Asian markets mostly little changed following Wall St inertia, USD watched
While the S&P500 hit fresh intraday highs on Thursday, the index eventually closed down 0.1% as supply chain problems at Pfizer forced it to halve this year’s coronavirus vaccine production target to 25m doses, albeit the company reaffirmed its plan to supply 1.3bn doses next year (the DJI and Nasdaq still posted small gains, however). Despite a solid services ISM report and a welcome drop in initial jobless claims, USTs reversed some of this week’s sell-off, with the 10Y yield falling back to 0.91%. The Greenback continued its weaker trend, however, but crude oil firmed after OPEC+ ministers agreed to withdraw previous output cuts by no more than 500k b/d each month, starting in January, with production hikes subject to review each month.
Since then, with little major news to shift the mood, US equity futures have been trading only a touch firmer than where Wall Street closed while forex markets and USTs are little changed, with the USD being closely watched. In coronavirus news, President-elect Biden said that he would ask all Americans to wear a mask for the first 100 days of his presidency, while California’s Governor warned that dwindling intensive care capacity in hospitals meant that within days four of the state’s five areas could meet the threshold for the announcement of new lockdowns (LA County imposed new stay-at-home measures on Wednesday).
On a quiet day for local data, equity markets in the Asia-Pacific region are also mostly little changed. In Japan the TOPIX closed flat, locking in a small decline for the week, even as Bloomberg – citing a draft government document it had viewed – reported that next week’s expected third supplementary budget would aim to lift economic activity back to pre-pandemic levels in FY21 (FY22 might be a more realistic target, especially if activity is to return to the levels seen before the consumption tax hike). Given the continued struggle with the pandemic, Tokyo Governor Koike called for residents to refrain from unnecessary journeys after Osaka confirmed an increase in its Covid-19 alert level to the highest. Equity markets were also little changed in China and Hong Kong. However, South Korea’s KOSPI continued this year’s impressive performance, rising a further 1.3% to lift its year-to-date gain above 24%. Stocks also increased more than 1% in Taiwan, led by the energy and tech stocks. Gains in energy and financial stocks helped lift the ASX200 slightly, but - despite some decent retail sales data, Aussie bond yields fell modestly, reacting to lower UST yields.
Australian retail sales lift in October as shops reopen in Melbourne
Australian retail spending increased 1.4%M/M in October, just 0.2ppt less than indicated by last month’s preliminary report. This was sufficient to erase the 1.1%M/M decline in September and left spending up a very respectable 7.1%Y/Y, not least due to the diversion of spending away from the services that sit outside the retail sector. Not surprisingly, growth was driven by the state of Victoria, where the reopening of stores saw spending rebound 5.1%M/M. Even with that rebound, spending in Victoria remained down 5.8%Y/Y – suggesting significant scope for further recovery in November – while spending outside of Victoria was up 11.6%Y/Y. The re-opening in Victoria also meant that spending at cafes, restaurants and takeaway food services increased 5.4%M/M, but remained down 10.9%Y/Y. Similarly, spending on clothing, footwear and accessories increased 6.8%M/M, but was down 3.2%Y/Y. Spending on household goods retailing – which rose sharply around the middle of the year – fell 1.0%M/M. While this marked a third consecutive decline, spending on these items was still up more than 15%Y/Y.
German factory orders surge in October back above pre-pandemic level
The strong recovery momentum in German manufacturing appears to be maintained, with new orders increasing for a sixth successive month and by a greater-than-expected 2.9%M/M in October (and following upwardly revised growth of 1.1%M/M in September) to be up 1.8%Y/Y. And that meant that they rose above February’s pre-pandemic level, by 0.8%, the first time to do so since the arrival of Covid-19.
Tallying with yesterday’s strong production data from the sector, auto manufacturers’ new orders rose again, up 1.0%M/M to be an impressive 6.0% above the pre-pandemic level. New orders of capital goods overall were up a robust 3.8%M/M to augur better for business investment while orders of intermediate goods rose 2.3%M/M. In contrast, despite recent firm growth in retail sales, new orders of consumer goods fell 2.2%M/M.
Domestic orders rose a firm 2.4%M/M but remained 0.6% below the pre-pandemic, while foreign orders accelerated 3.2%M/M to move 1.8% above February’s level. New orders from the euro area rose 0.5%M/M while new orders from other countries rose 4.8%M/M benefiting from the stronger economic recoveries in China and the US. Finally, with real turnover in manufacturing up a vigorous 4.0%M/M in October, Monday’s manufacturing production data should similarly report very strong growth for that month.
Brexit talks to continue to generate headlines amid fog of war
The talks between the UK and EU will resume today in London, albeit with EU negotiator Michel Barnier returning to Brussels. That’s despite a mixed bag of headlines, which include UK accusations that the European side was “bringing new elements into the negotiation” at the “eleventh hour”, seemingly at the behest of the French, who are threatening to wield their veto if the deal doesn’t pass muster in Paris. While sterling in particular will continue to respond to the news reports, at this stage amid the fog of war many of them should be taken with a large pinch of salt. It can’t be ruled out that a deal will emerge by the end of the weekend, before the UK government plans provocatively to table draft legislation inconsistent with the Withdrawal Agreement. By the same token, there would seem a good probability that we’ll still be waiting for a deal once the next European Council meeting has concluded a week today.
November employment report the key focus in the US today
The focus in the US today will be mostly on the performance of the labour market with the release of the employment report for November. Daiwa America chief economist Mike Moran has pencilled in a 500k gain in total non-farm payrolls – slightly above the median market forecast of 475k in Bloomberg’s survey – which would be the smallest increase since the recovery began (in part weighed down by further job losses in the government sector). While the household survey is unlikely to repeat the bumper increase in employment reported in October, Mike still expects the unemployment rate to nudge down a further 0.2ppts to 6.7%. Today will also see the release of the full trade balance and factory orders reports for October. Preliminary data from the goods sector points to a modest widening of the overall trade deficit to US$64.5bn, while the factory orders are likely to have increased by around 0.7%M/M thanks to the already-reported 1.3%M/M lift in orders for durable goods.
Kiwi construction activity rebounds very strongly in Q3
Ahead of the release of the full national accounts later this month, today Statistics New Zealand released information on construction activity during Q3. The good news is that the volume of residential construction increased a very sharp 35.9%Q/Q, more than erasing the 19.2%Q/Q decline in Q2 and leaving the level of activity up 4.3%Y/Y. Non-residential construction increased 32.6%Q/Q following a deeper 27.2%Q/Q decline in Q2, so remained down 7.1%Y/Y. With the volume of retail spending already reported to have rebounded 28.0%Q/Q in Q3, a strong rebound in GDP – which plunged 12.2%Q/Q in Q2 – seems likely to be reported on 17 December. Next week the release of further partial indicators will cast additional light on the likely size of that rebound.