US markets little changed ahead of Thanksgiving; Asian bourses mostly firmer
Developments on Wall Street were mixed yesterday – the S&P500 falling 0.2% from the previous day’s record high while the NASDAQ rose 0.5% – after a pre-Thanksgiving deluge of data that was also somewhat mixed (news of slightly firmer than expected capex orders and real consumer spending in October was tempered by a second consecutive lift in initial jobless claims). After trading in a 4bps range, the 10Y Treasury yield closed at 0.88% – essentially unchanged from where it had closed a day earlier but about 2bps firmer than just ahead of the release of the minutes of this month’s FOMC meeting. The main news in those broadly dovish minutes was a discussion amongst committee members about the current QE programme, with a view to providing the market with additional guidance ‘fairly soon’. While members appear fully on board for extended purchases, judging them as promoting smooth market functioning and fostering accommodative financial conditions, next month’s FOMC meeting could well see the committee lay out some broad economic criteria under which it would adjust the pace of buying.
Given that most members appear to prefer to withdraw QE stimulus ahead of a first rate hike, the conditions for tapering purchases would be somewhat less stringent than those required for a rate hike (as communicated by the Fed back in September). But members this month also discussed options for adding more stimulus if required, including making additional purchases or extending the maturity of currently planned purchases. Indeed, several participants raised the prospect of simultaneously extending the maturity but reducing the amount of purchases, leaving the overall degree of accommodation unchanged. However, on balance, there didn’t yet appear to be much appetite for any change in settings in the near term, with the current configuration of purchases described as ‘effective’ in fostering the desired financial conditions.
Turning to the Asia-Pacific region, with a couple of exceptions, equity markets have generally maintained a positive tone today. In Japan the TOPIX increased 0.6% to a fresh 2-year high, while South Korea’s Kospi advanced almost 1% after the BoK kept its policy settings unchanged and announced a modest upward revision to its forecast for GDP growth this year and next. Bucking the trend, China’s CSI300 was little changed. Meanwhile, Australia’s ASX200 fell 0.7%, not helped by a disappointing Q3 CAPEX survey (see below). In addition, Singapore’s Strait Times Index fell similarly, losing ground even before September IP growth was reported at -0.9%Y/Y when an increase of over 7%Y/Y had been expected.
German and French consumer confidence drops on second wave concerns
The second wave of the pandemic in Europe is increasingly taking its toll on consumer confidence, with this morning’s surveys from Germany and France both reporting notable deterioration. With German daily coronavirus cases spiking at a new high and related deaths up to the highest since April, Chancellor Merkel yesterday announced an extension of the country’s lockdown-light containment measures – including the continued closure of restaurants, bars and gyms – up to 20 December. And commensurate with the increased concerns about the coronavirus and its impact on livelihoods, the GfK survey forecast index for German consumer confidence in December dropped 3.5pts – the most since May – to -6.7, the lowest since July. All main survey components deteriorated, with willingness to buy down to the lowest since June and income expectations falling to the lowest since May.
Likewise, while President Macron earlier this week announced a gradual easing of his (far more stringent) lockdown measures, the INSEE survey of French consumer confidence also reported a more downbeat mood among shoppers. Indeed, the 4pt decline in the survey’s headline measure was the steepest since April and left the level at 90, the weakest in almost two years and a marked 10pts below the long-run average. Within the survey detail, concerns about unemployment rose to the highest since the euro crisis, perceptions of personal financial situations were considered the least favourable since May, and current conditions were also judged the least suitable for making significant purchases since May.
Later today will bring the account of the ECB’s October policy meeting, when Lagarde recognized the threat to the economic outlook from the second wave and thus announced that policy would be recalibrated next month. Since then, of course, Lagarde and other Executive Board members have made clear that we should expect an augmentation of the PEPP purchases and also action with respect to the TLTRO iii operations, but the account could provide further clues on the substance of the policy adjustments to come. We will also hear from ECB Board members Lane and Schnabel.
UK-EU talks continue after OBR highlights likely impact of hit from no deal
In the UK, immediate attention shifts back from yesterday’s fiscal announcements to the negotiations with the EU on the post-transition Brexit arrangements. Reports suggest little further progress this week. Yet, among yesterday’s flurry of announcements from the Chancellor of new spending plans and economic and fiscal forecasts, the OBR updated its view of the sharply negative impact that a failure to reach a deal would have on the UK economy. In particular, the independent fiscal watchdog judged that a default to WTO trading terms from 1 January would leave UK GDP 2% lower next year than it otherwise would be with a typical (Canada-style) FTA. The hit to many sectors – including manufacturing, and professional, technical, scientific and financial services - is judged to be greater than that emanating from Covid-19. The unemployment rate would peak almost 1ppt higher than with an FTA, while inflation next year would be roughly 1ppt higher too, peaking above 2.5%Y/Y, on account of higher tariffs and associated weakening of sterling. In addition, WTO arrangements would take their toll on longer-term UK economic growth, with an additional 1½% impact on GDP over the forecast horizon, on top of the 4% hit that is already estimated to result from the UK’s departure from the EU if a new FTA is reached.
