Japanese markets reopened for the first time this year in catch-up mode, with stocks opening sharply lower in the wake of ongoing events in the Middle East. With oil prices also up again (Brent crude briefly leapt above $70bpp for the first time since September’s spike), the Topix closed down 1.4%. Most other equity indices in the region were also down today (e.g. Korea’s KOSPI fell 1.0%, while China’s CSI300 was down a more moderate 0.4%).
In the bond markets, JGBs inevitably made gains, although these were largest at the short end (2Y yields down more than 2bps to -0.16%) while earlier gains at the longer end were pared back after the BoJ’s 10-25Y rinban operation saw a record high offer cover (10Y yields are down about 1bp to -0.04%). Having rallied at the end of last week, USTs were largely steady (10Y yields still below 1.79%, about 9bps lower than this time Friday.)
After some disappointing manufacturing output figures in the first two months of Q4, today’s final manufacturing PMI survey for December suggested a gloomy end to the year for the sector too. In particular, the headline index was downwardly revised by 0.4pt from the flash estimate to 48.4, fully reversing the increase seen in November, to leave the index on average in Q4 at its lowest since Q216. And the deterioration in the production PMI at the end of the year was even more striking, with the 1.8pt drop the largest monthly decline since February to leave the index (47.1) in contractionary territory in each month of 2019. The new orders component was also downwardly revised to 46.7, a modest improvement on the previous two months but nevertheless still pointing to ongoing weakness.
Today also brought December vehicle sales data, which, in light of October’s consumption tax hike, unsurprisingly showed a further notable fall compared with a year earlier, by 9½%Y/Y. Over the fourth quarter as a whole, this left registrations down a whopping 26%3M/3M, a similar decline to that seen after the tax hike in 2014. But the year-on-year drop in Q4 of almost 17%3M/Y was more than three times the size of the equivalent decline in Q214. We note, however, that retail sales do not appear to have fallen by as much as in 2014, and so the overall picture for consumer spending does not look quite so downbeat.
Final services PMIs for December will be released tomorrow, followed on Wednesday by the latest consumer confidence survey. While the former is expected to be broadly consistent with stagnation at the end of 2019, the latter might well report further modest improvement in household sentiment heading into 2020. That day will also bring the latest labour earnings figures. But likely of most interest this week in terms of the post-tax hike recovery will be Friday’s household spending and BoJ consumption activity indices for November. That day will also bring the Cabinet Office’s composite indices of business conditions for the same month.
A busy week for euro area economic data has got underway this morning with a welcome upside surprise from the latest German retail sales figures. In particular, following a drop of 1.3%M/M in October, sales rebounded in November by 2.1%M/M, the most in ten months, to be up 2.8%Y/Y. Overall, however, that left them trending little changed from Q3, suggestive of somewhat softer growth in German household consumption in Q4 than the 0.4%Q/Q pace the prior quarter. The equivalent euro area retail sales figures for November are due tomorrow and seem highly likely also to report a rebound, albeit likely closer to 1.0%M/M.
Shortly the final services and composite PMIs for December will be released. The flash euro area services PMI rose 0.5pt to a four-month high of 52.4 to suggest ongoing steady (if not vigorous) growth in the sector. But that still left the composite PMI stuck for a third month at 50.6 to match the second lowest reading since mid-2013.
Looking further ahead, the flash estimate of euro area inflation in December is also due tomorrow – the headline rate is expected to rise 0.3ppt to 1.3%Y/Y due principally to energy prices. The core measure is expected to remain unchanged, also at 1.3%Y/Y, but the latest spike in the oil price obviously represents an upside risk to the near-term inflation outlook.
Wednesday will bring the European Commission’s economic sentiment indices for December, which often provide the most reliable guide to economic activity. While the headline euro area ESI ticked up in November to 100.3, it was still merely the second lowest reading in almost five years, and little improvement is expected in the December figure. German factory orders figures for November are due the same day, with German IP and trade data for the same month due on Thursday. IP data from France, Italy and Spain will round off the week on Friday.
Beyond the economic data, politics will remain in focus in certain member states. After a first vote yesterday, Spain’s parliament is scheduled to vote again tomorrow on the establishment of a new minority left-wing coalition government led by the Socialists (PSOE) and also featuring the populist Unidas Podemos. PSOE leader Pedro Sanchez yesterday won 166 votes, with 165 votes against, 18 abstentions and one MP off sick. As such, he appears on track to win the simple majority required tomorrow to form the new government, although one or two changes of heart (or further cases of illness) could yet upset his plans. Elsewhere tomorrow, Italian Prime Minister Conte will hold a meeting with the leaders of the parties making up his coalition government in a bid to reach a compromise on judicial reform – failure to find an agreement could bring the government closer to collapse.
Like in the euro area, today will bring the final UK services and composite PMIs for December. In contrast to the better reading in the euro area, the UK’s flash services PMI fell for the fourth month out of the past five in December to 49.0, with the latest two observations marking the first successive sub-50 readings in the sector for more than a decade. The flash composite PMI fell 0.8pt in December to 48.5, the second-lowest reading since the height of the Global Financial Crisis, leaving the quarterly average at 49.3 in Q4, the weakest since Q109.
Today will also bring the official release of new car registrations figures for December. Reports this morning suggest that there was a welcome pickup at the end of last year, with registrations up 4%Y/Y in December. But this was in part flattered by a low base that month last year. And over the year as a whole, the number of new cars sold was down more than 2% in 2019 to 2.31mn, the lowest annual reading for six years. Other releases due this week include final Q3 productivity and labour cost data (Wednesday) and the BRC’s retail sales survey for December (Thursday).
A key focus in the US will be the December labour market report on Friday, with non-farm payrolls expected to have risen by somewhat less than the 180k average for the first eleven months of the year, having leapt 266k in November partly thanks to returning GM strikers. While revisions to the Household Survey will also be released, the unemployment rate is expected to remain unchanged at 3.5%. And growth in average hourly labour earnings is expected to move sideways at 3.1%Y/Y. Other US data due this week include the December non-manufacturing ISM survey results (tomorrow), along with the final November trade and factory orders figures and followed by the ADP jobs data (Wednesday). Fed speakers include Board of Governors Vice Chair Clarida and New York Fed President Williams, both on Thursday.
The main economic release out of China this week will be Thursday’s inflation figures for December. Given ongoing food price pressures, headline CPI inflation is expected to edge up again by 0.2ppt to 4.7%Y/Y, which would be the highest since 2011. But core inflation will remain well contained, close to the near-five-year low of 1.4%Y/Y reached in November. Energy price shifts will, however, see factory-gate deflation ease somewhat, with the PPI annual rate expected to rise about 1ppt to -0.4%Y/Y.
While they will of course be of secondary importance compared to the ongoing impact of the bushfires, this week is scheduled to bring a number of top-tier Aussie economic releases, including job vacancies (Wednesday), trade (Thursday) and retail sales figures (Friday) all for November. We would expect the bushfires to have taken a significant toll on consumer confidence, while activity in the important tourist sector will also likely be hit too. And with oil prices having moved in an unfavourable direction, the chances of a further near-term RBA rate cut have increased non-negligibly.