Asian markets start the week positively but massive event risk lies ahead
A late rally allowed Wall Street to pare its losses on Friday, but the S&P500 still closed down 1.2%, taking the weekly loss to 5.6%, the worst since March. Interestingly, the Treasury market weakened despite the risk-off tone, with the 10-year yield closing above 0.87% for the first time since early June – perhaps as investors judged that further bad news on the pandemic might eventually galvanize cross-party support to speed the passage of additional fiscal stimulus. In forex markets, in broad terms the US dollar was steady against most other major currencies once some intraday volatility had washed through. But the euro weakened as the spread of Covid took its toll and the ECB on Thursday signalled more easing to come next month.
With further lockdowns announced in Europe over the weekend (in England, Austria and Portugal) and others seemingly in the works (most notably with new measures set to be announced in Italy today), US equity futures initially reopened on the back foot again today. But that negativity was gradually erased as Asian markets opened and began to focus on the weekend’s positive PMI data out of China. And with today’s figures continuing that tone – more PMI data impressing in China and Japan, and housing data suggesting that monetary policy retains its efficacy in the Antipodes – regional bourses went on mostly to start the week positively.
Japan was the star performer, with the TOPIX rising almost 1.8% following some much larger than usual upward revisions in its final manufacturing PMI report for September. PM Suga reiterated that he was prepared to do more to support Japan’s emerging recovery, but repeated that he was not considering reversing last year’s consumption tax hike. Solid gains of over 1% were also seen equity markets in South Korea and Hong Kong, and most of the region’s other markets advanced too. But given the massive event risk that lies ahead – especially in the US – and the near-certainty of further worrying pandemic headlines, markets might do well to hold onto these gains as the week progresses. Indeed, European stocks have opened with a mix of small gains and losses. And government bonds are mixed too.
Japan’s manufacturing PMI revised up in October to a 9-month high
The main economic report of note in Japan today was the final manufacturing PMI for October. Building on the good news from last week’s stronger-than-expected IP report, the headline PMI index was revised up a solid 0.7pts to a final reading of 48.7 – now up a full 1pt from September and just a notch below this year’s high recorded back in January. In the detail, the output index was revised up a very large 1.6pts to an 11-month high of 48.7 while the new orders index was revised up an even larger 1.9pts to a 15-month high of 47.7. In addition, the new export orders index was revised to 1.0pts to 50.6, marking the first reading above 50 since November 2018. Curiously, the employment index was revised down 0.8pts to 48.9, leaving it down 0.9pts over the month. However, both the input and output price indices were revised up by 0.5pts apiece, to sit at 52.0 and 50.4 respectively – the latter the highest reading since May 2019. In summary, these revisions appear very consistent with upgraded outlook for October production that manufacturers’ conveyed in the IP report. But given the rapid rise in coronavirus case numbers in the US and Europe, firms’ might be less optimistic a month from now.
In other news, Japan’s vehicle sales increased 31.6%Y/Y in October – a growth rate that reflects the fact that vehicle sales fell by more than a quarter in the same month last year following the hike in the consumption tax. More meaningfully, the level of sales was about in line with the monthly average over the past couple of years or so. While car sales rose 34.5%Y/Y, truck sales rose 15.9%Y/Y. And in the new ‘stay at home’ economy with few tourists, sales of buses remained down 41.6%Y/Y.
Looking ahead to the remainder of the week in Japan, following tomorrow’s national holiday, Wednesday will bring the release of the minutes from the BoJ’s September Board meeting – unfortunately these are unlikely to be illuminating – together with monetary base statistics for October. On Thursday the final services PMI results for October will be released, while Friday will bring MIC’s household spending and income report and the preliminary Monthly Labour Survey, both for September. The latter is bound to continue to report a decline in labour cash earnings (per person) compared with a year earlier, but the decline should moderate somewhat as overtime hours and part-time work continue to gradually recover from the slump that took place in Q2.
China official PMIs again provide a positive surprise
China’s official PMI reports for October were released over the weekend and continued to paint the economy in a positive light. After reaching a more than 2-year high last month, the closely-watched manufacturing PMI edged down just 0.1pt to 51.4 – an outcome that was slightly firmer than market expectations. In the detail the output index also declined 0.1pt to 53.9, but the new orders index was steady at last month’s more than 2-year high of 52.8. And the new export orders index increased 0.2pts to 51.0, which is the highest reading since May 2018. The strengthening of activity appears to generating stronger upward pressure on input prices, with the respective index rising 0.3pts to 58.5. The output prices index increased 0.7pt to 53.2, thus reversing the decline that occurred in September.
