Morning comment: UK labour market & RBA minutes

Mantas Vanagas
Emily Nicol

Wall Street began the week on a very quiet note on Monday, with the S&P500 closing down just 0.1% on trading volumes that remained very light. There was similarly little change in fixed income or currency markets with the 10Y Treasury yield nudging down 1bp to 2.55% and the US dollar little changed. Against that background, equity markets across the Asia-Pacific region have generally traded with a slightly positive bias on Tuesday, with the main exception being a 2.6% rally in China’s CSI300 as investors await tomorrow’s Q1 GDP report. Japan’s TOPIX fell just 0.1% despite a weaker-than-expected Tertiary Activity Index reading for February (more on this below). JGB yields were also little changed after BoJ Governor Haruhiko Kuroda reiterated that the Bank would consider additional policy easing if there were signs that upward price momentum had been lost. While Hong Kong’s Hang Seng rose 0.9%, benchmark bourses rose less than ½% in Singapore, South Korea and Australia. Australian bond yields fell 2-3bps following the release of the minutes of this month’s RBA Board meeting, which reaffirmed that a rate cut would likely be warranted if the unemployment rate was to begin to trend higher – something clearly not evident in the data as yet, however. New Zealand’s bond yields nudged lower in line with US Treasuries, with RBNZ Governor Adrian Orr telling Reuters that the Bank’s easing bias remained in place “but it remains to be challenged by the data that we have seen”.

The only economic report in Japan today was the Tertiary Industry Activity Index for February. Unfortunately, the headline index fell a greater-than-expected 0.6%M/M, with the negative surprise only partly mitigated by a 0.2ppt upward revision to the January reading which now reports growth of 0.6%M/M. Annual growth slowed to 0.9%Y/Y from 1.6%Y/Y in January. The transport/postal sector was the only industry to make a positive contribution to growth in February, with all other sectors – aside from the retail sector which was flat – contributing to the decline in the overall index. Despite the disappointing result for February, for the quarter to date activity is presently tracking 0.2% above the average reading through Q4. However, given the likelihood of a heavy negative contribution to growth from the industrial sector, it remains to be seen whether this will be sufficient to drive positive GDP growth in Q1.

Euro area:
February construction output data are due for release in the euro area today. Equivalent data from Germany showed an increase of almost 7%M/M, which was the steepest in two years, while growth in the sector in France was positive too. So we are likely to see a decent increase in the aggregate construction output in February. Following a 1.4%M/M drop at the start of the year, that is likely to leave the average level so far in Q1 slightly above that in Q4. Among more timely indicators, the ZEW survey of financial analysts will provide an update on the current state of the German economy at the start of Q2. The current conditions index is expected to extent its downward trend seen since begging of last year and ease further to the new lowest level since Q414. Meanwhile, the index of economic expectations is likely to bring a slightly more upbeat message suggesting that the outlook for the economy improved slightly once again.   

After a quiet start to the week yesterday, the flow of top-tier UK economic data picks up today with the announcement of the latest labour market figures. In January employment increased by 222k3M/3M, the biggest rise in more than three years, but a moderation in jobs growth to around 165k3M/3M in the February is on the cards this time not least given that  against the backdrop of high Brexit uncertainty, business sentiment surveys signalled weakening in labour market conditions in recent months. The unemployment rate is expected to remain at 3.9%, but there is a significant risk of a rise of 0.1ppt. Finally, average weekly earnings growth will likely be little changed from January when it posted a rise of 3.4%3M/Y, one of the steepest in recent years.

The focus in the US will be on the release of the latest industrial production data for March. Consistent with the drop in employment in that sector, growth in manufacturing output most likely will have disappointed, perhaps even posting a negative reading for the third consecutive month. Nevertheless, with mining activity and utility output appearing to have picked up, total IP is still set to post a small increase increase following zero growth in February. The NAHB housing market sentiment survey will also be worth watching. With the headline index having declined to a 3½-year low of 56 at the end of last year, it has stabilised at 62 in the last couple of months, slightly higher than its average in the last six months. And a similar reading is on the cards for April.

Ahead of tomorrow’s swathe of important macro data – notably the GDP report for Q1 – today China reported home price data for March. According to Bloomberg’s calculations, the simple average price of new homes across 70 major cities rose 0.6%M/M – 0.1ppt firmer than the previous month – while annual growth increased 0.2ppt to 11.3%Y/Y. Prices rose just 0.2%M/M in 1st tier cities lifting annual growth to fractionally to 4.2%Y/Y. Prices rose 0.6%M/M in 2nd tier cities (11.7%Y/Y) and 0.7%M/M in 3rd tier cities (11.7%Y/Y). Meanwhile the average price of existing homes across all 70 cities rose 0.5%M/M and 7.9%Y/Y (just 0.5%Y/Y in 1st tier cities).

The minutes from this month’s RBA Board meeting provided no significant additional illumination regarding the policy outlook. The minutes reiterated that the Board’s central outlook is “for further progress towards the Bank's goals”, so members again agreed that “there was not a strong case for a near-term adjustment in monetary policy”. It was also noted that “Members recognised that it was not possible to fine-tune outcomes and that holding monetary policy steady would enable the Bank to be a source of stability and confidence.” This suggests that there remains a reasonable hurdle to be cleared before the Board would conclude that a change in policy is warranted. However, the minutes did note that the Board had discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances. The continued focus on the labour market means that Thursday’s February Labour Force survey will be scrutinised closely for any signs of emerging weakness.

On the data front the weekly ANZ-Roy Morgan consumer confidence index increased 2.1pts to 115.3 last week – the highest reading since early February and slightly above the average reading for this series. The increase was partly driven by improved optimism regarding the year-ahead outlook for the general economy, although all component series were slightly firmer last week.

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