Some stronger data ahead of payrolls

Emily Nicol
Chris Scicluna

The market mood in Asia remained broadly upbeat today, even if gains in equities were inevitably more moderate after yesterday’s rallies. With the yen stable at its weakest level for the year so far (through 109.5/$), and the latest Japanese economic data predictably showing a rise in spending in November following the post-tax-hike plunge the prior month (see below), the TOPIX rose 0.4% to end little changed over the week as a whole. Most of the region’s other major bourses posted gains too, but China’s CSI300 was unchanged to end the week up more than 2.0%.

Bond markets, meanwhile, were very uneventful with USTs and JGBs little changed, with 10Y yields still close to 1.85% and zero per cent respectively. ACGBs were a touch weaker following some stronger Aussie retail sales data. But while the latest French figures pointed to ongoing steady expansion in the euro area’s second largest member state, European govvies have opened stronger (yields on 10Y Bunds and Gilts both down about 2bps to about -0.20% and 0.80%), as the commentary from central bankers, from the BoE to the Bundesbank, remain broadly dovish. All eyes today, however, will be on the US economic data, with the December labour market report taking pride of place.

While Japan’s latest household spending figures, released overnight, fell a little short of expectations, they were still consistent with modest recovery in consumption after the immediate retrenchment following October’s tax hike. Unsurprisingly, spending was still down compared with a year earlier, although the 2%Y/Y drop was much improved from October’s decline of 5%Y/Y. And on a monthly basis, spending increased 2.6%M/M in November, with expenditure on core items (i.e. excluding the more volatile items like housing, vehicles etc.) up a stronger 3.5%M/M. Of course, this followed widespread double-digit percentage declines in October, to leave total and core spending in Q4 both trending more than 6% below the Q3 average. But while this implies an inevitable sizeable contraction in consumption in Q419, the drop looks to be smaller than that seen in the equivalent period after the tax hike in April 2014.

Today’s BoJ consumption activity index – which has more recently offered a more reliable guide than the household expenditure survey to the national accounts measure of consumption – offered a similar assessment. In particular, the headline consumption index increased 2.8%M/M in November, following a 9.0%M/M drop in October, to leave it down 1.4%Y/Y. Like with the household spending survey, the improvement was broad based with consumption on durable goods up more than10%M/M, non-durable goods up 2.7%M/M and services up 1½%M/M. Following the slump in the durable goods index in October (down a whopping 35%M/M), this component was still on average in the first two month of Q4 more than 20% lower than the Q3 trend. But this also represented a slightly softer pace of decline than in the first two months following the 2014 tax increase. And overall, while this release also remains consistent with a sharp contraction in household consumption in Q4 – the headline index was on average in October and November 4½% lower than the Q3 average – the post-tax hike pullback appears to be smaller than in 2014.

This notwithstanding, the latest Cabinet Office composite index of business conditions disappointed in November. Indeed, the headline index fell for the second successive month to its lowest level since early 2013 as the weakness in the manufacturing sector indices offset the more positive signs from retailers. And the leading index fell further to its lowest level in a decade, raising concerns that economic weakness might persist through to the start of 2020 and leaving the Government still judging that business conditions were “worsening”. As household spending rebounds and extra government spending kicks in, on the other hand, we expect activity to pick up from Q1 on, thus avoiding a technical recession.

Euro area:
After yesterday’s upside surprise in the German industrial production data for November, the equivalent French figures released this morning were also a touch better than expectations. In particular, total French IP rose for the third successive month, albeit by just 0.3%M/M, to be up 1.2%Y/Y, the strongest annual rate in six months. With growth the prior month revised up to 0.5%M/M, production was trending 0.6% above the Q3 average over the first two months of the fourth quarter.

Within the detail, manufacturing was broadly flat in November with stronger growth in output of capital goods and transport items offset by a drop in other categories. And given stronger growth over the previous two months, the average level of manufacturing output in October and November was 0.8% above the Q3 norm, strongly pointing to positive growth in the sector over Q4 as a whole. Meanwhile, construction output leapt 2.5%M/M in November to similarly be on track for its first quarterly expansion since Q1.

While it suggested a weakening of order books for the sector, the latest Bank of France business sentiment survey, also released this morning, suggested that conditions in French industry were broadly stable in December, with the index for the sector unchanged at 97, only a touch below the average for the year as a whole. While the equivalent figure for services was weaker, dropping 2pts, also to 97, the lowest in more than three years, construction activity was reportedly stronger in December (the index rose to 105, well above the long-run average). Overall, therefore, the Bank of France maintained its forecast of GDP growth in Q4 at 0.2%Q/Q, down 0.1ppt from the prior three quarters but in line with our own estimate.

While the UK’s labour market appeared to lose momentum over the second half of last year, the latest KPMG/REC UK Report on Jobs hinted at an improvement in December. Indeed, according to the survey, permanent staff placements by recruitment agencies picked up for the first time in a year, while growth in temps billings picked up too. Admittedly, overall staff demand growth reportedly remained relatively sluggish, with vacancy growth weak. However, recruiters continued to report skill shortages and generally tight labour market conditions. So, starting pay reportedly picked up for both permanent and temporary workers, and at slightly quicker rates than in November. Overall, therefore, while yesterday’s speech from Mark Carney flagged the possibility of near-term monetary policy easing, today’s KPMG/REC survey did nothing to suggest that the labour market has cooled sufficiently to prompt an immediate policy response from the BoE.

While consumer spending remained disappointingly subdued in October, there was an upside surprise to the ABS’s latest retail release, with households having seemingly delayed purchases earlier in the quarter to take advantage of Black Friday discounting. In particular, total retail sales rose a stronger-than-expected 0.9%M/M in November, the largest increase for two years and well above the trend. This left the annual rate of growth rising 0.9ppt to 3.2%Y/Y with sales trending 0.9% higher than the Q3 average. Within the detail, department store and clothing sales rose more than 3%M/M in November, with the latter the best since mid-2015, while sales of household goods increase at the strongest monthly pace for twenty months.

But with the impact of the Black Friday sales seemingly larger this year than in previous years, we would expect to see some payback in December. Moreover, the escalation of the bushfire emergency significantly clouds the outlook, with consumer confidence having unsurprisingly taken a turn for the worse – the ANZ Roy Morgan weekly sentiment indicator reported in Monday showed a further notable drop last week to its lowest level for more than four years.

Of course, the main event today will be the release of the December US labour market report, 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. Given the weakness of the ISM survey, the manufacturing payroll numbers will be under scrutiny for signs of additional cyclical weakness heading into 2020. While revisions to the Household Survey will also be published and might have an impact on perceptions of the strength of the labour market last year, the unemployment rate is expected to remain unchanged at 3.5%. Finally, while growth in average hourly labour earnings is expected to move sideways at 3.1%Y/Y, these numbers will be watched for any signs of upwards pressure that might get the Fed excited about any new inflationary impulse.

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