Equally encouraging was a further 0.3pt lift in the non-manufacturing PMI to a 7-year high of 56.2. Combined with the resilience seen in the manufacturing sector, this meant that the composite PMI increased 0.2pts to 55.3 – exceeding market expectations and the highest reading since this index was first calculated in 2017. In the non-manufacturing detail, after increasing sharply in September ahead of the Golden Week holiday, the new orders index declined 1.0pts to 53.0 – a reading that over the past 7 years has been bettered only by last month’s outcome. The new export orders index fell 2.1pts to 47.0 – erasing about half of last month’s improvement – but the business expectations index declined just 0.1pt to 62.9. The employment index also increased 0.3pts to 49.4, marking a 26-month high. In common with the manufacturing sector, the pricing measures in the survey were somewhat firmer too, with the inputs index rising 0.3pts to 50.9 and the output prices index rising 0.5pts to 49.4.
The positive news flow out of China continued today with the Caixin manufacturing PMI also posting an upside surprise in October. Whereas analysts had expected a modest softening in this survey of private SMEs, the headline index increased a further 0.6pts to 53.6 – the highest reading since January 2011. In the detail, the most notable development was a 1.6pt lift in the new orders index to 57.1, marking the highest reading since November 2010. By contrast, after jumping very sharply last month, the new export orders index fell 3.4pts to a still respectable 51.0. Given the volatility that may have been caused by the Golden Week holiday, next month’s PMI readings may give a cleaner gauge of economic momentum. Looking at the week ahead, the most important report in China will again be released on Saturday – this time trade data for October. Analysts expect the trade surplus to have widened slightly, with growth in imports expected to have softened somewhat after rebounding very strongly in September. The only other report scheduled this week is the Caixin services PMI for October, which will be released on Wednesday.
A huge week ahead in the US: Presidential election, FOMC meeting & NFPs
The coming week in the US is about as huge as it gets, with a Presidential election, FOMC meeting and monthly employment report all capable of generating substantial volatility, adding to that likely to be created by the ongoing flow of pandemic-related news.
As far as the election is concerned, if the latest polls are correct, Tuesday could still see a ‘blue wave’ – providing the Democrats with a clean sweep of the House, Senate and Presidency – that would be seemingly be bullish for stocks. However, the Senate vote is likely to be very close, and failure of the Democrats to take the upper house would diminish significantly the chances of a big fiscal boost early in 2021. Moreover, the vagaries of the Electoral College mean that Joe Biden could still come up short in his bid to become the 46th President, even though he appears certain to win the popular vote by a significant margin. There also remains the real possibility that the victor will not be known on the day – indeed, perhaps not for some time thereafter, especially if President Trump seeks to challenge the outcome through the courts. And this all points to the risk of a very volatile session for Asian markets on Wednesday which will be trading as the first results begin to emerge, and quite possibly over the period beyond.
As far as the Fed is concerned, with the US economy continuing to rebound more quickly than had been expected from the severe slump in Q2, it seems unlikely that the 2-day meeting that ends on Thursday will result in any change in policy settings. However, given the clear – and perhaps growing – risk that the recovery could lose momentum into year-end, as at the last meeting in September, Chair Powell is sure to leave all easing options on the table should additional policy stimulus prove to be required over coming months. It is equally certain that Powell will use his post-meeting press conference to repeat his call for timely additional fiscal stimulus. And it is possible that the Committee and/or Powell will also provide a little more information on the FOMC’s intentions for its asset purchases.
Turning to the data flow, this kicks off today with the manufacturing ISM for October – likely to have strengthened further if the regional manufacturing surveys are any guide – and the construction spending report for September. Tomorrw we will receive the full factory orders report for September together with news on auto sales during October. On Wednesday most interest will centre on the ADP employment report and services ISM for October. The full trade balance for September will also be released on Wednesday, with advance data on goods trade already pointing to a sizable narrowing of the deficit during the month. Following last week’s preliminary national accounts, the first estimates of productivity and unit labour costs for Q3 will be released on Thursday along with the weekly jobless claims data.
But all eyes, of course, will be on Friday’s US employment report. In advance of this week’s final indicators, surveys suggests that analysts expect a further 600k increase in non-farm payrolls in October – if realized, the smallest increment since the economy began recovering from the 21.8m jobs that evaporated in April. However, Daiwa America’s Mike Moran is more upbeat, predicting a rise of 900k as the sharp decline in the number of individuals receiving unemployment benefits suggests that many workers were recalled to their previous jobs or found other work. And the unemployment rate is likely to have declined, but likely at more than 7½% it would still be more than double the pre-pandemic level.
