Japan’s Q3 GDP revised up, Reuters Tankan indices improve, but sentiment survey drops

Chris Scicluna

Sterling back well above yesterday’s lows but Gilts a touch firmer again with Boris yet to go to Brussels
After yesterday morning’s slide, sterling recovered much of its lost ground yesterday, briefly moving above $1.3400 after the morning close, up from $1.3225 earlier in the day but still off Friday’s high of $1.3539. So far today, it’s only weakened modestly, down just below $1.3350. But having rallied yesterday, Gilts and euro area govvies are again a touch firmer again this morning (yields on 10Y Gilts down a further ½bp to 0.275%). That all reflects the realisation that a deal between the EU and UK is still just about feasible, with Boris Johnson set to go to Brussels ‘in the coming days’ to meet Commission President von der Leyen face-to-face to try to hammer out an agreement.

The chief negotiators have been asked to ‘prepare an overview of the remaining differences to be discussed’ by the two leaders. Those differences – on the long-standing obstacles of the level playing field, governance and fish – are still substantive. But the set-piece event will give Johnson the opportunity to dress up any old agreement as a negotiating triumph – just as he did a year ago with the initial Brexit Withdrawal Agreement – and thus present himself as a returning hero. His government’s decision last night to press ahead and secure House of Commons agreement to reinstate controversial Internal Market Bill clauses inflammatory to the EU can be overlooked for now, given that the clauses would be removed if a deal concludes.

Equities slip on coronavirus worries as investors await news on fiscal stimulus, Brexit
On a relatively slow day for US news, the S&P500 began the week with a modest 0.2% loss – although the index had been down as much as 0.6% shortly before the close – and S&P500 futures have slipped a further 0.2% in Asia, while Treasury yields and the greenback have moved sideways. That partly reflects a lack of obvious progress on fiscal stimulus negotiations, which left the focus on the near-term economic challenges posed by the coronavirus pandemic. However, the House of Representatives should vote tomorrow on a one-week stopgap spending bill to give more time to find agreement on Covid relief and also avoid a government shutdown at the end of this week.

Against that background, Asian equity markets also generally posted very slight declines today. In Japan, the TOPIX declined 0.1% even as the government unveiled an impressive-sounding ¥73.6trn stimulus to fight the pandemic – as noted below, as usual the devil is in the detail and the headline number doesn’t provide a realistic guide, so JGBs were firmer across the curve – and a small upward revision to GDP growth in Q3. Unfortunately, a soft Economy Watchers Survey sent alarm bells ringing late in the day. Equity markets were also little changed in Mainland China, but the Hang Seng is down 0.9% after Hong Kong announced more measures to constrain the pandemic. Meanwhile, South Korea’s high-flying KOSPI fell 1.6%. However, with Australian business conditions assessed to have improved to levels last seen in March 2019, the ASX200 bucked the trend with a modest 0.2% advance although ACGBs made modest gains.

Japan’s 3rd supplementary budget for FY20 said to be around ¥19trn, with more support ahead in FY21
In a news conference held early today, Japan’s PM Yoshihide Suga laid out the broad parameters of the fiscal package he will take to his Cabinet for approval later today. In line with yesterday’s reports, according to Suga, the total value is the stimulus is worth ¥73.6trn, including ¥6trn for measures to curb the coronavirus outbreak (including funds for the health sector and to support businesses forced to reduce trading hours), ¥5.9trn for disaster management and national resilience (including public construction to protect against disasters) and ¥51.7trn to support structural economic changes in the post-pandemic world (including funds to support universities, promote the green economy and advance the digital economy in schools). As usual, the devil is in the detail, with this large figure including spending beyond FY20 and spending presumed to come from the private sector. According to reports, central government outlays are set to increase by just over ¥30trn (although Suga has said that total fiscal measures would amount to ¥40trn). Of this, just over ¥19trn would be funded by a 3rd FY20 supplementary budget – broadly in line with surveyed expectations – with the remainder to be provided for in the budget for FY21 (to be announced later). With most of the ¥19trn-plus likely to be funded by T-Bill issuance and the rest by front-loading refunding bonds, JGBs made modest gains in relief. Further information can be expected later today.

Japanese GDP growth revised up slightly in Q3 on firmer capex and consumer spending
Today the Cabinet Office released the revised national accounts for Q3, which also included extensive historical revisions because of moving to a new benchmark year (2015). That said, the description of the economy’s recent performance was little changed, with real GDP now estimated to have rebounded 5.3%Q/Q in Q3 – just 0.3ppt more than first estimated. Moreover, this rebound now follows an 8.3%Q/Q contraction in Q2 – 0.1ppt deeper than first estimated – so that the 5.7%Y/Y annual contraction in Q3 was just 0.1ppt smaller than estimated previously.

