Measured markets after missile strikes

Emily Nicol
Chris Scicluna

News last night that Iranian forces had launched missile strikes against two US military bases in Iraq had inevitable immediate market consequences, with Asian equities opening significantly lower, the yen appreciating sharply and the price of Brent crude spiking up near $72bbl. However, bar the fatal crash of a Ukrainian Boeing 737 in Tehran, it was unclear whether there had been any casualties from the events overnight. And a subsequent tweet from Donald Trump that “All is well!”, and Iranian comments that they had “concluded proportionate measures” and “do not seek escalation or war”, gave some comfort to investors.

So, Brent fell back to $69bpp, less than $1 above its level before the strikes. The yen fully reversed its gain (currently around ¥108.4/$, close to its levels this time yesterday). And Asian stocks were able to enjoy a better afternoon session. Nevertheless, all major Asian equity indices closed lower on the day, with Japan’s TOPIX down 1.4% and China’s CSI300 down 1.2%. And European equities have opened lower too, albeit with declines of typically ½% or less.

In the bond markets, the initial flight to quality saw USTs rally, with 10Y yields pushed more than 10bps lower to below 1.71% for the first time in more than a month. But the initial boost to JGBs was more measured (10Y yields down less than 2bps to -0.03%), with the latest Japanese economic data predictably having no impact and being something of a mixed bag (see below). And, as for the yen and oil prices, these moves in major government bond markets were largely reversed, e.g. 10Y USTs are now back to 1.80%, little different to their levels this time yesterday. Euro area govvies have also opened little changed this morning despite some additional disappointing news on the economic data front, most notably with German factory orders hitting a new multi-year low (more on this and the latest Aussie data below too).

While the latest figures suggest a still very tight labour market in Japan – in November employment rose to a record high and the number of people unemployed fell to the lowest since the early 1990s – today’s labour earnings figures were again disappointingly weak. In particular, average wages fell 0.2%Y/Y in November, the eighth negative reading so far in 2019. Admittedly, the weakness was driven by overtime earnings, which fell for the third consecutive month and by a steeper 1.9%Y/Y, in part reflecting a double-digit drop in the manufacturing sector. Bonus/special payments were also down for the fourth month out of the past five (-3.9%Y/Y).

In contrast, regular wage growth remained positive for the fifth consecutive month, albeit at just 0.2%Y/Y. And regular wage growth for full-timers was firmer still at 0.7%Y/Y. Furthermore, when adjusting for sample issues, today’s figures were a touch more encouraging, reporting regular wage growth of 0.4%Y/Y, the 42nd consecutive positive reading. On this basis, total wage growth also eked out a positive reading at +0.2%Y/Y, although this still marked a slowdown from the average over the past three years. And overall it remains well short of rates required to push inflation on a higher trajectory.

The BoJ’s latest estimate of the output gap, also published today, suggested little additional upwards price pressures in the economy too. Indeed, while still positive, the output gap in Q319 (1% of GDP) was unchanged from the previous quarter which itself was the weakest reading since Q317. And the Cabinet Office has a less sanguine assessment (an output gap of 0.6%). Moreover, with the economy having surely gone into reverse in Q4, this likely narrowed further towards year end.

Despite ongoing weak income growth, today’s consumer confidence survey suggested that households were more upbeat about conditions heading into 2020. In particular, the headline sentiment index rose for the third consecutive month in December to 39.1, a seven-month high. The improvement principally reflected a pickup in households’ willingness to buy durable goods, with the relevant index similarly rising to a seven-month high and 8½pts higher than September’s trough. Of course, this remains well below the level from a year earlier and therefore consistent with still subdued consumption growth.

Euro area:
This morning’s German factory orders data were a big disappointment. Contrary to the consensus expectation of a rise, orders in November fell 1.3%M/M, the most since July, to be down a hefty 6.5%Y/Y at the lowest level since February 2016. The weakness in the latest month came from foreign orders, which followed two months of growth by dropping a steep 3.1%M/M, with orders from the euro area down 3.3%M/M and those from other countries down 2.8%M/M. In contrast, domestic orders, which had seen the steepest declines over the course of 2019, rose 1.6%M/M. By sector, the falls were concentrated in capital goods (down 2.1%M/M) while orders of intermediate and consumer items were little changed.

The picture is not quite as bad as the headline figures suggest. The October reading was nudged slightly higher to show growth of 0.2%M/M contrary to the previously estimated decline. (September’s figure, however, was revised down). In addition, the drop in the latest month was explained by big-ticket items – excluding these, orders rose 1.0%M/M with the fall in orders from abroad down a modest 0.4%M/M. And looking through the volatility, despite the new multi-year low, orders seem to be moving broadly sideways. On a three-month basis, total orders were down just 0.1%, with orders of capital goods flat and orders of autos and associated parts up 1.1%3M/3M. Admittedly, manufacturing turnover dropped 0.3%M/M in November to a 28-month low to suggest that tomorrow’s production figure might well be another soft one. And VDA data showed that car production in December plummeted to the third lowest level in the past fifteen years. However, the overall impression is that the worst of the declines in German factory output are now likely to be behind us, even if recovery in the sector evidently remains elusive.

This morning’s French INSEE consumer confidence survey also fell short of expectations. In particular, the headline sentiment index fell in December for the first time in 2019, by 3pts to 102, likely reflecting the impact of the strikes among workers in transport and certain other sectors. But while the weakness was broad based – with households less upbeat about their current and future financial situation, more concerned about unemployment and therefore assessing it to be a slightly less suitable time to make major purchases – the survey’s main components remained above the long-run average. And the headline index was still well above the trough seen at the end of 2018 when the Gilets Jaunes protests took a significant toll on sentiment, but had seemingly little impact on economic growth.

More comprehensive sentiment indicators will come later this morning in the shape of the European Commission’s survey for December, which often provides the most reliable guide to economic activity. While the headline euro area ESI ticked up in November to 101.3, it was still merely the second lowest reading in almost five years, and little improvement is expected in the December figure.

The latest economic data published by the ABS overnight had a more positive tone. In particular, there was a notable upwards surprise to November’s building approvals figures, with the 11.8%M/M increase the strongest since February. This was driven principally by a 22.6%M/M increase in private sector dwellings (excluding housing), while approvals for private houses reversed the 6%M/M decline seen in October. Overall, this saw a notable moderation in the year-on-year decline in November, by 19.1ppts to -3.8%Y/Y, the softest since mid-2018 and a further sign of a turnaround in momentum in the construction sector.

Meanwhile, there was also a notable improvement in the number of job vacancies in the three months to November, which were up 1.6%Q/Q following two consecutive quarterly declines. While public sector vacancies continued to rise (+3.0%Q/Q), there was also a turnaround in the private sector (+1.5%Q/Q). However, if yesterday’s ANZ monthly job advertisements figures are to go by vacancies seem likely to weaken again in the current quarter. Certainly, we expect the escalation of the bushfire crisis to take its toll on economic activity, not least via its impact on consumer confidence and tourism.

In the UK, today will bring final Q3 productivity and labour costs data, which are expected to confirm that productivity growth was flat compared with a year earlier.

In the US, ahead of Friday’s labour market report, this afternoon will bring the ADP employment survey for January, which is likely to report a notable pickup in light of the return of GM strikers to the workplace. November consumer credit figures are also due.

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