Morning comment: May humiliation, UK & German CPI, Japanese orders

Chris Scicluna
Emily Nicol
Mantas Vanagas

Sterling is little changed this morning from where it was this time yesterday, despite the hammering defeat received by Theresa May in yesterday evening’s Parliamentary vote. Indeed, sterling appreciated after the announcement of that result, as markets seemingly (and probably appropriately) judged that it increased the probability of an Article 50 extension and eventual softening of Brexit or no Brexit at all.

May seems bound to win Parliament’s no-confidence vote in the Government scheduled for later today. But although she now claims a willingness to consult on the way forward, it is difficult to believe that over the near term she will propose a path to deliver a Brexit backed by both a majority of MPs and the EU. Certainly, she looks highly unlikely to tear up her own red lines while the official Labour policy is undeliverable fantasy.

Nevertheless, there appears to be a cross-party quorum of MPs, facilitated by the Speaker, determined to take control and work to prevent a no-deal Brexit. And May herself – already tarnished with the ignominious distinctions of being the recipient of the biggest Parliamentary defeat for any UK Government in history and the first Prime Minister of a UK Government judged to be in contempt of Parliament – will also surely eventually give her consent to an extension of Article 50 to avoid completely trashing the UK economy.

Wall Street was already trading well in positive territory ahead of that Brexit vote, supported among other things by further dovish remarks from Fed speakers. However, the general lift in market sentiment seen following the UK’s news saw the S&P500 firm modestly to close up 1.1% – close to the intraday highs seen earlier in the session. The 10-year Treasury yield nudged up 1bp to 2.71% (and has edged a little higher again this morning) and the US dollar was generally slightly firmer, especially against the euro, the latter reflecting reaction to Mario Draghi’s dovish comments in the European Parliament.

With that background, Asian equity markets have been quite mixed today. A slightly disappointing machinery orders report (detail below) contributed to a modest 0.3% decline in the TOPIX, while equity markets were little changed in Hong Kong and mainland China. By contrast, equity markets posted small gains in Singapore, South Korea and Australia. In the bond markets JGB yields nudged lower as Bloomberg reported, quoting the usual ‘people familiar with the matter’, that the BoJ will leave its policy settings unchanged at next week’s meeting. The report added that the BoJ would downgrade its inflation forecasts amidst lower oil prices and temporary downward prices pressures stemming from government decisions (e.g. the decision to make pre-school education free).

As far as economic data are concerned, the key focus in Japan today was the machinery orders report for November. Total machinery orders rose a further 8.3%M/M following a 19.5%M/M rebound in October, so that annual growth stood at a decent 5.6%Y/Y. However, the closely-watched series of core private orders – which excludes ships and other volatile categories – was disappointingly flat in November following a disappointingly small 7.6%M/M rebound in October (the latter following a September slump). As a result, core private orders were up just 0.8%Y/Y, down from growth of 4.5%Y/Y last month. In the detail, orders by manufacturers fell 6.4%M/M and were unchanged from a year earlier. Core orders in the non-manufacturing sector rose 2.5%M/M and 1.4%Y/Y. Foreign orders rose a strong 18.5%M/M in November to be up 18.6%Y/Y. Public sector orders, which are especially volatile, slumped 26.8%M/M but were still up 4.2%Y/Y.

Given the flat outcome in November, core private orders are still sitting 4.2% below the average level recorded through Q3. This compares very unfavourably with the forecast that had been offered by respondents to the Cabinet Office survey of machinery manufacturers, published with the release of the September data, which envisaged a very strong 3.6%Q/Q increase in core private orders in Q4. It also seems at odds with the very positive forecasts for capex that continued to be evident in the BoJ’s last Tankan survey – spending which remains necessitated by widespread labour shortages. However, at least in the short-term, perhaps some comfort can be taken from the fact that total machinery orders are tracking ahead of the 1.7%Q/Q growth that firms had forecast for Q4.