Aussie business capex declines in Q3; near-term outlook still weak
The main domestic focus in Australia today was the release of the CAPEX survey for Q3, which provided a further indication of activity last quarter ahead of next week’s full national accounts, and perhaps more importantly, an update on firms’ expected spending over the remainder of this financial year. Disappointingly, the total volume of private capex declined 3.0%Q/Q in Q3 – double the decline expected by the market and coming after a 6.4%Q/Q contraction in Q2 that was slightly larger than reported previously. Indeed, private capex has now declined for seven consecutive quarters and was down 13.8%Y/Y.
The CAPEX estimate of private spending on buildings and structures fell 3.7%Q/Q – a slightly weaker outcome than the 2.9%Q/Q decline indicated by yesterday’s more comprehensive survey of construction work done – and was down 15.0%Y/Y. More importantly, spending on plant and equipment – which goes directly into the national accounts – fell a further 2.2%Q/Q and was down 12.3%Y/Y. Together with a decline in net exports, the apparent reduction in business capex will provide a partial offset to what seems likely to have been a reasonably strong rebound in private consumption. As a result, ahead of next week’s final partials, it remains likely that national accounts will show that GDP has regained only about a third of the record 7.0%Q/Q contraction recorded in Q2.
Turning to the section of the survey measuring firms’ expectations, unsurprisingly the near-term outlook appears to remain bleak, albeit not necessarily implying significant further declines from the levels prevailing in Q3. For the financial year 2020/21 (i.e. the year ending 30 June 2021), the 4th estimate of firms’ total nominal spending was 6.3% above the last estimate made three months – slightly above the typical revision for a fourth estimate – but was still 10.3% below the comparable estimate made for 2019/20 (the 3rd estimate had been 12.6% below its comparable estimate). Forecast spending on plant and equipment was revised up 16.6% from the understandably weak forecast made three months ago, but was still 7.9% below the comparable forecast made for 2019/20. Meanwhile, unusually, forecast spending on buildings and structures was revised down slightly and so was 12.0% below the comparable forecast for 2019/20. Within the mining sector, forecast spending was 6.4% lower than the comparable estimate for 2019/20. In the manufacturing sector the shortfall was 4.9%. In the remaining industries – which make up the bulk of investment spending – forecast spending was revised up 14.1% from three months earlier, but unfortunately was still 13.2% below the comparable estimate for 2019/20.
Second-tier data offers no major surprises in Japan
A quiet day for economic news in Japan saw the release of the final results of the Cabinet Office’s business conditions indices for September and the JMTBA’s survey of machine tool orders for October. The Cabinet Office’s coincident indicator increased was revised up 0.3pts to 81.1 – now up 1.7pts from August but still dreadfully weak by historical standards. The leading index was revised down 0.4pts to 92.5, but was still up 4.0pts for the month and still slightly above the long-term average of 91.6. According to the JMTBA the value of machine tool orders placed fell 6.0%Y/Y in October, which was a fractionally weaker outcome than reported previously.
Finally, for the record, yesterday the final results of the Monthly Labour Survey for September confirmed the 0.9%Y/Y decline in average labour earnings (per person) suggested by the preliminary report, although growth in scheduled earnings was revised up fractionally to 0.2%Y/Y. Growth in regular employment was likewise confirmed at 0.6%Y/Y. Meanwhile, in inflation news, the BoJ’s measures of ‘underlying’ inflation revealed that the trimmed mean inflation rate was 0.0%Y/Y in October i.e. slightly firmer than 0.2%Y/Y decline in prices suggested by its preferred exclusion-based measure of core inflation (CPI ex fresh food and energy). Moreover, the net proportion of items recording a price increase over the past 12 months increased to the highest level since June. In other news, the services PPI increased 0.1%M/M in October, but annual inflation fell to -0.6%Y/Y from 1.4%Y/Y previously as last year’s consumption tax hike fell out of the annual calculation (excluding the impact of the consumption tax, annual inflation fell by just 0.1ppt).
Kiwi 12-month merchandise trade surplus rises to 29-year high in October
New Zealand recorded a merchandise trade surplus of NZ$0.5bn in October – only half as large as in October 2019. And after allowing for seasonal effects – imports normally ramp up at this time of year – this equated to an adjusted surplus of NZ$0.2bn. Moreover, this lifted the 12-month surplus to NZD2.2bn (imports measures on a cif basis in these figures), which is the largest annual surplus since July 1992. Exports fell 4.4%Y/Y in October – the trade-weighted exchange rate rose about 1% over the period – due to lower exports of dairy and meat products. Imports were down 12.7%Y/Y, not least due to a 36.4%Y/Y decline in imports of crude oil. However, imports of machinery and plant were down 18.6%Y/Y – albeit from a very high base – and imports of general consumer goods were down 5.9%Y/Y.