Euro area data likely to take a back seat this week as lockdowns hit activity
With global attention set to be firmly focused on the US elections, and European governments imposing new restrictions to try to reverse the continued spread of Covid-19, the economic dataflow from the euro area is unlikely to be a major focus this week. Indeed, after France, Germany and Belgium announced more stringent lockdown measures last week, Portgual and Austria did likewise on the weekend, and Italy will follow today. So, whatever this week’s economic figures suggest, a marked contraction in euro area GDP is now inevitable in Q4. Indeed, given the stringency of its measures, a drop in GDP as much as 10%Q/Q is possible in France.
Nevertheless, with manufacturing activity unlikely to be impacted as severely as services, updates on the strength of the industrial sector will be of some interest, as will further sentiment survey results, starting today with the final manufacturing PMIs for October. Thanks to a big jump in the German index, the flash headline euro area manufacturing PMI rose 0.7pt to a two-year high of 54.4. And the Spanish index, released for the first time this morning, rose a larger 1.7pts to a three-month high of 52.5. The Italian PMIs, also to be released for the first time this morning, are similarly expected to suggest decent momentum in the sector. New car registration data for October from France, Italy and Spain should also be released today.
In a similar vein, Wednesday should bring German new car registrations along with the final services PMIs for October. With hospitality and leisure activity weighed by the resurgence in the pandemic, the flash euro area services PMI dropped 1.8pts to a five-month low of 46.2, and downwards revisions are possible this week. Moreover, the Italian and Spanish indices, to be released for the first time on Wednesday, are similarly likely to show significant deterioration, ahead of likely marked weakness in November. Thursday will bring the October construction PMIs along with euro area retail sales and German factory orders figures for September. Given the weakness reported in today’s German and French spending figures for that month, euro area sales are likely to have fallen back by 1½%M/M or more. Finally, German and Spanish industrial production data for the same month will come on Friday with another month of positive growth of more than 1%M/M expected in both countries.
BoE will ease policy this week as economic outlook weakens
The main event in the UK in the coming week will be Thursday’s BoE policy announcement, which will also be accompanied by the Bank’s latest Monetary Policy Report. And after Boris Johnson on Saturday announced plans for new lockdown measures from Thursday – involving the closure of all non-essential retail and leisure, as well as the banning of all overseas travel for non-work purposes, but leaving education open this time around – the case for further stimulus will be irresistible. Those measures are bound to send UK GDP sharply into reverse in Q4. And although the government plans additional fiscal support for businesses, and finally decided to extend its Job Retention Scheme to support worker furloughs this month, redundancies are likely to continue rising at a record pace. On top of all this, significant uncertainty persists regarding the nature of trade relations between the EU and UK from the end of the year, acting as a continued disincentive to business investment.
Based on the current rate of net asset purchases, the BoE’s existing £745bn target would be reached by the end of the year. So, even before the new lockdown measures, there was always a strong case for the MPC this week to extend the net purchases into 2021 in order to avoid an unwarranted tightening of financial conditions. And, consistent with the recent public comments of most MPC members, and in line with the consensus, we strongly expect the Committee to vote for an increase of £100bn in that target to £845bn. Indeed, out of the nine members, only Chief Economist Haldane, who voted against the previous increase in asset purchases, might have been tempted to vote against such an increase on Thursday. But given the new restrictions on activity, even he might be swayed to vote for the extra purchases this time around. Finally, in terms of forward guidance, the MPC will likely keep the door open to a possible eventual cut in Bank Rate to negative territory if economic conditions warrant such a move. But, for the time being there will be no rate cut, as preparations that might facilitate such action in future still need to be completed.
As in the euro area, the coming week’s UK dataflow is light, and centres on the October PMIs, with the final manufacturing and services indices due today and Wednesday respectively, and the construction survey results to be released for the first time on Thursday. According to the flash estimates, the headline manufacturing and services PMIs both weakened in October, to 53.3 and 52.3 respectively. And we expect the construction PMI similarly to suggest a moderation in growth in the sector, dropping from 56.8 in September. Beyond the PMIs, the other data of note due in the coming week will be October new car registrations, which will also come on Thursday.