Turning to the day’s other news, METI released the Tertiary Industry Activity Index for November. Following an upwardly-revised 2.2%M/M during the month – 0.3ppt greater than first estimated – the index fell a less-than-expected 0.3%M/M in November. As a result, annual growth stood at a solid 1.4%Y/Y, albeit down from an upwardly revised 2.5%Y/Y in October. In the detail, business-related services made a positive contribution to growth during the quarter, but this was outweighed by negative contributions from most other sectors (notably the finance/insurance and wholesale trade sectors). Importantly, today’s outcome leaves the overall index 1.3% above the average level recorded through Q3. As a result, the service sector appears well on track to contribute to positive GDP growth in Q4.

In pricing news, the BoJ released the goods PPI for December. The headline index fell 0.6%M/M – twice as much as the market had expected – marking the largest decline since January 2016. As a result, the annual pace of inflation slowed to 1.5%Y/Y from 2.3%Y/Y previously suggesting a notable softening of price pressures in the pipeline. Within the detail, prices in the manufacturing sector fell an even larger 0.7%M/M, in large part due to a 7.1%M/M drop in prices for petroleum and coal. Price declines were also recorded for chemicals, non-ferrous metals and machinery. In a similar vein, measured in yen terms, import prices fell 3.9%M/M in December, causing annual inflation to slow sharply to 3.3%Y/Y from 9.5%Y/Y previously. Prices for energy products slumped 10.3%M/M, while both metals and chemicals prices fell 1.9%M/M. And strikingly, prices of final consumer goods were down 1.2%Y/Y, the most since December 2016.

So,Theresa May yesterday evening suffered a massive defeat in the House of Commons meaningful vote on her Brexit deal, with the margin of loss 230 votes (202 in favour vs 432 against), firmly at the upper end of expectations and unprecedented for any UK government of the past century. In response, Labour leader Corbyn tabled a motion of no-confidence in May’s Government, which will be debated and voted on at 7pm UK time today. Despite the humiliating defeat, May will win this evening’s vote as the Northern Irish DUP and Brexiter Conservative MPs will continue to support the Government. So, May is strongly expected to survive. But her authority is now seriously diminished.

Before yesterday’s vote, May will have hoped simply to be able to resume talks with the EU to seek further concessions in the hope of eventually achieving a Parliamentary majority in favour of a slightly modified deal at a future date. But given the magnitude of defeat, further negotiations with the EU simply to tinker with her deal will now be considered pointless. Certainly, the EU will rightly consider it unfeasible for May to overturn such a large majority against her deal at a second attempt. And so, right now, the prospects for May’s negotiated settlement look bleak.

So, May is in a deep hole, and will need to seek support beyond the Conservative backbenches if she is to take Brexit policy forward. And she has indeed now committed to consult with the DUP and certain senior politicians before returning to the House of Commons on Monday with proposals on the way forward. But she has shown no willingness to listen to the concerns of other parties up to now, and the sincerity of her pledge to consult must be called into doubt. At the same time, official Labour policy is hardly grounded in reality. And it is difficult to believe that, over the near term, May will propose a path to deliver a Brexit backed by both a majority of MPs and the EU. But if May comes up with nothing constructive, other MPs seem likely – with the Speaker’s consent – to wrest control of the Brexit process to ensure a more orderly policy.

While the clock is still ticking towards the 29 March Article 50 deadline, there are still many possible ways forward, which could involve so-called ‘indicative votes’ in Parliament to gauge the extent of support for MPs for a range of different ways forward (e.g. so-called Norway-plus, etc.). And MPs could push for a second referendum, although after yesterday it is difficult to see what precise options might be presented to the public alongside the option to remain in the EU.

Whatever happens, there is certainly no chance of Parliament endorsing a Brexit deal and adopting all of the necessary legislation in time for the UK to leave the EU by end-March. Nevertheless, with a majority of MPs determined to avoid a no-deal Brexit, and May also likely to be keen to avoid completely trashing the UK economy, we expect Brexit eventually to be postponed via an extension of the Article 50 notice. That would also likely require a constructive proposal to break the current deadlock on future policy, and so we expect several weeks of uncertainty to persist before that is achieved. But given our expectation of an extension of the Article 50 process, we also still expect a ‘no deal’ Brexit to be avoided.

