UK GDP to have slowed in Q4

Emily Nicol
Chris Scicluna

While the number of coronavirus fatalities in China rose above 1k, and confirmed cases rose above 43k, Asian investors were largely unperturbed today. Indeed, on a day with little substantive economic news from the region, stocks took their cue from yesterday’s gains in the US. So, after the S&P500 closed up about ¾% at a new high, most Asian equities similarly advanced, with China’s markets posting a sixth successive day of gains. The CSI300 ended the day up a little less than 1%, while the Hang Seng is currently up by more than that, and the offshore yuan remained below 7/$.

While the yen depreciated slightly on the risk-on mood, however, Japan’s markets were closed for the Foundation Day national holiday. As such, trading in USTs has only just got underway in European time. Ahead of Jay Powell’s Congressional testimony, however, USTs have opened lower and weakened further – 10Y yields are currently up to about 1.59%, a couple of bps higher than yesterday’s close. Meanwhile, ACGBs were only a touch weaker today (10Y yields edged higher to pop back above 1.0%) after the latest NAB business survey suggested little change to Australian business conditions at the start of the year, but a surge in new mortgage lending tallied with RBA concerns about the impact that any further rate cuts might have on the Aussie housing market (see the detail below).

Looking ahead, UK Q4 GDP will be today’s main event data-wise, while Christine Lagarde and Mark Carney will, like Jay Powell, also speak publicly.

Against the backdrop of the escalation of the bushfire crisis at the turn of the year and concerns about a hit to Australian growth from the coronavirus, the latest NAB business sentiment survey arguably exceeded expectations. In particular, the headline confidence index rose 1pt in January to -1, nevertheless still the second-lowest reading since mid-2013 and well below the long-run average. But there were some signs of impact from the bushfires, with notable declines in conditions in New South Wales and Victoria, the two hardest states. And there was also particular weakness reported country-wide in recreational and personal services, as well as wholesale and manufacturing activity. Construction firms, however, reported improved conditions.

Overall, however, business conditions were judged to be little changed at the start of the year, with firms slightly more upbeat about profit growth, but more downbeat about the employment situation, with the relevant index declining to a six-month low. But, like the headline sentiment index, these components remain close to the bottom of the recent ranges. And the forward-looking indicators implied no material improvement over the near-term either, with the orders and capex intentions indices still in negative territory. And overall, today’s survey was consistent with a further slowdown in GDP growth at the start of the year.

Despite the softer economic backdrop, there were further signs of improvement in housing market conditions at the end of last year, with the latest ABS figures for home loan approvals rising in December by a sizeable 4.4%M/M, the most since March 2015. And coming on the back of steady growth since the middle of the year, loan approvals were up more than 20% from the trough in May 2019. The pickup in December was driven by new loan commitments for owner-occupied housing (5.1%M/M), while investor housing approvals also rose for the sixth month out of the past seven (2.8%M/M). So with RBA Governor Lowe having flagged last week concerns that additional rate cuts might exacerbate the current strong upswing in house prices, which “could increase the risk of problems down the track”, today’s figures appear to further support the case for keeping Aussie interest rates on hold for the time being.

This morning will bring the main UK event of the week with the flash estimate of Q4 GDP. While monthly data are expected to show some bounce back in activity in December (IP, services, construction and trade figures also due tomorrow) and the end-October Brexit deadline will have distorted the demand profile, overall the UK’s economy is anticipated to have slowed in the final quarter of the year. The Bloomberg consensus is for zero growth in Q4 – in line with the BoE’s assumption – to leave output up just 0.9%Y/Y, the softest annual pace since Q110. But we see significant risks that output contracted by 0.1%Q/Q, with household consumption and business investment set to have remained very weak.

This morning’s BRC’s retail sales monitor for January tallied with the recent CBI survey to suggest that spending remained subdued at the start of the year too, with like-for-like sales unchanged compared with a year earlier. And smoothing out monthly volatility, sales were still down compared with a year earlier at –0.8%3M/Y, with non-food store sales down 1.5%3M/Y, while food store sales fell for the first month in five (-0.1%3M/Y).

Later this morning, soon-to-depart BoE Governor Carney will speak before the House of Lords Economic Affairs Committee, while MPC member Haskel – one of the two that voted for a 25bps rate cut in each of the past three policy months – will speak on ‘monetary policy in the intangible economy’, one of his areas of particular expertise.

Euro area:
With no top-tier euro area releases due today, attention will likely turn to ECB President Lagarde’s appearance before the European Parliament, while Chief Economist Lane and newest Executive Board member Schnabel will both speak publicly.

In the US, the main focus today will be Fed Chair Powell’s testimony to the House Committee on Financial Services. While he will no doubt flag his vigilance to possible downside risks from the coronavirus, in line with Friday’s Monetary Policy Report, he is bound to reiterate that the Fed considers the current policy stance to be appropriate for as long as economic conditions align with its forecast, therefore implying that the Federal Funds Rate is on hold for the time being. Data-wise, tomorrow will bring the NFIB small business optimism survey for January, along with JOLTS job openings figures for December.

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