Japanese department store sales fall, while German Q3 GDP is revised up

Chris Scicluna

Equity markets generally firmer on a number of risk-positive headlines
Wall Street kicked the week off with a positive start on Monday, with the S&P500 advancing 0.6% – and the DJI an even greater 1.1% – as vaccine news from AstraZeneca added to investors’ risk appetite. The positive tone was reinforced by a lift in the US Markit composite PMI to the highest reading in the survey’s 3-year history, and also resulted in a modest increase in US bond yields (the 10Y yield rising 3bps to 0.85%). The US dollar rallied sharply off new lows, only to give up about half the gain as the day wore on.

Since Wall Street’s close the emergence of some political clarity in the US has further supported risk appetite. Following the certification of election results in the state of Michigan, the General Services Administration (GSA) said it would begin the formal transition process, giving President-elect Biden access to both funding and government agency officials. President Trump indicated that he had agreed to begin the transition process ‘for the good of the country’, but vowed to supporters that he would continue to contest the result in the courts. In related news, newswires reported that Biden would next week select former Fed Chair Janet Yellen to head the Treasury, which if confirmed would doubtless be welcomed by both investors and the Fed (especially in light of the recent disagreement over the return of emergency loans funds). Together these developments have lifted S&P e-mini futures by around 0.7%.

Turning to Asia, returning from yesterday’s holiday, Japan’s equity market had a very strong session, with a weaker yen helping the TOPIX climb 2.1% to its best close since October 2018. In local news, the latest department store sales data continued to show the hallmark of the coronavirus, while it was confirmed that the Government’s ‘Go-To’ campaign would be suspended in the coronavirus hotspots of Osaka and Sapporo. However, shares in Japan Air Lines jumped almost 5% after a key economic adviser to PM Suga gave an interview in which he called for the bail out and merger of Japan’s two largest carriers. Meanwhile, speaking in the Diet, BoJ Governor Kuroda rejected the idea that the country was headed back towards structural deflation, and reaffirmed that the Bank has no intention to review its monetary policy framework at present, but would do so at an ‘appropriate’ time. In South Korea, the Kospi increased 0.7%, setting a new record high, as the BoK’s index of consumer confidence improved to the highest level since January. By contrast, the Hang Seng was flat after Hong Kong said that it would close more indoor entertainment venues in light of rising coronavirus case numbers. And China’s CSI300 fell 0.8%, with newswires continuing to report that the Trump Administration might still try to impose more restrictions on China before leaving office on 20 January.

In the Antipodes, the 10Y ACG yield tracked higher in line with the weakness seen in the US Treasury market while Australia’s ASX200 increased 1.3% as both exports and imports strengthened in October (see more on this below). There was little reaction to comments made by RBA Deputy Governor Debelle, who told an audience of Australian economists that the bulk of the depreciation of the Aussie dollar in the lead up to the Bank’s November policy decision could be attributed to the anticipation of the Bank’s policy measures. Meanwhile, ahead of tomorrow’s RBNZ Financial Stability Review, Kiwi Finance Minister Robertson indicated that he had written to the Bank to ask it to consider how its Covid-19 response had contributed to the resurgence of house price inflation, and how the Bank might contribute to stability in the housing market. This resulted in a sharp very sell-off in the bond markets – the 10Y yield rising more than 11bps – and a rally in the Kiwi dollar to a 2-year high, with the market understandably viewing Robertson’s comments as another reason to price out any further policy easing, let alone a negative cash rate.

Japan’s department store sales still weighed down by pandemic in October
A quiet day for data in Japan was highlighted by the Japan’s Department Store Association’s release of department store sales data for October. Nationwide sales declined 1.7%Y/Y, with a 6.8%Y/Y decline in spending on food and a 4.1%Y/Y decline in spending on clothing more than offsetting growth in other categories (including a 13.9%Y/Y lift in spending on household goods).

While the October result represented a vast improvement on the 33.6%Y/Y decline in September, of course both months were impacted by the timing of last year’s consumption tax hike. Specifically, ahead of the tax hike, spending rose above trend in September last year, resulting in a very high base for comparisons, only to temporarily fall below trend in October after the tax hike was implemented. Perhaps more meaningfully, the level of spending was still about 20% below that seen in both October 2017 and October 2018, reflecting this sectors exposure to products that have suffered from the pandemic-induced ‘stay at home’ economy and continued absence of tourists.

