Morning comment: Japan CPI, France & UK confidence

Chris Scicluna
Mantas Vanagas

The market continues to react poorly to Wednesday’s message from the Fed. And risk aversion was heightened yesterday after newswires reported that President Trump would not sign the continuing resolution spending bill that had passed in the Senate due to the bill not providing funding for his much-promised wall. That news reinstated the risk of a partial government shutdown at the end of today, even with the House subsequently passing a bill that does provide USD5.0bn of funding for wall construction. The revolving door at the White House, which continued with Defense Secretary Jim Mattis resigning and citing differences of policy view with the President, didn’t help matters either.

At yesterday’s close the S&P500 was down 1.6% and at a 15-month low, recovering from an intraday loss of as much as 2.6% at one point. While Treasury yields were little changed, the deterioration in credit markets continued with US high spreads widening out to levels last seen in June 2016. Meanwhile the USD tumbled, with risk aversion driving an especially strong rally in the yen, with $/¥ trading below 111 at one point.

With that background, not surprisingly Asian equity markets were once again on the back foot today. After leading the region lower with a heavy 2.5% loss yesterday, Japan’s TOPIX has fallen a further 1.9% today, stretching its year-to-date loss to more than 18%. China’s CSI300 fell 1.2% to be down 25% for the year, but losses in most other key Asian markets amounted to less than ½% and gains were registered in Korea. In the bond market, JGBs remained volatile with yields pushed higher despite the weakness seen in the equity market and a weaker-than-expected core inflation reading in November. In Europe, meanwhile, equities and bonds have opened down, with some weak French business sentiment data adding to the downbeat tone.

As far as economic data were concerned, the domestic focus in Japan today was on the CPI report for November. As the market had expected, the headline index fell a seasonally-adjusted 0.2%M/M last month, propelled by a 5.5%M/M decline in the price of fresh food. And with fresh food prices now down 1.4%Y/Y – as opposed to the 10.8%Y/Y lift recorded in October – the annual headline inflation rate fell 0.6ppt to a 5-month low of 0.8%Y/Y.

More importantly, the key measures of core prices were weaker than expected, in all cases pointing to no lift in prices over the past month. As a result, the measure used by the BoJ in its quarterly Outlook Report forecast – which excludes fresh food prices from the CPI – reported a 0.1ppt decline in annual inflation to 0.9%Y/Y. Meanwhile the BoJ’s preferred measure of core prices, which excludes both fresh food and energy prices, also reported a 0.1ppt decline in annual inflation to 0.3%Y/Y. And the measure of core prices that strips out prices of all food items and energy (as monitored closely in many other major economies) also slipped 0.1ppt to an even weaker 0.1%Y/Y. So, while the BoJ thinks that the output gap has been maintained firmly in positive territory, these inflation measures are now identical to those recorded at the end of last year – a result that Kuroda will surely find discouraging.

Clearly, even given extreme tightness in the labour market, at this stage the underlying inflation pulse remains barely positive and nowhere near consistent with the BoJ’s current 2% target. And with the ongoing slump in global oil prices bound to apply downward pressure on the headline and forecast measures of core inflation over coming months, as well as inflation expectations, the BoJ forecasts for inflation are likely to come under significant downward pressure (again) when reviewed ahead of the publication of the next Outlook Report on 23 January.

Indeed, if oil prices stay around current levels, we continue to think that the BoJ’s forecast core inflation measure could well be back close to (or even below) zero this time next year after adjusting for the impact of the consumption tax. Therefore, in the absence of clear signs of negative feedback on the financial sector, there remains little prospect of the BoJ reducing the degree of accommodation provided by its “yield curve control”, as also suggested by the decline in JGB yields over the past month. Indeed, the BoJ may yet find itself resorting to the additional easing measures mentioned by Governor Kuroda at yesterday’s post-meeting press conference.

In other news, the MHLW released the final results of the Monthly Labour Survey for October, which for the most part contained only modest revisions from the preliminary survey. Indeed, growth in the headline measure of total labour cash earnings (per person) was unrevised at 1.5%Y/Y, with a downward revision to growth in bonuses offset by a 0.1ppt upward revision to growth in contracted earnings – now also up 1.5%Y/Y, which is the fastest pace since 1997. Taking a matched sample of business respondents – to try to look through the impact of sampling changes – growth in total labour cash earnings (per person) was also unrevised at a slightly weaker at 1.0%Y/Y.