Australian data continues to strengthen, especially in the housing sector
There were a number of economic reports released in Australia today. With regard to the housing market, the CoreLogic measure of prices increased for the first month since April, with the index rising 0.2%M/M and 3.7%Y/Y in October. Prices increased in every capital city aside from Melbourne, with activity boosted by a combination of monetary and fiscal policy easing, together with mortgage repayment holidays. Meanwhile, the number of dwelling approvals jumped 15.4%M/M in September, far surpassing market expectations. And while this was partly due to a 23.4%M/M surge in the volatile apartment category, private house approvals also increased a very strong 9.7%M/M and 20.7%Y/Y to the highest level since April 2018. In a similar vein, the ABS reported strong growth in housing construction loan approvals in September. Even with a drag from the lockdown in the state of Victoria, the value of approvals for loans by owner occupiers increased 6.0%M/M in September, lifting annual growth to a whopping 33.8%Y/Y. And a turning point may have been reached in the investor market, with approvals for this class of loans rising 5.2%M/M and 4.2%Y/Y.
In other news, the CBA manufacturing PMI was confirmed at its preliminary reading of 54.2 in October, while the very volatile AiG Performance of Manufacturing Index was reported to have surged 9.6pts to 25-month high of 57.1. Good news was also seen in the labour market, with the ANZ Job Ads Index increasing a further 9.4%M/M in October – a 6th consecutive increase after plunging more than 50% in April – to the highest reading since March. The number of ads remains over 13% below the pre-pandemic level, however. Finally, the Melbourne Institute’s monthly inflation gauge fell 0.1%M/M in October, causing the annual inflation rate to decline 0.2ppts to a lowly 1.1%Y/Y.
RBA the key focus in Australia this week; retail and trade data also due
Looking to the week ahead, the focus is tomorrow’s RBA monetary policy decision. Polls suggest that the RBA is widely expected to cut its cash and 3-year bond rate targets by a further 15bps to a new low of 0.1% (the rate applicable to the Term Funding Facility should fall similarly). In addition, given the Board’s discussion at the last meeting, it is also seems likely that the RBA will announce a programme of longer-maturity bond purchases – focused on the 5-10 year part of the curve – with the aim of placing downward pressure on yields and the Aussie dollar. However, it is unclear whether the RBA will commit to a fixed quantity of purchases or rather retain a degree of flexibility to adjust the purchase rate depending on the behavior of yields. On Friday the RBA will have the opportunity to fully explain its views on the outlook for the economy and policy when it releases its quarterly Statement on Monetary Policy, which will also include an update on the Bank’s numerical forecasts for growth, unemployment and inflation.
On the data front, while preliminary data pointed to a decline in retail spending in September, Wednesday’s final report for September is likely to confirm that retail volumes nonetheless increased a mammoth 6%Q/Q in Q3, more than reversing the 3.4%Q/Q decline that was registered in Q2. The final services PMI for October is also released on Wednesday, while the following day will bring the full trade report for September. As far as the latter is concerned, preliminary data on goods trade suggests that a rebound in exports – driven by non-monetary gold – will lead to a widening of the trade surplus to around A$3.7bn.
Labour market and business confidence the focus in New Zealand this week as RBNZ eyed
The only economic news in New Zealand today concerned house prices and construction. Regarding the former, the Corelogic house price index increased a further 1.3%M/M in October, lifting annual home price inflation to 8.0%Y/Y – the fastest pace since July 2017. This contrasts with the RBNZ”s expectation of a hefty price decline in the wake of the pandemic, and raises the prospect of the Bank having to backtrack on this year’s decision to remove loan-to-value ratio (LVR) restrictions, even as the Bank looks to ease policy further in its bid to help the business sector. Meanwhile, the number of dwelling consent issued increased 3.6%M/M in September and was up 17.7%Y/Y. Dwelling consents rose 14.4%Y/Y in value terms – consents for smaller units growing faster than those for house
– while consents for commercial buildings rose 22.6%Y/Y on the same basis.
Looking ahead to the remainder of the week, the key focus will be Wednesday’s labour market report for Q3. The unemployment rate fell to 4.0% in Q2, catching the markets by surprise, as a small decline in employment was more than matched by a decline in the active labour force due to the impact of the lockdown on job seeking. This quarter the market expects a somewhat larger decline in employment – 0.7%Q/Q according to Bloomberg’s survey – coupled with an increase in the labour force participation rate as job search was able to resume. As a result, the unemployment rate is forecast to have jumped 1.5ppts to 5.5% – providing a fairer reflection of the state of the labour market – while private labour costs are expected to have grown just 0.3%Q/Q. The other important reports this week are Thursday’s preliminary ANZ Business Outlook Survey for November and Friday’s RBNZ Survey of Expectations for Q4.