Equity markets begin December in confident mood as data impress
Like other major markets, Wall Street ended November on a slightly softer note, with the S&P500 falling 0.5%. But that meant it still closed the month with a thumping 10.8% gain – the best month since 1928. And, at least at this stage, investors appear not to anticipate a repeat of what followed in 1929, as the new month is also off to a flyer with the S&P500 e-mini future having rallied a further 0.8% since Wall Street went home. By contrast, the Treasury market has traded a narrow range with yields only fractionally higher than this time yesterday and euro area govvies have firmed slightly at the opening.
The positive tone echoed through the Asia-Pacific region where some upbeat local data also helped to boost markets. This is especially so in China, where the CSI300 increased 2.1% after the Caixin manufacturing PMI unexpectedly jumped to the highest level in 10 years, confirming the upbeat picture in yesterday’s official PMI report. Japan’s TOPIX rose 0.8%, with the country’s manufacturing PMI revised up to a 15-month high and the labour market showing signs of stabilising despite a small increase in the unemployment rate. Meanwhile Australia’s ASX200 increased 1.1% and yields on ACGBs edged up as the RBA retained both current policy settings and its dovish forward guidance even as dwelling approvals and price data pointed to a further unexpected strengthening of the housing market.
MoF corporate survey points to weaker Japanese capex in Q3, but not as soft as feared
Today the MoF released the results of its quarterly survey of company performance, in this case for Q3. As usual, most interest centred on the survey’s finding regarding firms’ capex, which will provide an input into the national accounts revisions that will be released next Tuesday. On that score, including spending on software, the survey reported a 1.2%Q/Q decline in investment in plant and equipment, so that spending was down 10.6%Y/Y (a similar 1.3%Q/Q decline was reported once spending on software is excluded). While not a great result, this was not quite as soft as the market had expected. This suggests the possibility of a small favourable revision to the 3.4%Q/Q decline in non-residential investment estimated in the preliminary national accounts.
Elsewhere in the survey, after slumping 9.8%Q/Q in Q2, firms’ sales rebounded 3.8%Q/Q in Q3, with manufacturing sales rising 5.0%Q/Q and non-manufacturing sales rising 3.3%Q/Q. Even so, sales were down 11.5%Y/Y in Q3. Therefore, after plunging 30.2%Q/Q in Q2, ordinary profits rebounded 33.7%Q/Q in Q3 but were still down 28.4%Y/Y. As a result, firms’ overall profit-to-sales ratio rebounded to 4.7% in Q3 – back to where it stood in Q1 but still a full percentage point below the historically high level that has been more typical in the previous five years or so. Meanwhile, with economic uncertainty declining somewhat, growth in firms’ short-term borrowings slowed to 11.8%Y/Y from 20.8%Y/Y previously, causing firms’ liquidity ratio – while still elevated – to decline from what had been a record high.
Japan’s manufacturing PMI revised up; jobless rate rises as workers re-enter labour force
Turning to more contemporary news, in contrast to the 0.4pt decline indicated by the flash release, Japan’s manufacturing PMI registered a 0.3pt increase to a final reading of 49.0 in November – the highest reading since August 2019 and consistent with the positive near-term picture suggested by the forecasts accompanying yesterday’s IP report. Amongst the activity indicators, the largest upward revisions came in the output and new orders indices, which now stand at 48.9 and 48.7 respectively – up 0.2pts and 1.0pts from their respective October readings but still a little below their long-term averages. While the new export orders index was revised up from its flash estimate, its final reading of 49.2 was still down 1.4pts from October. Despite stronger activity, the output prices index fell 1.1pts to 49.3 in November, although this was a smaller decline than indicated by the flash release.
Today also brought the release of the MIC’s household-based Labour Force Survey for October, together with the MHLW’s suite of indicators measuring job applications and vacancies. In summary, these data continued to point to some signs of stabilization in the labour market. The household survey pointed to a small 30k increase in employment, but base effects meant that the annual decline in employment increased 0.3ppts to -1.4%Y/Y. Not surprisingly, the largest job loss over the last 12 months has occurred in the hospitality sector (430k). However, with the labour force increasing by a somewhat larger 130k in October – a positive development – the unemployment rate edged up 0.1ppts to 3.1%. The female unemployment rate was steady at 2.7%, but the male unemployment rate increased 0.2ppts to 3.4%, marking the highest reading since August 2016. Meanwhile, the MHLW reported that the job-to-applicant ratio increased 0.1ppts to 1.04 in October – the first increase since April last year. The number of outstanding job offers increased 2.2%M/M in October – continuing the positive trend since July – but in light of earlier declines was down 23.2%Y/Y. However, after increasing sharply last month, the number of new job offers fell 5.8%M/M and was also down 23.2%Y/Y.