French INSEE survey points to notable weakening ahead of ifo survey results
Tallying with yesterday’s flash PMIs, this morning’s French INSEE business climate survey suggested a significant drop in economic activity this month as pandemic containment measures took their toll. However, the decline appears in no way comparable with the record slump during the first wave of coronavirus. In particular, the headline business climate indicator fell by a steep 11pts in November to 79, the same level as in June level, still nevertheless a sizeable 25pts above the April low. Within the detail of the survey, there were steep drops in the respective indices for services (down 12pts to 77, led by accommodation and food, but with marked declines across the board) and retail trade (down 23pts to 72). But the declines in manufacturing (down 2pts to 92) and wholesale trade (down 3pts to 87) were much more modest. Meanwhile, due largely to lower demand in services, the employment index fell 6pts to a three-month low of 83. All indices, however, remain well above their springtime lows.

The equivalent German ifo survey due later this morning should provide better news than the INSEE survey. With manufacturing strength at least in part offsetting services weakness, the flash PMIs suggested that German GDP might yet avoid a drop in Q4. The headline ifo business climate index is expected to fall about 2½pts to 90.2 – that relatively modest decline would leave it close to July’s reading and just 3pts below September’s seven-month high.

Updated German GDP figures for Q3 released this morning revised up the rate of growth, by 0.3ppt to 8.5%Q/Q, which left the level 4.0% below the peak in Q419. Growth was driven by household consumption (up 10.8%Q/Q) and investment in machinery and investment (up 16.0%Q/Q). Having grown in Q2, however, construction investment dropped 2.0%Q/Q. Net trade also made a substantive contribution to growth, with exports of goods and services up 18.1%Q/Q, almost double the pace of imports (9.1%Q/Q). On the production side, the rebound in value-added was particularly vigorous in manufacturing (14.0%Q/Q), trade, transport, accommodation and food services (13.8%Q/Q) and public services, education and health (9.5%Q/Q).

UK retail sector survey to suggest significant weakening due to lockdown
The CBI’s UK Distributive Trades survey for November will be released this morning. Last week’s strong retail sales figures suggested that households had started their Christmas shopping early, as a second lockdown loomed. But, with non-essential shops having been forced to close this month, it is likely that the CBI will report the steepest fall in sales volumes since the second quarter. And with car showrooms having also been forced to close, auto sales are also likely to be very weak too.

US consumer confidence likely to have softened in November
While yesterday’s flash Markit PMI reports pointed to a welcome – and, considering other indicators, perhaps overdue – lift in business sentiment in November, today’s Conference Board consumer survey for November will likely reveal a small drop in household sentiment. Skyrocketing coronavirus cases and President Trump’s post-election shenanigans could well have weighed on sentiment, although positive vaccine news and rising asset prices should have provided some relief. The S&P/CoreLogic and FHFA house price indices for September are also released today, while the Richmond Fed’s manufacturing survey for November will be of some interest considering the somewhat mixed picture seen in the other regional surveys released to date.

Australian exports and imports strengthen in October; consumer confidence softens a little
In Australia, the only economic news released by the ABS today was the preliminary estimate of merchandise trade for October. These data, only presented in original (i.e. non-seasonally adjusted) form, pointed to a solid 6.3%M/M lift in exports, reducing the annual decline to 2.9%Y/Y. This growth occurred despite a 16%M/M decline in exports of non-monetary gold, which was more than offset by a 13%M/M lift in exports of rural goods (still down 15%Y/Y) and an 8%M/M increase in exports of non-rural goods (now down just 1%Y/Y). Exports of iron ore increased to a record high – clearly linked to strong demand from China and Japan – and contributed strongly to a 37%Y/Y lift in exports of all metal ores. This growth more than offset large declines in exports of gas, coal and petroleum.

Meanwhile, imports were estimated to have rebounded 8.3%M/M in October, but nonetheless remained down 10.4%Y/Y. Of particular note was a 14%M/M jump in imports of consumption goods to a level little changed from a year earlier. Imports of capital goods increased 8%M/M but unfortunately were still down 9%Y/Y. In addition, imports of intermediate goods increased 6%M/M but were down 20%Y/Y, with about three-quarters of the annual decline driven by a 49%Y/Y reduction in imports of petroleum. Taken together these results point to a merchandise trade surplus of around A$4.8bn in October, down slightly from A$5.0bn last month but larger than the A$2.8bn surplus recorded a year earlier. The final trade report, which will also include information from the services sector, will be released on 3 December.

In other news, the ANZ-Roy Morgan consumer confidence index broke a record 11-week winning streak, declining 2.0%M/M last week to 104.5. Most of the sub-indices were slightly weaker, which may have reflected reaction to the community outbreak of coronavirus in South Australia and subsequent short-lived lockdown.

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