Morning comment: Reuters Tankan, German orders, Aussie trade & sales

Chris Scicluna
Mantas Vanagas

With US markets closed yesterday to mark the funeral of President George H. W. Bush, markets elsewhere were left to react mostly to the late slump seen on Wall Street back on Tuesday. US equity futures initially firmed modestly as President Trump referred to “Very strong signals” from China since his weekend meeting with President Xi, adding that “Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting”. Unfortunately any positivity went quickly out the window with the belated news that the CFO of Huawei Technology – a daughter of the iconic company’s founder – had been arrested in Canada on 1 December at the request of US authorities, facing the charge of violating US sanctions on Iran. This news was widely viewed as further complicating US-China trade negotiations, with any concessions made by China to the US perhaps now harder to sell to the Chinese public.

US equity futures initially traded down as much as 2% on the Huawei news, while 10-year Treasury yields moved down 4bps to 2.88%. And in Asia benchmark equity indices have fallen close to 2% or more in China, Hong Kong, Japan and Taiwan. In Japan’s bond market, the 10-year JGB yield fell to a fresh 5-month low of just 0.05%. In a brief statement issued with the BoJ’s tabling of its Semi-annual Report on Currency and Monetary Control to the Diet, Governor Kuroda reaffirmed that while Japan's economy is still expected to continue its moderate expansion, “risks to the outlook are skewed to the downside, particularly regarding developments in overseas economies”, an assessment that is hard to dispute. This morning’s German factory orders figures did at least break the seemingly relentless run of downbeat data from the euro area. But they were never going to be able prevent this morning’s inevitable opening declines in European equity markets or the further gains by all major euro area sovereign bonds.

The only economic data out of Japan today were the Reuters Tankan survey indices for December which painted recent developments in the economy in a mixed light. The headline index for manufacturers fell a further 3pts to a 7-month low of +23, with the forecast index suggesting that the index would decline a further 1pt over the next 3 months. No sectors reported negative conditions on net. But the precision machinery sector index fell to 0 for the first time since June 2016, while sentiment in the general machinery and auto sectors eased somewhat from the very positive levels reported previously. In contrast, sentiment among non-manufacturers improved very slightly, with the headline index up 1pt to +31 and a similar net proportion of respondents (+30) expecting improved business conditions three-months down the track. Within the detail, retailers’ sentiment fell to a 4-month low but improved sentiment was evident in the information services and transport sectors – the latter recovering back to its earlier trend after taking a downward hit in October. Further light on business sentiment will be cast by next week's Economy Watchers survey (Monday), MoF Business Outlook Survey (Tuesday) and, most notably, the BoJ Tankan survey (Friday).

Euro area:
Following the seemingly relentless run of disappointing economic data and business sentiment surveys out of the euro area in recent weeks, this morning’s German factory orders figures provided some welcome relief. Total orders rose 0.3%M/M in October. Following five negative readings in the first six months of the year, that represented a third consecutive increase. Admittedly, domestic orders were disappointing, down by more than 3%M/M. So, the pickup was driven by foreign demand, in particular – and perhaps surprisingly – from other euro area member states, from which orders rose more than 7%M/M. As a result, total orders in October rose more than 1% above the average level in Q3, strongly suggesting the likelihood of a return to growth in the sector in the fourth quarter. And with today’s figures also showing a 1.0%M/M increase in manufacturing turnover in October, tomorrow’s German industrial production figures similarly seem likely to show that manufacturers started Q4 on the front foot.

After yesterday’s services PMI suggested that GDP growth in the UK has all but ground to a halt, today will be free of top-tier Brit economic data. That, of course, means that attention can remain fully focused on machinations in the House of Commons, where MPs will today debate the economic implications of the Brexit Withdrawal Agreement and Political Declaration. But with the parliamentary arithmetic still suggesting that May is on course for a humiliating defeat in the meaningful vote scheduled for Tuesday evening, some reports today suggest she is still desperately hunting for some kind of concession to appeal to the Brexiters to persuade them to change their minds and come onside next week. The Times, however, is reporting that several Cabinet members are now trying to persuade May to call off the vote on Monday if the arithmetic has not by then materially improved. But while such a ‘timeout’ could provide her with a breather and the opportunity to examine new avenues at the EU summit next Thursday, a ‘magic bullet’ capable of pleasing Brexiters, Tory Remainers and the Northern Irish DUP seems highly likely to remain elusive. And in her BBC radio interview right now, however, she seems to be unwilling to change course yet.

Today brings several US releases originally scheduled for yesterday, including the ADP employment and non-manufacturing ISM reports for November and revised estimates of labour productivity for Q3. The full trade balance and final factory orders reports for October are also due along with the usual weekly claims numbers.

Following on from yesterday’s disappointing Q3 GDP report, the domestic focus in Australia today turned to the performance of consumer spending and the tradeables sector during October. Beginning with the former, the ABS reported that the value of retail sales rose 0.3%M/M – exactly in line with market expectations, but following a downwardly-revised 0.1%M/M increase in September (from 0.2%M/M previously). Annual growth in spending was steady at the previous month’s downwardly-revised pace of 3.6%Y/Y. Within the detail, spending increased across all categories with the exception of cafes and restaurants, where spending fell following four months of solid gains. Spending on apparel rebounded a strong 2.6%M/M and spending on household goods rose 0.6%M/M. Today’s outcome leaves spending 0.5% above the average level experienced through Q3. Lower fuel prices should provide a lift to spending when the November data is released (fuel spending is not captured in Australia’s retail sales report).

Turning to trade, Australia reported a trade surplus of AUD2.3bn in October – a larger-than-expected narrowing from the very-slightly revised AUD2.9bn surplus estimated in September. Exports rose 1.3%M/M in October, lifting annual growth to a very strong 20.0%Y/Y. While receipts from the rural sector fell 6.7%M/M and 2.3%Y/Y, other receipt rose 4.3%M/M and 31.8%Y/Y (increased exports of coal and LNG accounting for most of the growth this month). Imports rose an even stronger 3.2%M/M – driven by a 7.8%M/M rebound in imports of capital goods and a 5.2%M/M increase in imports of intermediate goods – causing annual growth to slow to pick up 13.0%Y/Y.

New Zealand:
As widely expected, dairy giant Fonterra lowered its forecast ‘payout’ to farmers to $6.00-6.30 per kilo of milk solids, from a range of $6.25-6.50 previously – a key price in the economy given the status of the dairy industry as by far the largest generator of export revenue for goods (and second only to the tourism sector as far as total exports are concerned). Fonterra noted that the new range assumes some improvement in spot prices over the balance of the season. The decline in the payout reflects relatively strong growth in dairy supply, with New Zealand milk production still estimated to rise 3%Y/Y in the current season. Demand from China and Asia was described as strong but political factors were said to be disrupting demand in some other markets.

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