Asian markets little changed after yesterday's risk-on session as US fiscal stimulus plans resurface
As futures markets had foreshadowed earlier in the day, Wall Street began December on a positive note with the S&P500 advancing 1.1% yesterday to a new record high. While the manufacturing ISM – and especially the employment sub-index – fell a little short of expectations, and November auto sales disappointed too, investors took heart from new fiscal stimulus proposals circulated by House Speaker Pelosi and Senate Majority Leader McConnell, and suggestions that the first coronavirus vaccines will begin to be circulated by the middle of this month. Even with Fed Chair Powell citing ‘extraordinary uncertainty’ about the economic outlook during a downbeat Senate Banking Committee hearing, the prospect of further fiscal stimulus – albeit with reports that the new Democrat and Republican proposals remain far apart – awakened the Treasury market from its slumber, with the 10Y yield settling 8bps higher at 0.92%. The positive risk environment weighed on the greenback, which weakened sharply against all but the yen. So, the euro pushed clearly above $1.20 for the first time since April 2018. And sterling appreciated late in the day on reports that the EU-UK negotiations were reaching the end-game and thus entering the so-called ‘tunnel’ (Barnier is reportedly to brief EU ambassadors shortly).
US equity futures have backtracked a little since Wall Street close, with the S&P500 e-mini down 0.2% as we write. In the Asia-Pacific region, the economic news flow has been relatively light and equity markets are mostly little changed. Indeed, Japan’s TOPIX increased just 0.3% as the latest consumer confidence survey (see below) provided downbeat reading against the backdrop of the worsening pandemic. Stocks ended flat in China and are similarly little changed in Hong Kong, perhaps in part restrained by a New York Times interview in which President-elect Biden said that he would not be moving quickly to remove tariffs on China or the obligations imposed on China by the Phase 1 deal. Meanwhile, Australia’s ASX200 closed little changed despite GDP recording a stronger rebound in Q3 than most analysts had expected (more on this below too). Australian bond yields rose sharply, with the 10Y yield climbing 8bps to 0.99%, although this had more to do with the sell-off in the Treasury market than the local data. Indeed, speaking to a Parliamentary committee, RBA Governor Lowe made clear that despite the ‘good’ GDP data, he was still open-minded on the need to add further stimulus next year.
Japanese consumer confidence little changed in November
While Japanese firms appear to somewhat more optimistic of late, today’s Cabinet Office survey indicated that consumer confidence remains glum. The overall consumer index improved a negligible 0.1pt to 33.7 in November – albeit a better result than the market had expected given the recent rise in local coronavirus cases – to leave it still more than 5pts below where it had ended 2019 and slightly weaker still relative to the survey’s longer-term average. Households were more optimistic about their overall livelihood – perhaps helped by the rally in the stock market – but were less optimistic about employment. The index measuring respondents’ willingness to buy durable goods was unchanged from last month and so still 4pts weaker than at the end of last year.
In other news, the BoJ reported that the monetary base increased 16.5%Y/Y in November, up fractionally from 16.3%Y/Y in October. This marked the fastest growth since June 2017, and reflects the increase in the pace of the Bank’s asset purchases as part of its response to the pandemic.
Australian GDP rebounds 3.3%Q/Q in Q3, further growth likely in Q4
The domestic focus in Australia today was on the release of the national accounts for Q3. Somewhat encouragingly, following a record 7.0%Q/Q contraction in Q2, real GDP recovered 3.3%Q/Q in Q3 – ahead of market expectations, which envisaged growth of about 2½%Q/Q, but not inconsistent with developments in the labour market during the quarter. While this is a smaller recovery than seen in some countries, in large part this reflects the re-imposition of lockdown restrictions in Melbourne during the quarter. Indeed, final demand in the state of Victoria fell a further 1.0%Q/Q in Q3, whereas growth of 6.8%Q/Q was recorded in both New South Wales and Queensland, and 6.7%Q/Q in South Australia. Sadly, GDP remained down 3.8%Y/Y in Q3 and was still 4.2% lower than in Q419.