Finally, new vehicle sales increased 6.0%Y/Y in November – down from last month’s especially exaggerated growth of 31.6%Y/Y (the latter reflecting the fall in spending in immediate aftermath of last October’s consumption tax hike). Sales of cars and trucks increased 6.4%%Y/Y and 4.0%Y/Y respectively, but curbs on travel and tourism meant that sales of buses slumped an unsurprising 37.3%Y/Y.
China’s Caixin manufacturing PMI confirms strong lift in activity last month
The positive economic news flow out of China continued today with the Caixin manufacturing PMI replicating the upside surprise seen in yesterday’s official PMI report. Whereas analysts had expected this survey of private SMEs to soften slightly, the headline index increased a further 1.3pts to 54.9 – the highest reading since November 2010. In the detail, the most notable development was a 2.6pt increase in the output index to 57.1, while encouraging signs of strengthening domestic demand was evident in a further 1.2pt lift in the new orders index to 58.3 (in both cases also the highest readings since November 2010). The outlook for exporters also appears positive, with the new export orders index rising 2.3pts to a very respectable 53.3.
RBA leaves policy settings and forward guidance unchanged, as expected
After easing policy last month, the RBA’s Board elected to keep all of its policy settings unchanged – an outcome that was fully expected by the market. So the Bank’s cash and 3-year bond rate targets remained at 0.1% (also the rate applicable to new drawings under the unchanged Term Funding Facility), and for now the Bank’s government bond purchase programme remains capped at A$100bn (to date the Bank has purchased A$19bn). The Bank’s forward guidance was also unchanged. Specifically, given the outlook for inflation and the labour market, the Bank repeated that it is not expecting to increase the cash rate for at least 3 years. Meanwhile, it will keep the size of the bond purchase programme under review, with the Board prepared to extend the programme if necessary.
Turning to the Bank’s economic commentary, the global news was described as ‘mixed’, with rising coronavirus cases hampering economic recoveries in the US and Europe but positive vaccine news providing a degree of support. Domestically, once again, the Bank acknowledged that recent data had been better than it had expected. However, predictably, the Bank cautioned that the economic recovery will still be uneven and drawn out, and dependent on significant policy support. The Bank’s central scenario is for GDP growth of around 5% next year and 4% over 2022 – unchanged from the forecasts contained in last month’s Statement on Monetary Policy (SMP). Similarly, the Bank continues to expect the unemployment rate to rise in the near-term, before gradually declining to around 6% at the end of 2022. The Bank’s inflation outlook was also unchanged, with underlying inflation expected to be just 1% in 2021 and 1½% in 2022 – still a full-percentage point below the midpoint of the Bank’s 2-3% target range.
RBA Governor Lowe will give his semi-annual testimony to the House of Representatives Standing Committee on Economics tomorrow, but this is likely to closely following the script from last month’s SMP.
Net exports to subtract around 2% from Aussie GDP growth in Q3
Turning to the Aussie data flow, the countdown to tomorrow’s national accounts continued today with the ABS releasing data on external trade and government spending during Q3. The former revealed a A$6.8bn narrowing of the seasonally-adjusted current account surplus to A$10.0bn in Q3, with the goods and services surplus declining an even greater A$8.7bn to A$13.6bn. The volume data indicated that total exports fell 3.2%Q/Q, with services falling a further 8.8%Q/Q. Meanwhile, total imports rebounded 6.5%Q/Q, led by a 6.8%Q/Q increase in goods. As a result, in the absence of significant revisions, the ABS notes that net exports have made a 2.0ppt negative contribution to GDP growth in Q3 – a slightly larger subtraction than analysts had expected. Fortunately, the government sector remains a direct source of growth. According to the ABS real general government consumption spending rose a further 1.4%Q/Q in Q3, which will make a positive contribution of 0.3ppts to GDP growth. Total real public investment spending rose a modest 0.3%Q/Q, which will make only a fractional contribution to growth. All up, we expect around a 2½%Q/Q rebound in GDP growth in Q3 (today’s data have reduced the prospect of an upside surprise). This would represent a very modest uplift from the 7.0%Q/Q contraction in Q2, not helped by the further lockdown in Melbourne during part of the quarter.
Aussie dwelling approvals and house prices up, manufacturing in recovery
In other news, the number of dwelling approvals increased a further 3.8%M/M in October – a significant upside surprise following a very sharp uplift in September (now revised up 0.4ppts to 16.2%M/M). While this was partly due to a further 5.1%M/M increase in the volatile apartment category, private house approvals also increased a further 3.1%M/M in October. Indeed, private house approvals are now up 31.7%Y/Y and at their highest level in more than 20 years. The reinvigoration of the housing market was also evident in today’s CoreLogic measure of house prices. The overall index increased 0.7%M/M in November – the second consecutive increase – with prices increasing in every capital city for the first time since the pandemic started. Prices increased 0.7%M/M in Melbourne, 0.6%M/M in Brisbane and 0.4%M/M in Sydney, but larger-than-average increases were recorded in all of the smaller population centres.
