Morning comment: Japan labour earnings & German trade

Chris Scicluna
Emily Nicol
Mantas Vanagas

Following yesterday’s third successive daily gain in US stocks (with the S&P500 closing up a further 1.0%), Asian markets picked up the baton today, benefiting not least from the positive mood music surrounding the US-China trade talks, which were extended to a third day today. Markets in Hong Kong (with the Hang Seng currently up more than 2%) and China (the CSI300 closed up 1.0% while CNY appreciated to its strongest level since 4 December) were among the leading performers, benefiting also from comments from an official from the National Development and Reform Commission (NDRC) in an interview with state media that the Chinese authorities would launch new initiatives to boost consumption, particularly of cars and household appliances. Japanese equities also took comfort from the upbeat regional tone, with the Topix closing up 1.1% supported by further upbeat wage data (detail below). Meanwhile, 10Y JGB yields continued to move higher, touching 0.04%. Having risen yesterday, 10Y UST yields remained 2.70% for the first time since New Year’s Eve. And oil prices remained higher too (with WTI crude back above $50pb for the first time since 17 December).

The positive global backdrop means that European equities have opened firmly on the front foot again too, with most government bonds also a touch weaker despite yesterday’s downbeat Commission sentiment survey and weak German IP data, which have been followed this morning by some further disappointing German trade figures. Meanwhile, sterling is little changed after yesterday saw the UK government defeated in a parliamentary Finance Bill vote for the first time in more than forty years, with the result confirming that a majority determined to avoid a no-deal Brexit exists among MPs. As the House of Commons Brexit debate resumes today ahead of Tuesday’s ‘meaningful vote’ that May looks set to lose by a significant margin, we continue to attach a very small probability to a no-deal Brexit.

After last week’s Japanese jobs data illustrated the continued tightness of the labour market, today’s labour earnings  figures put in another decent showing, with total wage growth in November rising a much stronger-than-expected 2.0%Y/Y, the strongest such increase since June. And while adjusting for sample changes this year resulted in a more modest rise of 1.5%Y/Y, this was still the firmest growth since December 2017. After allowing for inflation, real total cash earnings jumped 1.1%Y/Y following a decline of 0.1%Y/Y in October and the first positive reading since the summer. 

Turning to the detail, the pickup in headline wage growth was attributable once again to firmer scheduled earnings, with growth of 1.6%Y/Y the strongest for more than two decades, with a notable jump in base wage growth in the manufacturing sector to the most since mid-1996 (2.1%Y/Y). Growth in bonus payments was also solid at 9.6%Y/Y, while the increase in overtime earnings moderated slightly (1.1%Y/Y) on the back of a decline in the number of hours worked. Overall hours worked, however, were notably higher in November, with scheduled hours worked rising at the fastest annual pace since March 2015. Today’s data suggest that scheduled earnings of part-time workers rose 1.7%Y/Y on a per hour basis, down from 2.2%Y/Y in October. Growth in scheduled monthly wages for full-time workers also moderated slightly to 1.2%Y/Y, albeit from its 21-year high of 1.6%Y/Y previously.

Elsewhere in the survey, the number of regular employees rose for the fifth consecutive month in November (0.1%M/M) to leave them up 1.0%Y/Y. And today’s figures showed the number of full-time and part-time employees rising at the same rate. While this suggested that full-time employment growth was the firmest for five months, given the tendency for subsequent revisions that tend to boost the numbers of part-time employment at the expense of full-time employment, this finding might well be substantially overturned when the final figures are published on 23 January. Nevertheless, today’s figures will undoubtedly have provided some encouragement to the BoJ after much of the recent dataflow had highlighted how its forecasts for both growth and inflation are in need of downwards revision.  

Euro area:
With yesterday’s German industrial production data having reported the steepest annual drop in output since 2012, today’s trade figures from the largest euro area member state were similarly downbeat. The value of goods imports fell by 1.6%M/M in November, one of the worst readings in recent years, albeit maintaining an upward trend in the annual pace of growth of 3.6%Y/Y. Meanwhile, exports declined by 0.4%M/M to a level unchanged from a year ago. Within the details, exports to other euro area member states and non-EU countries were down 0.4%Y/Y, with only exports to non-euro EU countries reporting an increase. Looking at Q4 as a whole, so far exports remain on track to post an increase, with the October-November average up by 0.4% compared to the Q3 average. In contrast, imports are trending slightly down on Q3, suggesting that the figures so far are consistent with a positive contribution to GDP growth from net exports in Q4. However, with survey data reporting that momentum in the German economy deteriorated further in December, we would not rule out a further decline in exports at the end of the year, and do not think that net trade provided any significant boost to German GDP growth in the final quarter.

Later this morning come euro area unemployment data for November. Given the notable loss of economic momentum since the start of the year, the headline euro area unemployment rate is expected to remain unchanged for a fifth consecutive month at 8.1%, suggesting that improvements in the labour market could be grinding to a halt – a development that, if sustained, would surely deter any further moves by the ECB to exit its current policy settings. Meanwhile, in the markets, Germany will sell 10Y Bunds.

Data-wise, today brings only final Q3 labour productivity figures. The flash estimates released in mid-November showed a very disappointing 0.4%Q/Q drop in output per hour, leaving it up just 0.2%Y/Y. Output per worker rose by 0.5%Q/Q, leaving it up a similarly weak 0.4%Y/Y. There were no significant revisions to the estimate of GDP growth in Q3, and so we expect today’s productivity growth estimates not to be revised significantly either.

Meanwhile, in the House of Commons, the Parliamentary debate on Brexit will restart this afternoon ahead of the ‘meaningful vote’ scheduled for 15 January. Like in yesterday evening’s vote on an arcane Finance Bill amendment that confirmed that a majority of MPs determined to frustrate moves to a no-deal Brexit exists, Theresa May looks set for defeat next Tuesday. But what she will do next remains highly uncertain.   

In the US, the minutes of the Fed’s December monetary policy meeting will be released while 2019 voting FOMC member Bostic and non-voting members Evans and Rosengren will speak publicly about the economic outlook. But no top-tier economic data are due, with the scheduled releases postponed on account of the government shutdown. In the markets, the Treasury will sell 10Y Notes.



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