In broad terms, the detail of the national accounts was in line with the various partial indicators. After declining 11.0%Q/Q in Q2, overall private sector final demand rebounded 5.8%Q/Q in Q3. The key driver of that growth was a 7.9%Q/Q rebound in household consumption expenditure, which may have been somewhat larger than the market had expected. Spending on goods increased 5.2%Q/Q, as suggested by the retail sales report, while spending on services – about which little was known previously – increased a solid 7.9%Q/Q, albeit following a 17.9%Q/Q plunge in Q2 (not least due to a near 50%Q/Q rebound in spending at hotels, cafés and restaurant). Residential building activity increased a modest 0.6%Q/Q, but commercial construction fell 4.8%Q/Q and investment in machinery and equipment fell 3.7%Q/Q. Net exports subtracted 1.9ppts from growth in Q3, with exports falling 3.2%Q/Q and imports rising 6.5%Q/Q. Meanwhile, as indicated yesterday, public demand made a 0.3ppt positive contribution to growth. Elsewhere in the accounts, nominal GDP rebounded 3.7%Q/Q in Q3 but was still down 3.9%Y/Y. The GDP deflator thus increased 0.4%Q/Q, but was unchanged from a year earlier. The domestic final demand deflator was unchanged in the quarter and up just 0.6%Y/Y, consistent with other soft inflation measures in Australia.
Looking ahead, with the state of Victoria reopening, we expect a further recovery in GDP during the current quarter. Household consumption would appear to have scope for particularly solid growth considering that the household savings rate stood at 18.9% in Q3 – down only slightly from the 46-year high of 22.1% in Q2 and still more than 10ppts higher than the trend during preceding quarters. Conservatively, additional growth of around 1½%Q/Q in Q4 would leave output down 2.8%Y/Y for the year – about 1ppt firmer than the ‘around -4%Y/Y’ contraction envisaged by the RBA in last month’s Statement on Monetary Policy.
This upside surprise is unlikely to have much impact on the RBA’s policy outlook, however. As the Bank emphasised in yesterday’s post-meeting statement, even with the current degree of stimulus the economic recovery is expected to be an uneven and drawn out affair and it will be a number of years before employment and inflation return to levels consistent with the Bank’s mandate (bearing in mind that inflation was well below the RBA’s target even before the pandemic struck). Today’s data was released during RBA Governor Lowe’s testimony to the House of Representatives Standing Committee on Economics. While he described the GDP news as ‘good’, Lowe still noted that he was ‘open minded’ about the need for further policy stimulus next year, most likely by expanding the QE programme given the Bank’s view that a negative cash rate would likely be counterproductive.
German October retail rebound beats expectations
German retail sales rebounded in October and by more than expected, rising 2.6%M/M in real terms to be up a whopping 8.0%Y/Y and a sizeable 5.9% above the pre-pandemic level in February. Compared to a year earlier, sales of food and beverages were up 7.3%Y/Y with supermarket sales up 7.9%Y/Y. Non-food sales were up 9.0%Y/Y with online and mail order sales up almost 30%Y/Y. Mirroring trends elsewhere in Europe, trade in furniture, household appliances and building materials also remained vigorous, up 14.2%Y/Y, while sales of clothes, textiles and shoes remained weak, down 6.4%Y/Y.
Euro area labour market data for October are due later this morning and expected to report only a slight increase of 0.1ppt in the unemployment rate to 8.4%. While that would be the highest since March 2018, it would still be remarkably low, reflecting the millions of jobs still supported by government short0term working/furlough schemes.
UK shop price deflation intensifies in bad week for big retail names
Attention is bound to remain on the EU-UK negotiations, which some reports have suggested have now entered the so-called ‘tunnel’ phase during which both teams would make commitments to avoid media briefings. Nevertheless, Michel Barnier will reportedly brief EU ambassadors shortly on progress, with those member states seeking to retain significant access to UK fishing territory seemingly concerned that their chief negotiator might be about to go soft on the issue.
UK data-wise, in a week that has seen the Arcadia Group go into administration and the Debenhams chain announce that it will close all of its 124 stores, the BRC shop price index for November released overnight unsurprisingly suggested that competition on the high street remains fierce. In particular, the pace of decline in shop prices on the survey accelerated by 0.56ppt last month to -1.8%Y/Y, the steepest decline since May.
ADP jobs report, Fed Beige Book & Powell testimony ahead in the US today
Following yesterday’s disappointing decline the manufacturing ISM survey’s employment index – and back-to-back increases in initial jobless claims over the past fortnight – today the ADP employment report for November will be of some interest, albeit noting that it has not tracked official payrolls estimates well in the wake of the pandemic. The Fed will release its Beige Book of economic anecdotes later in the day and Fed Chair Powell will repeat yesterday’s testimony on the CARES Act, this time before the House Financial Services Committee.
Kiwi export and import volumes rebound at a similar pace in Q3
Ahead of the release of the full national accounts later this month, today Statistics New Zealand released its breakdown of Q3 merchandise trade values into its constituent volume and price components. The report pointed to a 5.6%Q/Q rebound in export volumes and a 6.5%Q/Q rebound in import volumes, suggesting that net merchandise exports will act as only a modest drag on Q3 GDP growth after contributing positively in Q2. Compared to a year earlier exports volumes were up 2.1%Y/Y whereas import volumes were down 13.7%Y/Y.