Completing the day’s Aussie data flow, the manufacturing PMI was revised down 0.3pts from the flash estimate to a final reading of 55.8 in November – still up 1.6pts for the month and at its highest level since December 2017. While the employment index was revised down, it was still up 4.5pts over the month. Meanwhile, both the new orders and new exports order indices were revised higher, with the former now up 1.8pts from October to a final reading of 54.4 – the highest reading since January. In contrast to the PMI, the AIG’s long-running but very volatile Performance of Manufacturing Index fell 4.2pts to 52.1. Finally, the ABS reported that its experimental indicator of payrolls pointed to a 0.1% increase in jobs over the fortnight to 14 November – the same increase as recorded over the prior fortnight.
Euro area inflation, car registrations and final PMIs due with German claims
Today brings the flash estimates of euro area CPI in November. The various member state figures moved in different directions, with inflation in France and Italy picking up, inflation in Spain unchanged, but German inflation on the EU-harmonised measure falling to a series low of (-0.7%Y/Y). On balance, therefore, we expect the euro area headline rate of inflation to remain unchanged at -0.3%Y/Y, the lowest rate since February 2015, with the core rate probably also holding at 0.2%Y/Y. The risks to this forecast are skewed to the upside, however. In addition, we caution that, given pandemic containment measures, a large share of the data will need to be imputed by the statisticians, rendering the inflation rates a less reliable guide to price movements than usual.
In terms of other hard data, November new car registrations figures for France, Italy and Spain are expected to be weak, with the pandemic acting as a restraint on sales. Meanwhile, national labour market data from Germany are expected to show an increase in unemployment in November, with the claimant count rate rising to 6.3%, from 6.2% previously, reflecting the recent lockdown-light measures, including the closure of restaurants and leisure centres, which are set to last until 20 December (at least).
Survey-wise, today brings the final November manufacturing PMIs – for which the flash euro area headline index fell 1.2pts to a still-respectable 53.6 – with the indices for Italy and Spain to be published for the first time. We will also hear again from ECB President Lagarde, although the nature of the event – a discussion with Janet Yellen to mark the launch of a new Atlantic Council GeoEconomics Centre – seems unlikely to yield any monetary policy clues ahead of the ECB’s next announcement on 10 December.
UK-EU negotiations drag; UK house prices rise most since early 2015
All eyes in the UK remain on the negotiations with the EU, although reports still suggest no breakthrough on the key outstanding issues of the level playing field, governance and fish. Data-wise, the Nationwide measure of house price inflation continued to beat expectations in November. Contrary to expectations of a moderation, house prices accelerated 0.7ppt to 6.5%Y/Y, the strongest rate since January 2015. With mortgage approvals up last month to the highest since 2007 and the RICS survey pointing to still-high levels of new buyer enquiry last month, further strength in house price growth seems likely, albeit perhaps only for as long as the stamp duty holiday – which is currently set to expire at end-March – remains intact. Looking ahead, as in the euro area, the final UK manufacturing PMIs are also out later today. Contrary to prior expectations of a moderation, the flash headline manufacturing PMI rose 1.5pts to a three-month high of 55.2.
US ISM manufacturing survey due; Fed’s Powell to testify before Senate
In the US, most interest today will centre on the ISM manufacturing index for November. While the factory sector has recovered strongly in recent months, we suspect that last month’s ISM survey somewhat overstated the vigour. So mimicking the pullback in yesterday’s Chicago PMI, we expect the headline index to decline 2.3pts to a still very respectable 57.0. The construction spending report for October and auto sales figures for November will also be of some interest. Meanwhile, Fed Chair Powell will testify on the CARES Act before the Senate Banking Committee.
Kiwi house prices storm ahead with expectations at record high
Today’s CoreLogic house price data for November contained more bad news for the prospective (but not current) homeowners. Prices increased a further 2.1%M/M – the largest monthly increase since 2004 – lifting annual growth to a more than 3-year high of 9.2%Y/Y. Moreover, the ASB Housing Confidence Survey indicated that a record net 45% of respondents expect house prices to rise over the coming year – an expectation that will concern both the Government and RBNZ. In the near-term, house prices are likely to continue to rise at a solid pace, not least because the RBNZ has signalled clearly that it will reinstate LVR restrictions on investor loans in March.
In other news, the RBNZ announced that the recently announced Funding for Lending Programme will begin on 7 December, offering eligible counterparties 3-year funding at the same rate as the OCR. Meanwhile, RBNZ Governor Orr will deliver the annual Sir Leslie Melville Lecture to an Australian audience tomorrow evening. The title of the speech is unavailable, but given the venue and time we doubt that the speech will introduce anything of market relevance.