Japan's trade surplus widens in November; French retail sales fall

Chris Scicluna

US fiscal stimulus hopes lift equity markets (again)
The S&P500 increased 1.3% on yesterday, erasing most of the decline recorded over the prior four sessions, as prospects for near-term fiscal stimulus were boosted by remarks made by Senate Majority leader Mitch McConnell (who also made the news by belatedly recognising Joe Biden as President-elect). McConnell said that senators would not be getting a holiday break until a fiscal deal is done, with an agreement said to be getting ‘closer and closer’ following further discussions late on Tuesday. That said, the bipartisan proposal that appears to be currently under consideration amounts to just $US748bn – about a third of what Democrats had been seeking ahead of the election. As a result, Treasury yields increased only modestly on the day – and with investors keenly awaiting the Fed this evening, 10Y yields are still close to 0.90% - while the greenback slipped a little against most counterparts, with $/¥ falling towards 103.5.

The more positive tone has underpinned equity markets in the Asia-Pacific region today, although the gains have generally been quite a bit smaller than in the US. In Japan, the TOPIX increased just 0.3% as both November exports and imports disappointed market expectations while the flash December PMIs proved mixed. Late yesterday, Japan’s Cabinet approved the ¥21.8trn third supplementary budget that PM Suga had announced last week – a package of measures forecast to impact economic activity mostly in FY21 and beyond (the first budget for FY21 will be announced next Monday). Associated with that budget, the current year’s bond programme has increased by ¥22.4trn to a record ¥263.1trn. Elsewhere, China’s CSI300 increased 0.4% and South Korea’s KOSPI 0.5% – the latter despite a small but unexpected decline in the unemployment rate in November.

In Australia, the ASX200 increased 0.7%, led by a rally in technology stocks, as the flash December PMI reports impressed, Westpac’s leading index improved again and as the Government said that it would go to the WTO to challenge China’s earlier imposition of tariffs on imports of Australian barley (with further challenges possible given China’s recent actions with respect to imports of Australian coal and wine).

Japanese trade surplus widens but both export and import values weaken
Today’s Japanese dataflow began with the MoF releasing the merchandise trade report for November. The adjusted trade surplus widened to ¥570bn this month from an upwardly-revised ¥362bn in October – just slightly above market expectations – but both exports and imports fell short of market expectations. After growing for five consecutive months, export receipts fell 0.3%M/M in November. While not a large decline – especially in light of the near 21% cumulative increase since the May low – this left the level down a disappointing 4.2%Y/Y (the market had forecast a small increase). In the detail, exports of electrical machinery increased 1.0%Y/Y, but exports of general machinery were down 3.0%Y/Y and exports of other manufactured goods fell more than 10%Y/Y. Meanwhile, after finally showing some signs of recovery last month, import values declined 4.0%M/M in November. As a result, imports values remained down 11.1%Y/Y – in large part clearly due to weaker prices for some key commodities, but perhaps also suggesting that firms continue to harbour doubts about prospects for the domestic economy.

As usual, a little later in the day the BoJ released its analysis of the export and import data, adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. Somewhat surprisingly – especially considering the relatively modest movements in export and import prices reported early by the BoJ earlier this month – the BoJ’s calculations cast developments in exports and imports in a considerably more positive light than the MoF’s nominal data. According to the BoJ, the recovery in real exports continued unabated with growth of 3.7%M/M in November, so that annual growth increased to 4.6%Y/Y. As a result, real exports over the first two months of Q4 were more than 12% above the average level through Q3. Meanwhile, the BoJ estimates that real imports increased 2.6%M/M in November – the third consecutive month of growth – lowering the annual decline to 1.9%Y/Y (far less than the decline in values, in large part due to lower prices for petroleum and chemicals). As a result, the level of real imports over the first two months of Q4 was just under 6% above the average level through Q3. Taken together, the BoJ’s calculations imply that net goods exports are on track to make a positive contribution to GDP growth, but perhaps only about a third of the 2.5ppt contribution made in Q3.

The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to China slowed to 11.1%Y/Y in November from 15.5%Y/Y in October. After turning positive last month for the first time this year, exports to the rest of Asia fell 4.5%Y/Y in November. Similarly, after growing fractionally last month, exports to the US fell 2.6%Y/Y in November. Predictably, the situation with respect to European markets remained very weak, with the 9.8%Y/Y decline in exports in November representing only a small improvement on the 10.9%Y/Y declined registered in October.

