise of 0.1%M/M that month would still leave sales down 1% over the quarter as a whole.

With the UK Cabinet having failed to reach a breakthrough in their discussion on the appropriate arrangement for the Irish border backstop yesterday, and with time running out to make sufficient progress in the negotiations to seal the deal with the EU by the end of this month, the focus today will remain on the Brexit news flow. PM May and her team are trying to convince Brexiter ministers to get behind her strategy and reports suggest that another Cabinet meeting on Brexit could be held before the end of the week. Away from that, the only noteworthy data release in the UK today was the Halifax house price index, which suggested that in October house price growth eased to only 1.5%Y/Y.

As markets digest the results from the mid-term elections and the FOMC’s latest two-day meeting gets underway, today’s US data releases include September consumer credit figures and weekly mortgage application numbers.

New Zealand:
The main focus in New Zealand today was on the official labour market report for Q3. Despite very weak measured levels of business confidence and reports of subdued hiring intentions, household employment rose a very strong 1.1%Q/Q – more than double market expectations – so that annual growth remained extremely buoyant at 2.8%Y/Y. As a result, even with the labour force participation rate nudging up 0.2ppts to return to its record high of 71.1%, the unemployment rate fell a very surprising 0.5ppts to 3.9% (the rate in Q2 was revised down 0.1pts to 4.4%). This marks the lowest unemployment rate since Q208 and contrasts with the 4.4% rate expected by the market the 4.5% rate that had been forecast by the RBNZ in its August Monetary Policy Statement (indeed, the RBNZ had forecast the unemployment rate to trough at 4.2% in 2019). The employer-based QES survey pointed to a much more modest 0.3%Q/Q/1.2%Y/Y lift in filled jobs in Q3, but this survey does not have complete coverage.

Turning to labour costs, the overall Labour Cost Index – which measures wage movements across a fixed sample of jobs – rose 0.5%Q/Q in Q3. Annual growth slowed to 1.8%Y/Y from 1.9%Y/Y previously, reflecting the rolling out of a large increase in Q317 associated with a major pay adjustment for care workers. The ‘analytical unadjusted index” – which does not adjust for reported changes in labour quality – rose 0.9%Q/Q, leaving annual growth steady at 3.3%Y/Y. In the private sector the headline Labour Cost Index rose 0.5%Q/Q and 1.9%Y/Y, which was in line with the expectations of both market and RBNZ. The employer-based survey reported that average hourly earnings rose 1.0%Q/Q and 2.9%Y/Y, but these estimates can be influenced by changes in the composition of employment (private ordinary time hourly earnings rose a stronger-than-expected 1.4%Q/Q/3.6%Y/Y).

The RBNZ will release the outcome of its OCR Review and revised Monetary Policy Statement this evening (Thursday 9am NZT). Following recent much stronger-than-expected GDP and CPI reports, the key labour activity indicators in today’s report have also beaten the RBNZ’s expectations by a large margin. So while today’s labour costs data was in line with expectations, it seems reasonable to expect that the RBNZ will regard today’s report as raising the prospect of faster growth in labour costs over time. While it is too late for the RBNZ to incorporate the labour market data into the Monetary Policy Statement (the Bank’s forecasts would have been finalised a week ago), today’s news will likely be reflected in the post-meeting press statement and Governor Orr’s press conference. Certainly, these outcomes further reduce the already small likelihood of the RBNZ moving to lower the OCR, while raising the likelihood that the RBNZ tightens policy sooner than the H220 timeframe that the Bank projected back in August (OIS pricing now indicates a 80% probably of a first rate hike in 2019, up from 50% a day earlier). Reflecting this likelihood, the New Zealand dollar rallied sharply today while the 10-year bond yield rose 10bps to 2.74%.

In other news, the RBNZ released its quarterly Survey of Expectations – a survey of the views of a small sample of mostly economists and business people. Expectations regarding GDP growth picked up slightly to 2.4%Y/Y on both a year-ahead and two-year-ahead horizon. The mean year-ahead inflation expectation increased to 2.09%Y/Y from 1.86%Y/Y previously, while the two-year-ahead expectation was fractionally lower at 2.03%Y/Y from 2.04%Y/Y previously.

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