UK car production plunged, Aussie capex declined and Spanish CPI fell more than expected

Chris Scicluna
Emily Nicol

While European and US equities made further losses yesterday, Asian equities had a mixed performance overnight, with the major Japanese and Chinese indices posting further losses in contrast to solid gains in the major indices in Taiwan and Korea. But some disappointing capex and housing market data from Australia – see more details below – saw the main Aussie S&P200 post a more significant decline. But with 10Y UST yields having moved slightly higher yesterday, Japanese yields also edged up from their multi-month lows, while Aussie yields also largely reversed the previous day’s declines – i.e. 10Y ACGB yields rose 5bps to 1.53%. And European bond markets have so far followed a similar pattern, with the exception of Spain as a weaker-than-expected flash inflation estimate this morning (see more below) added to yesterday’s disappointing French CPI release.

Euro area:
We have already seen the only economic data released out of the euro area today, with Spanish inflation and retail sales figures both falling short of expectations. In particular, coming on the back of a softer French inflation release yesterday, the flash harmonised CPI estimate from Spain declined 0.7ppt to 0.9%Y/Y in May, the weakest rate since January 2018. An even larger drop of 0.9ppt was recorded in the national measure, to just 0.8%Y/Y. And while this weakness was reportedly principally driven by a decline in electricity prices, underlying inflationary pressures are likely to have remained very subdued this month too.

There was also an unexpected decline in Spain’s retail sales in April, with the 0.4%M/M drop leaving the annual increase moderating to just 1.1%Y/Y, down from a near-3%Y/Y rise previously and the weakest reading since October 2017. And when excluding sales at petrol stations, spending was down a steeper 0.6%M/M. Overall, however, the weakness at the start of Q2 followed solid increases since the start of the year, to leave sales still up ½%3M/3M in April.

While UK politics will continue to dominate the headlines today, today’s economic data further highlighted the adverse impact on UK manufacturers of persistent political uncertainty surrounding Brexit. According to the Society of Motor Manufacturers and Traders (SMMT), car production crashed in April as manufacturers had brought forward and extended factory shutdowns normally scheduled for the summer in anticipation of a no-deal Brexit at the end of March. Indeed, car production was down compared with a year earlier for the eleventh consecutive month in April and by a whopping 45%Y/Y. So, this left production in the year-to-date down by more than a fifth compared with the equivalent period in 2018. While the weakness in the SMMT figures in the first quarter was less pronounced than in the official IP release in Q1, today’s figures suggested that auto production will continue to be a notable drag on output growth at the start of Q2.

Ahead of the coming week’s RBA policy announcement, today’s economic data, including the latest quarterly CAPEX survey and monthly building approvals, further added to the evidence that Australia’s economy has weakened considerably since the start of the year. Indeed, the CAPEX survey for Q1, which provided further important indications ahead of next week’s full national accounts, was particularly disappointing. For example, the total volume of capex spending fell 1.3%Q/Q in Q1, to leave it down a much steeper-than-expected 1.7%Y/Y, the first annual drop since Q217. Within the detail, the weakness was principally driven by spending on buildings and structures – which is not used in the national accounts – which fell 2.8%Q/Q in Q1, to leave it 5½% lower compared with a year earlier. But there was also a decline in spending on plant and equipment – which goes directly into the national accounts – by 0.5%Q/Q, leaving the annual increase moderating almost 4½ppts to just 2.4%Y/Y, the softest pace since Q217.

This notwithstanding, the news regarding firms’ forward capex plans was more positive. For the 2018/19 financial year, the 6th estimate of firms’ nominal spending was 3.8% higher than the comparable estimate made for 2017/18, and 3.7% above the last estimate made three months ago. And while the early estimates for the coming financial year tend to be very unreliable, the 2nd estimate of capex spending for the 2019/20 financial year was 12.8% higher than the comparable estimate made for 2018/19, and 7.6% above the initial estimate three months ago.

With respect to the housing market, the latest building approvals data were again extremely downbeat at the start of the second quarter. In particular, the number of dwelling approvals fell for the second successive month and by 4.7%M/M, to leave them down more than 24% compared with a year earlier, the ninth consecutive double-digit decline. And the weakness was broad-based, with a 6½%M/M drop in the volatile ‘other dwellings’ category and house approvals down for the fifth month out of the past six (2.6%M/M). As such, approvals for houses were down more than 20%Y/Y, the largest annual drop for more than a decade.

In the US, this afternoon will bring revised figures for Q1 GDP, which are expected to leave growth little changed from the initial estimate of 3.1%Q/Q annualised. But perhaps of more interest will be the latest monthly advance goods trade and inventories data for April, which will provide insight into developments at the start of Q2.

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