The political fallout from the Brexit vote will clearly dominate attention in the UK today. But today will also bring December’s inflation figures. We expect the annual core CPI rate to remain unchanged at 1.8%Y/Y, the lowest rate since Q117. But with energy prices having fallen very significantly, the headline CPI rate should fall 0.2ppt from November to 2.1%Y/Y, the lowest since the start of 2017. ONS official house price data for November are also due. Meanwhile, BoE Governor Carney will testify on financial stability at the House of Commons Treasury Select Committee.

Euro area:
After Draghi yesterday acknowledged that recent economic developments had been weaker than expected and that uncertainties, notably related to global factors, remain prominent, there was further evidence this morning to suggest that domestic demand remained subdued at the end of last year too. In particular, euro area new car registration numbers for December were down compared with a year earlier for the fourth consecutive month and by a hefty 7.6%Y/Y. And the weakness was widespread across member states, with for example German registrations down more than 6½%Y/Y, French registrations down a whopping 14½%Y/Y and Spanish registrations down 3½%Y/Y. Perhaps surprisingly, Italian registrations were up 2%Y/Y in December, although they were still down for the year as a whole. In contrast, euro area registrations were still up in 2018, by a little more than 1%, albeit a marked slowdown from the 5% increase in 2017 and the weakest full-year growth since 2013.

Price-wise, this morning’s release of final German inflation data for December confirmed the preliminary estimate of 1.7%Y/Y (on the EU-harmonised measure), the weakest pace in eight months and 0.5ppt lower compared to November. The decline was accounted for mainly by energy prices, in particular those of heating oil and motor fuels which saw prices dropping by 16.7%M/M and 6.4%M/M respectively. This downward pressure on the headline rate is likely to have persisted into this month despite the fact that oil prices seem to have stabilised. Going forward, we would expect that German inflation will ease further this month, likely to 1.5%Y/Y. And so having last year recorded full-year inflation of 1.9%Y/Y, a level consistent with the ECB target, Germany is likely to see weaker inflation this year.

Final Italian inflation figures are due later this morning. The flash estimate came in at 1.2%Y/Y, down 0.4ppt from November. But we caution that these final estimates are often subject to revisions. Italian industrial sales and orders data for November are also out this morning. In the markets Germany will sell 30Y bonds.

In the US, today will bring import and export price data for December, the NAHB housing market survey for January and the Fed Beige Book. The other scheduled top-tier data (retail sales and business inventories) has been postponed due to the shutdown.

Today China reported home price data for December. According to Bloomberg’s calculations, the simple average price of new homes rose 0.77%M/M. While this was the smallest increase since April last year, base effects meant that annual growth still picked up 0.3ppt to 10.6%Y/Y. In contrast to the recent trend, prices rose most in 1st tier cities – up 1.25%M/M but still just 2.8%Y/Y. Prices rose 0.71%M/M in 2nd-tier cities (11.0%Y/Y) and 0.77%M/M in 3rd-tier cities (11.1%Y/Y). 

The first Westpac consumer confidence survey for 2019 pointed to a marked decline in consumer sentiment over the past month. The headline index fell 4.7%M/M to 99.6 in January – the lowest reading since September 2017 and now below a little below the long-term average. While all components of the survey were weaker, the most significant deterioration was seen in perceptions of the year-head outlook for the economy (down 7.8%M/M). Respondents were also notably less upbeat about recent developments in their family finances – hardly surprising given developments in both the financial and housing markets – and about the 5-year-ahead outlook for the economy. 

New Zealand:
The key economic report released in New Zealand today was the Electronic Card Transactions survey for December – a timely indicator of retail spending based on payments processed electronically. The value of total spending in the retail sector slumped 2.3%M/M, in part due to a price-driven 8.0%M/M decline in spending at fuel stores. Core spending, which excludes fuel and vehicles, fell 1.5%M/M. Spending on durable goods fell 4.4%M/M, albeit following five consecutive months of increase, accounting for most of the weakness seen during the month. Despite today’s data, core spending still rose 0.6%Q/Q in Q4 following very strong growth of 1.9%Q/Q in Q3. Total spending fell 0.1%Q/Q, weighed down by lower fuel prices.

In other news, the QV house price index rose 3.2%Y/Y in December, down from 3.5%Y/Y in November. Prices in the Auckland region fell 0.4%Y/Y. The recent easing of mortgage lending restrictions may provide a modest boost to the housing market over coming months, however.

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