Abe stimulus less than meets the eye

Emily Nicol
Chris Scicluna

With news reports flipping back to suggest that – once again, despite the more prickly rhetoric of the past couple of days from both sides – the US and China are moving closer to a first-phase trade deal, markets moved back into risk-on mode later in the day yesterday. As such, Asian equities today trended higher, with China’s main CSI 300 closing up 0.8%. But with no surprise that Abe unveiled his latest fiscal stimulus package with a headline grabbing (but rather misleading) ¥26trn (see the detail below), the increase in the TOPIX was more modest at just ½%.

In the bond markets, after Treasury yields moved higher in the course of yesterday, they have made little further headway today. And with Japan’s fiscal news having been drip-fed throughout the past week, 10Y JGB yields edged up only 1bp higher to close to -0.04%, failing fully to reverse yesterday’s drop. Meanwhile, despite some weaker Aussie retail sales and trade data, the upwards move in Aussie 10Y yields was slightly larger, although this still left them more than 10bps below their spike after the RBA’s less dovish statement on Tuesday.

Finally, despite some disappointing German factory orders figures this morning (see more on this and the Aussie data below too), euro area bond markets have opened lower as equities have opened higher. Sterling is up yet again too, now above $1.31 for the first time since March, as investors add to bets that the Conservatives will win a majority in next week’s UK General Election.

After weeks of speculation, Abe appears to have finalised his fiscal stimulus package, which seems to be in the process of being endorsed by the Cabinet. As suggested by reports over the past couple of days, the headline figure is an eye-catching ¥26tn (about 5% of GDP). But, as ever with Japanese fiscal packages, don’t be fooled by this top-line number, not least as about half of it represents extra spending by the private sector, which the Government claims will be crowded in by the extra public sector activity.

In addition, more than ¥3tn of the total will come from government agency loans. But many of these projects to be funded this way would surely have been financed anyway. As the BoJ frequently emphasises, credit conditions in Japan are highly accommodative, with interest rates on loans near record lows, and banks the most willing to lend in decades.

So, according to Bloomberg, extra public expenditure will amount to ¥9.4tn. At about 1.7% of GDP, that’s not to be sniffed at, and is the reason why the Government suggests the package will boost growth by about 1½ppts. But, of that total, ¥1.8trn is expected to come from local government. And of the ¥7.6trn extra to come from central government, about ¥3.3trn (0.6% of GDP) will be allocated to the budget for FY20, while a larger ¥4.3tn will come from the supplementary budget for the current fiscal year most likely with no impact on actual borrowing. A supplementary budget of this magnitude at this time of year is hardly extraordinary. Indeed, the previous equivalent packages in FY18 boosted total expenditure by a not dissimilar ¥3.7bn above the initial budget level.

Finally, the experience of past years suggests that it’s impossible to know quite how much of the extra public spending will actually materialise and score in terms of GDP. Indeed, the baseline is relatively opaque, with this year’s budget having already included a little more than ¥2tn extra funds to try to neutralise the impact on demand of October’s consumption tax hike, but public expenditure associated with the Olympic Games set to fall away rapidly. So, the actual boost to both public spending and economic growth from the package is debatable.

Overall, nevertheless, we would judge the package to provide a helpful contribution to demand to ensure that economic growth returns to positive territory from Q120 on. Much of the extra public investment – such as that to enhance the resilience of Japan’s economy to natural disasters - will be worthwhile. And public spending will probably make the single largest contribution to GDP growth in the coming year. Indeed, fiscal policy will thus help take a little pressure off the BoJ as inflation remains subdued. (In this respect, the ECB would certainly have been happy to see certain euro area governments come up with something similar).

Euro area:
This morning’s German factory orders figures were disappointing. Contrary to expectations of a second successive monthly rise, orders dropped 0.4%M/M in October to be down 5.5%Y/Y. Admittedly, the decline in October followed upwardly revised growth of 1.5%M/M in September, and so the level was still almost 0.5% above the Q3 average. However, the headline figure was flattered by major orders (e.g. Airbus) and excluding these items orders fell a much larger 1.4%M/M. Strikingly, while foreign orders rose 1.5%M/M for a second month, domestic orders fell a steep 3.2%M/M, with weakness in consumer, intermediate and capital goods alike. And so they remained down 7.7%Y/Y, the steepest annual drop since the euro crisis in 2012. Meanwhile, manufacturing turnover was up just 0.1%M/M in October to suggest that output growth in the sector (data for which will be released tomorrow) remained subdued too. Survey indicators, such as those from the ifo and PMIs, imply that underlying orders and production have continued to contract in Q4, albeit at a more moderate pace than in recent quarters.

A busy day for euro area economic data will also bring revised Q3 GDP and employment, and retail sales figures for October. Headline euro area GDP growth looks set to align with earlier estimates of 0.2%Q/Q, unchanged from Q2 and half the rate in Q1. More interesting, however, will be the release of the expenditure breakdown, which seems likely to show that growth was driven by consumption while fixed investment contracted. Employment growth, meanwhile, seems bound to have been very modest at 0.1%Q/Q for the second successive quarter. October’s retail sales, meanwhile, are expected to have declined for the first month in three. In the markets meanwhile, France and Spain will sell bonds with various maturities.

After yesterday’s GDP report showed that household consumption slowed in Q3 – the quarterly (0.1%Q/Q) and annual (1.2%Y/Y) increases were the joint-weakest since the height of the Global Financial Crisis – today’s monthly retail sales figures for October, published by ABS, implied a sluggish start to the fourth quarter. In particular, the value of sales was flat on the month, to leave annual growth moderating 0.4ppt to 2.1%Y/Y, the softest increase for two years. And while the weakness was broad based, there were further monthly declines in clothing and department store sales (-0.8%M/M), while sales of household appliances fell for the first month in six (-0.2%M/M).

October’s trade report was also disappointing, with the trade surplus narrowing AUD2.3bn to AUD4.5bn, the smallest for ten months. This principally reflected a notable decline in the value of exports, with the 5.1%M/M drop the largest for 2½ years, to leave the annual increase falling 8.6ppts to 6.0%Y/Y. And the weakness was widespread, with sizeable declines in the value of shipments of key commodities – e.g. metal ores (-10.9%M/M), metals (-14.3%M/M) and coal (-4.9%M/M) – no doubt reflecting in part the sharp decline in prices that month. To some extent, however, a pullback in October was inevitably given strength in the prior quarter. Meanwhile, there was also a modest increase in the value of imports in October (0.4%M/M). So, while it is difficult to assess the full impact of price moves, today’s data on balance suggest that having accounted for half of the 0.4%Q/Q GDP growth in Q3, net trade was a drag on growth at the start of Q4.

This morning brought the latest UK new car registrations figures. Against the backdrop of weak consumer confidence, these reported a further year-on-year decline in November – down 1.3%Y/Y – for the eighth month out of the past nine and leave the 12-month moving sum down at its lowest level since February 2014. In the markets, the DMO will sell 30Y Gilts.

In the US, ahead of tomorrow’s November labour market report, today will bring Challenger Job Cuts figures for the same month as well as weekly jobless claims numbers. Final October trade and factory orders data are also due.

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