Within the detail, scheduled earnings of part-time workers rose an upwardly-revised 2.2%Y/Y on a per hour basis, while growth in scheduled monthly wages for full-time workers picked up to 1.6%Y/Y – 0.3ppt firmer than the preliminary reading. After allowing for inflation, real total cash earnings (per person) fell an unrevised 0.1%Y/Y in October, but should pick-up in coming months as headline inflation falls under the weight of lower energy prices. Elsewhere in the survey, the number of regular employees rose an unrevised 1.1%Y/Y. But as is usually the case, growth in the number of full-time employees was revised lower (down 0.3ppt to 0.4%Y/Y) and growth in part-time employment was revised higher (up 0.7ppt to 2.9%Y/Y). Total hours worked (per person) fell an unrevised 0.3%Y/Y, thus maintaining the long-term downward trend.

Euro area:
The week ends today with plenty of new economic data from the euro area, including several December sentiment surveys. The European Commission’s flash estimate of euro area consumer confidence, which last month reached its lowest level in twenty months, is among the new releases. And while this morning’s German GfK consumer confidence survey suggested stable sentiment heading into the New Year, albeit at the lowest level since mid-2017, we expect to see a deterioration in the euro area figure caused not least by events in France, where the Gilets Jaunes protests have taken their toll.

Indeed, the impact of those protests was visible in the INSEE French business survey, also released earlier this morning. This survey’s headline business climate indicator fell 3pts to 102, its lowest level since December 2016. Sentiment in manufacturing weakened somewhat. But the headline deterioration was driven by retail trade, where the respective business climate fell 7pts to its lowest level since February 2015 and firms on average signalled expectations of falling sales over the coming three months. That follows confirmation of a weakening in household spending in November, although the fall of 0.3%M/M was insufficient to reverse the 0.9%M/M rise the previous month. Moreover, adding to the downbeat tone of the French dataflow, GDP growth in Q3 was revised down this morning by 0.1ppt to 0.3%Q/Q, suggesting that the economy had even less momentum that previously thought heading into Q4. We currently have French GDP growth of 0.2%Q/Q pencilled in for the current quarter, but the risks to that forecast seem to be skewed to the downside.

Having been on a downward trajectory since the end of the summer, UK consumer confidence deteriorated further at the end of the year, with today’s GfK survey indicator falling 1pt to -14, the lowest level since mid-2013. Consumers’ assessment of how the economy is going to evolve over the coming twelve months deteriorated sharply to the lowest level in seven years, while the equivalent indicator for personal finances was also weaker and matched the reading seen immediately after the Brexit referendum. There was some slightly more positive news with regards to the climate for major purchases, which improved slightly from the previous month and was in line with its average in 2018. However, overall, we would not expect that the festive period to see particularly strong consumer spending this year. Indeed, yesterday’s figures from the retail sector, which showed stronger than expected sales growth in November, likely only reflected the effect of consumers bringing their spending forward from December to take advantage of Black Friday deals. Looking at Q4 as a whole, consumer spending seems likely to have increased only slightly, almost certainly at a slower pace than the 0.5%Q/Q rate seen in Q3.

Looking ahead, the full Q3 national accounts are due later this morning. The figures will probably confirm that economic output increased by 0.6%Q/Q last quarter, a step up from 0.4%Q/Q in Q2. The preliminary release suggested that private consumption accounted for half of that growth, while net exports provided a 0.8ppt contribution, which was offset by stock building and acquisitions less disposals of valuables. Today’s data will probably show a very similar expenditure breakdown, although the contribution from net trade is highly likely to be revised lower.

Data-wise, the personal income and spending and advance durable goods orders reports for November, due later today, will give an update on the strength of demand in Q4. In the spending report, the core PCE deflator will obviously be watched, but a tame reading is expected in light of the CPI figures already released. We will also receive the ‘final’ estimate of GDP in Q3 (current growth estimate 3.5%Q/Q ann.) and the final results of the University of Michigan’s consumer survey for December.

New Zealand:
The ANZ-Roy Morgan consumer confidence index rose 2.8%M/M in December – the second consecutive such increase – lifting the index to a 9-month high of 121.9 and now slightly above the historic average. This month respondents were slightly more positive about the near-term outlook for their family finances and the economy more generally. Respondents also indicated a greater willingness to buy major household items from levels that were already historically robust.


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