Japan’s services and composite PMIs revised higher

Chris Scicluna

Asian markets mixed despite more encouraging local data
US asset prices echoed faintly their previous day’s moves on Wednesday, with the S&P500 nudging up 0.2%; 10Y Treasury yields rising 2bps to 0.94% (after being above 0.96% intraday) and the greenback losing ground against the euro and Aussie dollar in particular. However, since Wall Street closed, S&P futures have moved a fraction lower. Of note, Los Angeles issued a stay-home order on a day in which, sadly, more than 2,700 US residents were reported to have lost their lives to Covid-19 – the worst day yet.

Turning to the Asia-Pacific, markets have been somewhat mixed today despite some encouraging PMI data in Japan, China and Australia. In Japan, the TOPIX was little changed even after the previously-reported decline in the services PMI was erased, with media reports suggesting that the Osaka prefecture would soon issue a ‘red alert’ state of emergency encouraging people to stay at home due to the rising number of coronavirus patients. Meanwhile, unsurprisingly, it was also reported that at this month’s Policy Board meeting (18 December) the BoJ would likely consider extending its special funding programme. This programme – which supports businesses via corporate debt purchases and loans intermediated through banks – is currently due to expire at the end of March. According to the same reports, this would demonstrate solidarity with in the government, which will soon to unveil its third supplementary budget. Indeed, the BoJ programme has previously been augmented in tandem with the government’s enhancement of its business support measures.

In China the CSI300 fell 0.2% even as the Caixin services PMI increased unexpectedly in November, lifting the composite PMI to a more than 10-year high. In Australia, the ASX200 rose 0.4% following better-than-expected trade and PMI data, and on reports suggesting that China had finally begun to offload Australian coal furloughed outside of its ports. Meanwhile, the 10Y ACG bond rate closed above 1% for the first time since September. The 3Y yield also nudged up to a 6-week high of 0.13%, even as the RBA stepped in to buy A$1bn of paper to remind the market of its 0.10% target for this maturity.

Japan’s services and composite PMIs revised higher, now up from October
Today Japan printed its final services and composite PMI figures for November. Encouragingly, at least at the headline level, the weakening suggested in the flash report was more than overturned. Within the services sector the business activity index was revised up 1.1pts to 47.8, leaving it up 0.1pts from October and at the highest level since January. However, while the new orders index was revised up 0.5pts to 45.8, it remained down 2.1pts compared with October. Similarly, the business expectations index was revised up 2.1pts to 55.4, but was still down 1.4pts from October. Combined with similarly-revised information from the manufacturing survey, the composite PMI output index was revised up 1.1pts to 48.1 – now also up 0.1pts from October. However, the composite new orders index finished the month down 1.1pts at 46.8, albeit 0.7pts firmer than indicated by the flash reading. Next week’s Reuters Tankan and Economy Watchers surveys will cast further light on how firms’ are viewing the near-term economic outlook, especially in light of the near-term challenge posted by rising coronavirus case numbers.

In other news, the BoJ reported that the stock of banks’ outstanding lending to corporates declined 0.2%M/M in October. However, due to base effects, annual growth picked up to slightly to 7.8%Y/Y (growth had increased sharply at the onset of the pandemic as firms scrambled to secure liquidity). Growth in lending to individuals, which has been much steadier, increased 0.3%M/M and 1.9%Y/Y.

China’s Caixin PMI confirms strengthening service sector activity
It almost goes without saying that today’s Caixin services PMI for November became the latest Chinese economic report to exceed market expectations. Whereas the market had expected the headline index to moderate slightly from last month’s elevated level, instead the index increased by a further 1.0pts to 57.8 – now almost 4pts above the historic average for the series. Especially encouraging was a 3.1pt lift in the new orders index to 58.7 – the highest reading since April 2010. With the manufacturing PMI having also improved in November, the composite PMI output index increased 1.8pts to 57.5 – the highest reading since March 2010, and adding to signs that China will record another quarter of above-trend GDP growth in Q4.

Australian trade surplus surprises to upside; composite PMI revised up
Australia recorded a trade surplus of A$7.5bn in October – A$1.7bn above a consensus expectation that in retrospect was too low considering the preliminary goods data released last month. This was also A$2.7bn wider than in the same month last year, with about half of that widening explained by growth in the services balance due to the collapse in spending on outbound travel in the wake of the pandemic. Driven by exports of metals ores, overall exports made a strong start to the quarter, increasing 5.4%M/M and so trimming their annual decline to 11.7%Y/Y. Meanwhile, after declining 6.5%M/M in September, imports grew just 0.6%M/M in October and so were still down a hefty 21.3%Y/Y. Imports of consumption, intermediate and capital goods all increased by around 1½%M/M, but imports of non-monetary gold fell by almost a thirds. Compared with a year earlier imports of consumption goods were little changed, but imports of intermediate goods fell by more than 17%Y/Y (in large part due to lower oil prices) and imports of capital goods were down 10%Y/Y. Meanwhile, with Australians not travelling overseas, imports of services were down almost 58%Y/Y.

In other news, the final services and composite PMI figures for November were released today. The good news is that the headline services activity index was revised up 0.2pts to 55.1 – now up 1.4pts from October, doubtless assisted by the reopening of retail and hospitality businesses in Melbourne. In the detail the new orders index was revised up 0.5pts to a final reading of 51.7 (up 1.0pts for the month) and the employment index was revised up 0.6pts to an 18-month high of 51.3 (up 3.1pts from October). Combining these results with those from the manufacturing sector, the headline composite PMI output index was revised up 0.2pts to a very solid 54.9.

