US Covid cases mount; UK recovery lags well behind its peers

Chris Scicluna

Tech stocks rebound in NY, but Asia mixed as Covid cases hit a new high
The sector rotation that had dominated markets since Pfizer’s vaccine announcement reversed slightly on Wednesday, albeit on lower volumes due to the Veterans’ Day holiday. The Nasdaq rebounded 2.0%, outperforming a 0.8% lift in the S&P500 and a 0.1% decline in the Dow. In US election news, counting continued with Biden stretching his lead in the popular vote to over 5 million but the states of Arizona and Georgia remain uncalled. Despite President Trump’s continued unwillingness to accept defeat, Japan’s Suga became the latest world leader to congratulate Biden, with the two men also agreeing to meet as soon as possible.

US equity futures have moved lower since New York closed,. Not helping sentiment was news that the US had recorded more than 143k new coronavirus cases on Wednesday, with New York responding by ordering that restaurants, bars and gyms must close at 10pm, with indoor gatherings to be limited to 10 people (these restrictions to apply from Friday). With that background, equity markets generally weakened somewhat today in the Asia-Pacific region. In Japan, the TOPIX pared earlier losses to close down 0.2%, with a disappointing machine orders report later countered by a stronger-than-expected lift in service sector activity (more below). Chinese stocks fell similarly, but slightly larger losses were seen elsewhere in the region.

In the bond market, USTs reopened stronger, with the 10Y yield declining to 0.94%. JGB yields have also nudged lower, with BoJ Board member Adachi telling a business audience that the provision of ample liquidity to firms was crucial to avoid a rise in unemployment and corporate bankruptcies. Adachi added that he thought that the BoJ’s inflation target should be revisited after the pandemic subsides, and that he was ‘very interested’ in recent changes in the US inflation target, which he interpreted as giving greater weight to changes in employment. Meanwhile, with the RBA buying 3Y bonds today, Aussie bond yields reversed Wednesday’s steep sell-off. And after hitting new intra-day highs following further commentary from a clearly less-dovish RBNZ, Kiwi bond yields eventually nudged lower after a new unexplained community case of coronavirus was discovered, prompting the Government to state that it would review alert levels.

After this morning’s GDP data confirmed that the UK recovery continues to lag well behind those of other major economies despite record growth in Q3, today’s economics highlight will again come from the ECB’s Central Banking Forum. Following yesterday’s unambiguously dovish speech there from President Lagarde – during which she gave the clearest steer yet that the Governing Council will next month announce an increase in PEPP (and perhaps also regular APP) asset purchases and an extension/augmentation of the TLTROs – this afternoon will bring a policy panel featuring Fed Chair Powell, BoE Governor Bailey and, once again, Lagarde. Data-wise, US CPI will be most closely watched.

Japan’s machine orders disappoint in September; forecast for Q4 also weak
While business sentiment in Japan appears to have lifted noticeably over the past month or so, there was little sign of that in today’s Cabinet Office’s survey of firms’ machinery orders for September, which also included firms’ forecast for growth in orders in Q4. The survey indicated that total machinery orders fell 4.4%M/M in September – not too surprising considering the 19.8%M/M jump in August. , but even so remained down 16.5%Y/Y. More disappointingly, the closely-followed measure of core private domestic orders – which excludes volatile items such as ships and capex by electricity companies – also fell 4.4%M/M in September, after recording a negligible increase of just 0.2%M/M in August. This outcome was well below market expectations and left orders down 11.5%Y/Y – albeit an improvement on the 15.2%Y/Y decline reported last month. And it means that core orders declined 0.1%Q/Q in Q3, thus showing no improvement after plunging 12.9%Q/Q in Q2.

In the detail – and bearing in mind that seasonally-adjusted component data need not add up to the total – orders from the manufacturing sector increased 2.0%M/M in September, led by increased orders in the chemical, electrical machinery and shipbuilding industries. Even so, manufacturing orders were still down 12.7%Y/Y, representing only a slight improvement on the 13.2%Y/Y decline reported in August. Core orders from the non-manufacturing sector increased 3.2%M/M in August, not least due to a rebound in orders from the finance and insurance industry, but were still down 10.7%Y/Y. Government orders, which are especially volatile, increased a further 20%M/M in September and so were up more than 51%Y/Y. However, after rising sharply last month, foreign orders fell 16.7%M/M, albeit the annual decline still narrowed slightly to 6.4%Y/Y.

Looking ahead, firms’ forecast for growth in orders in Q4 was also disappointing. Firms export total orders to decline 7.8%Q/Q, led by a sharp decline in expected orders from overseas and weaker orders from the government sector. But core private orders are also expected to decline a further 1.9%Q/Q, suggesting that a recovery in investment is unlikely until next year – not entirely surprising considering broader developments in the economy.

Japan’s service sector activity continues to recover in September
On a brighter note, following on from its earlier report of a strong 4%M/M lift in factory output in September, today METI released some good news regarding activity in the services sector. The Tertiary Industry Activity Index increased a greater-than-expected 1.8%M/M, albeit leaving output down 9.0%Y/Y – a decline that is exaggerated by the pre-consumption tax hike lift in activity that occurred in September last year. Given the growth in September, the level of service sector activity increased 6.0%Q/Q in Q3. Of course, sadly, this follows the 10.1%Q/Q slump that occurred in Q2. As a result, next Monday’s GDP report will likely confirm that overall activity has reversed little more than half of the 7.9% Q/Q plunge in Q2.