Turning to the detail, as indicated by the MoF’s corporate survey, non-residential investment fared slightly better than indicated by the preliminary estimate, with the decline revised down 1.0ppt to 2.4%Q/Q. However, unfavourable historical revisions mean that the annual decline in business capex is now 10.8%Y/Y – 0.3ppt larger than estimated previously. The first published breakdown revealed that investment in non-transport machinery slumped a further 5.2%Q/Q, taking the annual decline to 17.4%Y/Y. Transport investment rebounded 9.6%Q/Q but was nonetheless down almost 22%Y/Y. With investment in intellectual property falling 3.7%Q/Q in Q3, the only category of business capex not to report an annual decline was non-residential building.

Private consumption also contributed to the small upward revision in GDP growth, with spending now estimated to have rebounded 5.1%Q/Q in Q3 – 0.4ppt more than first estimated, albeit following a contraction in Q2 that was 0.2ppt deeper than estimated previously. Residential investment fell 5.8%Q/Q in Q3, which was 2.1ppts less severe than estimated previously, while growth in public consumption was revised up 0.6ppt to 2.8%Q/Q. However, the contribution to growth from net exports was revised down 0.2ppt to 2.7ppts, with imports falling by slightly less than estimated previously.

Elsewhere in the accounts, nominal GDP grew an upwardly-revised 5.5%Q/Q in Q3, driven by the upward revision to real growth, but was still down 4.6%Y/Y in Q3. The cumulative effect of this revision and of the historical benchmark revisions was to raise the level of nominal GDP by 1.5% to ¥539trn – still ¥25trn lower than the peak a year ago.

Japanese labour cash earnings recovering slowly, household spending lifts in October
Turning to more up-to-date indicators, today’s preliminary Monthly Labour Survey reported that average labour cash earnings (per employee) declined 0.8%Y/Y in October – an improvement of just 0.1ppt from September. After accounting for inflation, real wages declined 0.2%Y/Y, compared with 1.1%Y/Y previously. Average overtime earnings fell a substantial 11.7%Y/Y, similar to the decline in September. As has been the case since the pandemic began, this continues to be driven by a reduction in overtime hours worked. Indeed, despite a further 2.4%M/M increase in October – the fourth consecutive monthly improvement – overtime hours were still down 11.1%Y/Y. Regular earnings increased a modest 0.3%Y/Y in October, unchanged from last month, while average regular hours worked increased 1.2%Y/Y – the first increase since February. The number of people in regular employment increased 0.2%M/M – the fourth consecutive increase – but annual growth still slowed 0.2ppt to 0.6%Y/Y. In the detail, growth in the number of full-time employees slowed to 1.1%Y/Y (down 0.5ppt from last month), but the 0.4%Y/Y decline in the number of part-time employees was 0.6ppt less severe than in September. Finally, it is worth noting that once again all of the pick-up in regular employment in October occurred outside of the manufacturing sector, with factory employment down 0.1%M/M during the month.

In other news, the MIC released its monthly survey of household spending and incomes for October. Consistent with the positive picture portrayed by yesterday’s more reliable BoJ Consumption Activity Index, MIC’s estimate of total real spending increased a solid 2.1%M/M. Spending was up 1.9%Y/Y – slightly less than the market had factored – compared with the 10.2%Y/Y decline reported in September. Of course, these annual comparisons are exaggerated by last year’s consumption tax hike, which brought spending forward into September 2019. MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, increased 3.6%M/M and 3.8%Y/Y in October. Meanwhile, the survey’s measure of workers’ real disposable incomes increased 2.6%Y/Y in October, down only slightly from September. So with understandably cautious household’s having also saved a good portion of their earlier government pandemic relief payments, there appears to be scope for a further pick-up in household spending once worries about the pandemic begin to subside (presumably sometime next year, given the latest resurgence of cases).

Moving on, the BoJ reported that total new bank lending increased 0.2%M/M in November, causing annual growth to increase 0.2ppt to 6.3%Y/Y. Lending by the major city banks – which had increased sharply at the onset of the pandemic, as firms sought to bolster liquidity – also increased 0.2%M/M, marking the first increase since July and causing annual growth to increase 0.3ppt to 6.9%Y/Y. Both regional and shinkin banks also reported a 0.2%M/M lift in new lending, resulting in annual growth of 5.2%Y/Y and 8.3%Y/Y respectively. On the other side of the ledger, bank deposits increased ¥6.7bn in November, causing annual growth to remain at a very elevated 9.0%Y/Y – growth that is suggests ongoing precautionary behaviour by households.