Meanwhile, continuing the run favourable housing data, the ABS reported another increase in housing construction loan approvals in October, albeit one that was not quite as strong as the market had expected. The value of approvals for loans by owner-occupiers increased 0.8%M/M, so that annual growth slowed only slightly to a still considerable 31.2%Y/Y. This constitutes a new record high, with growth driving by loans to finance new home construction (now up by two-thirds since the Government implemented the Homebuilder grant in June as part of its economic policy response to the pandemic). In addition, after rising more than 5%M/M in September, approvals for investor loans for housing increased 0.3%M/M and 2.8%Y/Y. Approvals for personal loans rebounded 4.3%M/M in October but were still down 7.9%Y/Y.

German car & euro retail data the focus after Germany extends restrictions
Yesterday’s confirmation of the extension of German pandemic containment measures should not have come as a surprise. After all, Wednesday also brought confirmation of Germany’s highest single-day death toll (487) from Covid-19. The measures, which had previously been scheduled to conclude on 20 December, were extended at least to 10 January and will thus mean that hotels (for non-business visitors), restaurants, bars and many leisure and entertainment facilities will have to remain closed into the New Year, meaning a soft start to 2021 for German economic activity.

In terms of hard data, today will bring euro area retail sales figures for October and German new car registrations and production numbers for November. Not least given yesterday’s strong results from Germany, we expect euro area retail sales to have risen by at least 1.0%M/M to be up 3.0%Y/Y or more as households continued to spend more on goods at the expense of services as the pandemic intensified across the region. But as in France, Italy and Spain, car registrations in Germany look to have weakened last month in the face of the renewed pandemic. Indeed, yesterday the ifo institute reported that expectations of German automakers and their suppliers for the coming months had turned sour, with the respective business survey index falling for the fourth consecutive month in a row, and by more than 20pts -4.0. Within the detail, the manufacturers stated that they intended to cut car production, that export expectations had worsened and growth in new orders had weakened, and they also intended to cut jobs.

Survey-wise, like in Japan, China and Australia, today brings the release of the final service sector and composite PMIs for the euro area, Germany and France, as well as the first release of the equivalent figures for Italy and Spain. The flash headline euro area composite PMI dropped almost 5pts to a six-month low of 45.1, albeit still well above April’s trough of 13.6. Inevitably, that decline principally reflected a marked weakening in services activity on account of the recent tightening of containment measures, with the respective index down more than 5pts to 41.3, similarly the lowest since May but well above April’s trough of 12.0. Expect the Italian and Spanish indices, to be released for the first time, to show a significant deterioration.

Brexit headlines to continue to drive movements in sterling
Brexit negotiation headlines are likely to continue to drive movements in sterling, which yesterday weakened as reports suggested increased risks of no deal ahead of the end of the transition period. While there has supposedly been progress on certain issues, inertia remains the case for many others. Clearly there are difficult political decisions to be taken. But, unfortunately, UK PM Johnson has recently been distracted by other political matters, not least his struggle to convince his own party’s backbenchers of the merits of his new Covid-19 containment measures. And that might well have left the UK negotiating team somewhat rudderless this week.

Given the lack of new traction over key stumbling blocks, some EU member states – including those seeking to retain significant access to UK fishing territory – have now seemingly urged enhanced preparations for no deal. In addition, France appears to be flexing its right to veto any deal if it doesn’t pass muster for Paris. Moreover, if the UK government presses ahead next week with draft clauses in the Finance Bill that are inconsistent with the Withdrawal Agreement, it does seem fair to say that such provocation would throw the talks into crisis. Nevertheless, such heightened tensions are just what might be expected if and when the negotiations reach the end-game. And, on balance, and given the economic and political costs to the UK of a failure to reach an agreement, we still expect a deal to be done just in time for ratification, although that might well have to come after the next EU summit a week today.

Like elsewhere, the UK November final services and composite PMIs are also due today. The flash services PMI fell more than 5pts to a six-month low of 45.8, albeit still more than 32pts above April’s record low to suggest a far less traumatic contraction than during the first wave. The composite PMI dropped 4.7pts to 47.4, the lowest since May but still almost 40pts above April’s record low.

ISM services index and jobless claims the focus in the US today
While attention will remain on discussions in Washington DC on possible new fiscal stimulus, the key data focus in the US today will be the ISM services report for November and latest jobless claims. Given the likely impact of mounting coronavirus cases, we expect the headline ISM index will report a modest 0.6pt decline to 56.0. With the November employment report looming, perhaps of greater interest will be developments in the employment sub-index, especially in light of yesterday’s softer-than-expected ADP employment report and the large decline in the employment index in the ISM manufacturing survey released earlier this week. For the same reason, today’s weekly jobless claims report will be of interest, especially given the disappointing back-to-back rise in initial jobless claims reported over the past fortnight. The final readings of the Markit services and composite PMIs for November will also be released today.

Kiwi housing approvals surge in October
The run of very strong Kiwi housing data continued today with Statistics New Zealand reporting that the number of dwelling consents issued jumped a further 8.8%M/M in October, lifting annual growth to 12.8%Y/Y. Moreover, despite the pandemic, the number of consents issued in the year to October is now up 2.8%Y/Y and at the highest level seen since 1974. Growth remains dominated by consents for apartments and townhouses, which are generally cheaper to build then houses, so the value of dwelling consents rose a less emphatic 4.2%Y/Y. Meanwhile, following a robust September, the value of consents for commercial buildings declined 18.3%Y/Y in October, but rose 8.3%Y/Y on a 3-month average basis.

Categories : 

Back to research list

Disclaimer

This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.


Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.