Japanese PMIs mixed – manufacturing firmer, but services a little weaker
In other Japanese news, today’s flash PMIs for December were a mixed bag. On a positive note, the headline manufacturing PMI increased 0.7pts to 49.7, marking the highest reading since May 2019. In the detail, the output index also increased 0.7pts to 49.5 and the new orders index increased 0.5pts to 49.2 – in both cases the highest reading since December 2018. Moreover, the employment index increased 1.0pts to 50.1 – the first expansionary reading since February. However, perhaps reflecting the impact of renewed offshore lockdowns, the new export orders index fell 0.9pts to a 3-month low of 48.3. The pricing indices were modestly firmer, however, with the input price index rising 0.4pts to 51.7 and the output price index rising fractionally to 49.5.

Unfortunately, the news from the service sector was somewhat softer – perhaps not surprising given the rise in local coronavirus infections over the past month. The headline services PMI – the business activity index – fell 0.6pts to a 3-month low of 47.2. While the new orders index fell just 0.1pts to 45.7, the business expectations index fell 2.5pts to 52.9 – in both cases, the lowest readings since August. The employment index also edged down 0.1pts to 49.7. Moreover, while the input prices index increased to a 10-month high of 51.6, the output prices index fell 1.5pts to a 6-month low of 47.9.

Combining results from both sectors, the composite PMI output index edged down 0.1pts to 48.0, thus returning to where it had stood in October. While the composite PMI new orders index edged up 0.1pts to 46.8, it was still down 1.0pts from October and indicative of a slight loss of momentum late in the quarter. Moreover, it is worth noting that both indices remain a little below their longer-term average readings.

UK inflation unexpectedly falls sharply in November on discounted clothes
We had expected UK inflation to fall last month, but this morning’s data still surprised significantly on the downside. In particular, headline CPI inflation fell 0.4ppt in November – the most since August – to just 0.3%Y/Y, similarly the lowest in three months. Core inflation also fell 0.4ppt to 1.1%Y/Y, likewise the lowest since August. The drop was caused principally by discounted prices of clothing and footwear, which have been a significant source of volatility of late and fell 3.7%Y/Y last month (having been unchanged year-on-year in October) against the backdrop of the closure of non-essential stores in England. However, food and beverages also made a significant contribution, dropping 0.8ppt to just 0.2%Y/Y, the lowest since 2016. And prices of the other major categories of goods also fell, pushing inflation of non-industrial goods down 0.9ppt to 0.6%Y/Y. In contrast, inflation of services remained unchanged at 1.4%Y/Y, although we caution that prices of many items were imputed by the statisticians. Indeed, prices of items accounting for almost 14% of the total basket were unavailable for collection. Energy inflation was effectively unchanged at -9.4%Y/Y. But that component in particular will rise steadily over coming months, pushing headline inflation up to about 1½%Y/Y by the second if, as we assume, a deal between the EU and UK is reached. If there is no deal, inflation could well be 3%Y/Y or more by then, pushed higher by new tariffs as well as the likely plunge in sterling.

French retail sales down by about one quarter last month due to lockdown
Having surged at the start of Q4, rising 6.2%Y/Y in October, French retail sales inevitably plunged last month as non-essential stores were closed until the 28th of the month. Indeed, according to this morning’s Bank of France survey results, retail sales fell by almost one quarter (down 24.5%Y/Y) last month. While steep, that was still some way short of the decline of 39.1%Y/Y during the peak of the first wave in April, and was likely accentuated by the delay to Black Friday sales. Within the detail, the survey suggests that sales of manufactured goods were down 37.0%Y/Y while food products fell a more limited 6.4%Y/Y. Big falls were recorded in sales of watches and jewellery (down more than 75%Y/Y), sports equipment (similarly down 75%Y/Y), perfume and hygiene products and textiles and clothing (all down more than two thirds). The only two categories to see an increase in sales from a year earlier were DIY-related items and pharmaceuticals. Sales at small firms fell by almost one third but those at large firms were down by just 8.0%Y/Y.

European flash PMIs to show more impact of pandemic on German economy?
The data highlights in the euro area will be the flash December PMIs, for which the figures from France and Germany are due shortly. These seem likely to underscore the likelihood of a contraction in euro area GDP in Q4 with another sub-50 reading expected in the headline composite index, which fell to 45.3 in November dragged lower in particular by weakness in services. The latest survey will be watched, however, for continued resilience in Germany, where the manufacturing PMI remained very strong last month at 57.8 and the composite PMI encouragingly remained above 50 last month, but where pandemic restrictions have since been tightened. In contrast, the French services PMIs might be expected to tick higher on account of the relaxation of restrictions this month. Likewise, the UK composite PMI should rise from 49.0 in November reflecting the easing of some pandemic containment restrictions as well as Brexit-related stock-building.