Japan’s Reuters Tankan better, Economy Watchers survey rings alarm bells
Turning to the latest sentiment indicators, early in the day the Reuters Tankan pointed to a further reduction in business sector pessimism over the past month, consistent with last week’s revised PMI readings. The overall manufacturing diffusion index (DI) increased 4pts to -9, marking the best reading since February. The industry detail was quite uneven, however. Firms operating in the machinery and food sectors were notably less downbeat, while the auto sector index jumped 40pts to +23 – the highest reading in 14 months. However, those gains were offset partly by greater pessimism in the oil products and metals-related industries. Looking ahead, encouragingly, the forecast DI – which measures expected business conditions three months ahead – also increased to -5, indicating that respondents expect the improving trend to continue. The same survey pointed to a more impressive 9pt rise in the DI for non-manufacturing firms to -4 – also the best reading since February – although respondents indicated that they expected no further improvement in conditions over the next three months. In contrast to the manufacturing sector, the improvement in sentiment was widespread across industries, although retailers and wholesalers were notably less downbeat than a month earlier – an outcome that suggests a continuation of the recovery in consumer spending that was highlighted by yesterday’s BoJ Consumption Activity Index.

Unfortunately, later in the day, the Cabinet Office Economy Watchers survey painted a quite different picture of sentiment, with the key indices falling sharply in November – an outcome that presumably reflects the recent sharp upswing in local coronavirus cases. Sadly, the headline current conditions DI slumped a much greater-than-expected 8.9pts to a 3-month low of 45.6, marking the first decline since April. The household sector index fell an even greater 10.7pts to a 4-month low of 44.4, led by an especially sharp 24.5pt drop in sentiment amongst those respondents interacting with the food sector. The retail and services indices also recorded significant declines, so moving back below the crucial 50 level. The corporate sector index was slightly more resilient, but this still fell 4.9pts to 48.1 with both the manufacturing and non-manufacturing sub-indices falling similarly. Unfortunately, it appears that respondents expect conditions to deteriorate further over the coming 2-3 months. The overall expectations index plunged 12.6pts to 36.5 in November, marking the lowest reading since April. The household index fell 14.0pts to 35.1, with the food sector index down 26.0pts to just 22.1. Meanwhile, the corporate sector index fell 8.6pts to 39.7, suggesting that respondents were fearful of a broader slowdown over coming months. All eyes will now turn to next week’s BoJ Tankan survey.

Australian business conditions improve; consumer sentiment also firmer
With coronavirus back under control and monetary and fiscal policy providing substantial support to the economy, today’s NAB Business Outlook Survey indicated that Australian business sentiment improved markedly in November, albeit with signs of caution still evident. The headline confidence index increased 9pts to +12, marking the highest reading since April 2018. More importantly, the closely-watched business conditions index increased 7pts to +9, which is the highest reading since March 2019 and now back above the historic average. In the detail, the trading activity index surged 10pts to the highest level since September 2018. However, it appears that firms remain cautious about the forward outlook, as the capex index was steady at -4 and the employment index was also unchanged at -5 – both weaker-than-average readings. The inflation news also remained weak, with firms reporting that their output prices declined 0.1% over the past three months. Moreover, labour costs were reported to have increased just 0.1% over that period.

In other news, the ANZ-Roy Morgan consumer confidence index increased a further 1.7% to 109.3 last week – the highest reading in 13 months. Consumers were more positive about both the economic outlook and their own prospective financial situation. As a result, the index measure respondent’s assessment of whether it is a good time to purchase major household items increased to its highest level since early March. Likely contributing to that assessment is the turnaround in house prices, which was confirmed today by the ABS. The official measure of house prices increased 0.8%Q/Q in Q3 – a considerably firmer result than the market had expected based on competing monthly indicators. Annual growth still slowed to 1.7ppts to 4.5%Y/Y, however, reflecting the very strong upswing that was underway prior to the pandemic. Judging by recent indicators, that upswing has resumed in recent months.

Today’s US economic diary unlike to move markets; focus to remain on fiscal negotiations
The only economic reports scheduled for release in the US today are the NFIB’s small business survey for November and the final productivity and unit labour cost readings for Q3. Regarding the latter, while the second estimate of GDP growth was unrevised, Daiwa America Chief Economist, Mike Moran, thinks that productivity will be revised down 0.8ppt to 4.1%AR because of an upward revision to hours worked. Neither of these reports are likely to move the market, so the focus for investors will remain on any progress on fiscal stimulus negotiations.

ZEW survey, revised Q3 GDP and employment data on the euro area docket
Today’s euro area data are also unlikely to impact the markets. The ZEW investor sentiment survey for December will be published. And contrary to yesterday’s upbeat Sentix survey results, the imposition of restrictions on many service sector activities last month, and their extension to 10 January, is expected to contribute to a modest fall in the German current situation balance – the Bloomberg consensus is for a reading of -66.0, close to September’s level, from -64.3 in November. However, the expectations balance is expected to edge higher to 46.0, some way below September’s high of 77.4 but still a historically high level, supported by optimism surrounding the development of vaccines. Today also brings the release of revised Q3 euro area GDP figures (current growth estimate of 12.6%Q/Q), which will be accompanied by the expenditure components for the first time – household consumption, fixed investment and net trade will all have made substantive positive contributions. Final employment figures for Q3 are expected to align with the preliminary estimate, which showed a moderate 0.3%Q/Q increase, following a 2.9%Q/Q fall in Q2.

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