German production provides some positivity

Emily Nicol
Chris Scicluna

With the crisis in the Middle East de-escalating, risk appetite returned today to Asian markets, which chalked up solid gains in equities across the board. So, for example, Japan’s Topix rose 1.6% as the yen fell back to ¥109.3/$, its weakest level so far this year. And the CSI300 rose 1.3%Y/Y as Chinese economic data showed that consumer price inflation remained at a seven-year high due to food price pressures but factory gate deflation persisted and car sales were down again in December to conclude another bad year for the sector (see detail below).

In the bond markets, having sold off yesterday, USTs were little changed in Asian time (10Y yields currently around 1.87%, up about 17bps from early Asian time yesterday). But JGBs inevitably played catch up, with 10Y yields moving back within a whisker of zero per cent. Aussie yields also shifted higher, with an improved trade report providing extra cause for optimism and leaving market-implied odds of an RBA rate cut next month at pretty much 50-50. Euro area govvies have opened lower too, with a better German industrial production report providing extra good news. And Gilts are firmer, ignoring another weak survey from the UK High Street (more on all these data below too).

Euro area:
After yesterday’s disappointing factory orders figures, this morning’s German industrial production report provided better news. Overall IP rose a slightly larger-than-expected 1.1%M/M in November, while the extent of the drop in October was revised down to 1.0%M/M (compared to the fall of 1.7%M/M previously estimated). As such, production was down 2.6%Y/Y, the softest annual pace of decline since March. Within the detail, manufacturing output rose for the first month in three, up 1.0%M/M (albeit still down 3.9%Y/Y), boosted by a rebound in production of capital goods (2.4%M/M) while production of consumer items rose for a second successive month (0.5%M/M). The headline IP figure got an extra boost from a leap in construction sector output, up 2.6%M/M and 5.4%Y/Y. But energy production slipped back 0.8%M/M (to be down 5.7%Y/Y) after exceptionally strong growth in October.

This morning’s figures left construction and energy production in the first two months of Q4 trending more than 2% and 3% respectively above their Q3 averages. However, despite the rebound in November, on an equivalent basis manufacturing output was still down about 2% with total IP thus trending down 0.6% on the prior quarter. And with the VDA having reported a steep decline in auto production in December, manufacturing output seems bound to have fallen back again in December, and declined over the fourth quarter as a whole, extending the downturn in the sector for an eighth quarter. However, with factory orders having broadly levelled off, that should represent the trough, and we expect manufacturing production to cease being a drag on German (and euro area) GDP growth from the current quarter on.

This morning will also bring the euro area’s latest labour market figures, which are expected to show the unemployment rate moving sideways in November at 7.5%, the joint lowest since 2008. Elsewhere, the ECB’s Chief Economist Lane will speak at a BoE conference, while newly appointed Executive Board member Schnabel’s speech in Germany will also be watched.

This morning’s BRC retail sales monitor for the end of 2019 was unsurprisingly weak. While there was inevitably a bounce back in sales growth in December, with total sales growth up 6.3ppts to 1.9%Y/Y and like-for-like sales growth at 1.7%Y/Y, this reflected special factors related to the inclusion of the Black Friday discounting period that month compared with November in 2018. Certainly, when smoothing out monthly volatility, today’s release implied continued underlying weakness in consumption – i.e. total sales were down 0.4%3M/Y in Q4 – suggesting a moderation in consumption growth from Q3. And over the year as whole, 2019 saw the first annual decline in BRC sales since records began in 1995, highlighting the major challenges facing the High Street.

Later this morning, BoE Governor Carney will give opening remarks at the Bank’s conference on the future of inflation targeting.

Today brought the latest Chinese inflation figures for December. While these fell slightly short of expectations, they still confirmed that inflation remained elevated at the end of 2019, with the headline CPI rate moving sideways at 4.5%Y/Y, the joint-highest since 2011. Of course, the principal driver of inflation remained food prices, which recorded the fifth consecutive double-digit year-on-year increase (17.4%Y/Y). But this was down from November’s reading as pork price inflation fell 13.2ppts on the month to 97%Y/Y, suggesting that the headline CPI rate might well have reached its peak. Certainly, core inflation remained well contained in December, unchanged at the near-five-year low of 1.4%Y/Y reached in November. And while energy price shifts saw factory-gate deflation ease somewhat, with the headline PPI annual rate up 0.9ppt to -0.5%Y/Y, producer prices of consumer goods continued to ease, with prices of consumer durables down 2.4%Y/Y, the steepest drop for more than a decade.

Meanwhile, Chinese car sales declined 3.6%Y/Y in December to 2.17mn, marking the eighteenth negative growth rate in nineteen months. This left sales for the year as a whole in 2019 at 21mn units, a decline of 7.5%Y/Y, following a near-6%Y/Y drop in 2018, which itself marked the first annual decline in more than 20 years.

The ABS’s latest trade figures reported an unexpected jump in the headline trade surplus in November, rising AUD1.7bn to AUD 5.8bn, supported by a recovery in exports as well as a drop of imports. In particular, the value of exports rose 1.8%M/M in November, boosted by a modest rebound in goods exports (1.9%M/M) in part reflecting a recovery in commodity prices. But this did little to offset the 4½%M/M decline in October, leaving the value of exports so far in Q4 more than 4% lower than the Q3 average. And the escalation of the bushfires suggests risks to Australian exports, particularly of tourist services, will remain skewed to the downside over coming months. Meanwhile, despite the near-3% decline in November, imports were trending broadly flat compared with the Q3 average, suggesting that net trade in Q4 is still on track to provide a drag on GDP growth for the first quarter in four.

A quieter day for US releases brings just the weekly jobless claims figures. But there will be a number of FOMC voting members in action, including Vice Chair Williams, Clarida, Evans and Bullard.

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