Fed the main focus in the US; retail sales, PMI and housing data due too
Most attention in the US today will be centred on the final FOMC meeting of this year, which will include the usual announcement regarding policy settings as well the publication of updated economic forecasts. In light of Congress dithering on another round of fiscal stimulus, with the Treasury having pulled funding for some of the Fed’s pandemic-response credit facilities, and the labour market recovery faltering in the face of the intensified spread of Covid-19, Daiwa America Chief Economist Mike Moran suspects that the Committee will see the need for additional monetary policy support. In line with the discussion that took place at the Committee’s November meeting, that support is likely to take the form of some combination of increasing the pace of purchases, by concentrating purchases in the long end of the maturity spectrum, or by lengthening the horizon over which purchases would be made (so far the Fed has not provided any information on the latter, but could elect to announce dates that it judges to be longer than currently expected by the market). Even so, supported by the Fed’s own actions, the updated Summary of Economic Projections could also show a somewhat more favourable outlook, especially as regards the unemployment rate, which is already nearly a full percentage point below the Fed’s previous expectation for Q4. And whereas in September the ‘dot plot’ indicated that the median Fed official expected no hike in the fed funds rate until beyond 2023 (just 4 of the 17 contributions showing at least one hike in 2023), the median official might even signal a tentative lift-off in 2023 – a forecast that might spook the market, were it not accompanied by the announcement of additional QE.

The release of the retail sales report for November will garner some attention ahead of the Fed’s announcement. Here Mike expects a 0.2%M/M decline in total spending, led by weaker auto sales. Core spending is likely to be broadly unchanged from October, but still noticeably above pre-pandemic levels. Also today, we will receive the flash Markit PMIs for December and the NAHB housing market index for December.

Australian composite PMI rises to 5-month high, led by the service sector
The main economic news in Australia today concerned the release of the flash PMI readings for December. While these reports attract less attention than the more established NAB Business Outlook Survey, the news from the PMIs was very good and consistent with the sharply improved trading conditions reported in the most recent NAB survey. The composite PMI increased 2.1pts to 57.0 in December – now well above the average recorded since this indicator began in 2016. This was the highest reading since July – when activity rebounded from the lockdown – and, before that, June 2017. Not surprisingly, with pandemic-related restrictions easing, the improvement this month was driven mostly by the service sector, with the services PMI rising 2.3pts to 57.4. The manufacturing PMI edged up just 0.2pts to 56.0, which was nonetheless the highest reading since June 2017. Although the new orders index increased 1.4pts to 55.7 the highest reading since November 2018 – the new export orders index fell 0.9pts to a 4-month low of 48.5, thus mimicking the dichotomy in Japan’s PMI report.

In other news, Westpac’s leading index increased 0.5%M/M in November – the largest increase since August – and so reducing the annual decline to just 0.6%Y/Y.

NZ Treasury raises economic forecasts; reduces bond programme
Today the Government released the Treasury’s Half-Year Economic and Fiscal Update, which pointed to a further improvement since the Pre-Election Update was published in September. GDP is now expected to grow 1.5% in the current fiscal year, rather than contract 0.5% as was forecast previously. As a result, the Treasury now expects the unemployment rate to rise from its current level of 5.3% to a peak of 6.9%, down from 7.8% previously. Given the more positive economic outlook, the current year’s fiscal deficit was revised down to NZ$21.6bn (6.7% of GDP) from NZ$31.7bn (10.5% of GDP), with a deficit of just 1% of GDP now expected in 2025. Therefore, the Treasury announced a NZ$5bn reduction in this year’s bond programme to NZ$45bn, with the forecast for subsequent years also revised down by NZ$5bn per year. In addition, the current year’s Treasury bill programme was revised down by NZ2bn to NZ$8bn, with forecasts for subsequent years revised down by NZ$4bn per year. Net debt is now forecast to peak at 52.6% of GDP – about 3ppts lower than forecast previously – or 44.8% of GDP excluding the RBNZ’s liabilities.

In other news, a current account deficit of 0.8% of GDP was reported for the 12 months to 30 September – the smallest annual deficit since 2001, despite a 50% loss of revenue from overseas tourists. The result was broadly in line with market expectations and so is unlikely to have altered expectations for tomorrow’s release of the national accounts for Q3.

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