In the detail, in seasonally-adjusted terms, personal services activity increased 2.1%M/M in September but was still down 9.8%Y/Y. This was driven completely by a 5.4%M/M lift in non-essential personal services, which were especially impacted by the pandemic and remained down 17.4%Y/Y. Activity in the living and amusement industry rebounded more than 10% M/M but was still down a whopping 22.6%Y/Y despite the Government’s attempts to encourage spending in the industry. The business services index increased 1.3%M/M in September and was down 9.0%Y/Y, with services provided to the manufacturing sector declining 11.9%Y/Y.

Japan’s goods PPI down, weighed down by lower power prices
The BoJ’s producer goods price indices for October unsurprisingly continued to point to little underlying inflationary pressure. That said, the larger-than-expected 0.2%M/M decline in the headline index was more than accounted for by a 5.4%M/M decline in utility prices, which in turn was driven by lower prices for electricity. The PPI for manufactured goods increased 0.2%M/M, with increased prices for food, chemicals and metals only partially offset by lower prices for fuel. With last year’s tax-driven 1.1%M/M jump in prices dropping out of the calculation, the annual pace of deflation for the total PPI picked up 1.3ppts to -2.1%Y/Y. That for manufactured goods increased 1.3ppts to -1.7%Y/Y. Final good prices declined 1.4%Y/Y in October while consumer goods prices were down 1.7%Y/Y. Meanwhile, measured in yen, import prices fell 0.1%M/M and 10.6%Y/Y, with energy prices still down more than 32%Y/Y and chemicals prices down 8.6%Y/Y.

Finally, it is worth noting that the Tokyo office vacancy rate increased a further 0.50ppts to 3.93% in October – the highest level since July 2016 and indicative of the continued fall-out from the economic pandemic, even with economic activity rebounding from its low-point.

UK recovery lags well behind its peers despite record Q3 growth
Having been hit harder by the pandemic than all other G7 economies in the first half of the year, the UK recovery continues to lag well behind that of its peers despite record growth in Q3. Data released a little while ago showed that GDP last quarter rose 15.5%Q/Q – incidentally bang in line with our forecast. That, however, was still 9.6% down on a year earlier, and a similar 9.7% below the pre-Covid level in Q419 – more than double the equivalent shortfall in the euro area (4.3%) and each of the three largest member states, and almost three times that in the US (3.5%). Moreover, following the initial rebound, the monthly pace of growth steadily slowed over the course of the third quarter, with growth of 1.1%M/M in September down from 2.1%M/M in August and the softest since the recovery started.

All major sectors posted record growth in Q3 as the lockdown restrictions eased. Following a drop of 19.2%Q/Q in Q2, services output jumped 14.2%Q/Q in Q3. But that still left the level still around 10% below where it was in Q419, with significant variation among the various sub-sectors. Despite the support provided by the government’s incentives to spend, accommodation and food services output was still about 29% below Q419 level, with arts, entertainment and recreation little better (down more than 26% on the same basis). In contrast, wholesale, retail and motor vehicle repair activity was back above the Q4 level, as was public administration and defence. And the shortfalls in real estate (-1.7%) and finance and insurance (-2.5%) were relatively modest.

Beyond services, production rose 16.3%Q/Q in Q3 to be 6.3% below the Q419 level. Output of chemicals, pharmaceuticals and electrical equipment was above the pre-Covid level. But production of machinery and equipment (-18%) and transport equipment (-25%) was well down on Q419. Meanwhile, construction output rose 41.7%Q/Q but was still down 11.5% from the pre-lockdown level.

On the expenditure side, there was also inevitably rapid growth in all major components. But reflecting significant uncertainty about the outlook – perhaps related to the end of the Brexit transition period as well as the pandemic – the recovery in business investment continued to lag behind, with the level still 20.5% below where it was in Q419, while household consumption was down 12.4% on the same basis.

Unfortunately, with the second wave of pandemic, surveys and high-frequency data suggest that economic activity slowed further last month. And with England under a more substantive lockdown – with the closure of all non-essential retailing, hospitality, and leisure and other face-to-face services – throughout November and quite possibly into December too, GDP is now set to decline in Q4. With economic output in Q1 also set to be impeded by disruption caused by the end to the Brexit transition – whether or not the UK government secures an FTA with the EU – the UK recovery seems bound to continue to lag that of the other major economies well into 2021 and perhaps beyond too.

German inflation provides no surprises, euro area IP to post a modest drop
The final estimates of German inflation in October confirmed the flash figures. So, headline inflation on the EU-harmonised measure fell 0.1ppt to -0.5%Y/Y, the lowest since January 2015. And the detail published on the national measure (which was unchanged from September at -0.2%Y/Y) revealed that inflation of energy and food was a touch firmer, suggesting a slight softening of core inflation last month.

Looking ahead, September industrial production figures for the euro area as a whole are due later this morning. Given the marked drop of reported on Tuesday from Italy (-5.6%M/M), as well as weaker data from some of the smaller member states, this now looks set to report a decline in production on the month (and down about 7%Y/Y) despite further positive growth in Germany, France and Spain.

Chinese credit growth remains strong in October
Late yesterday the PBoC released the money and credit aggregates for October which, in summary, continued to indicate robust support for economic growth. Aggregate social financing increased CNY1.42bn – almost bang on market expectations but CNY0.55n above the same month last year (both months being impacted by the Golden Week holiday). As a result, the outstanding stock of aggregate social financing increased 13.7%Y/Y, marking the fastest pace of growth since 2018. Meanwhile, growth in M0 and M2 eased to 10.4%Y/Y and 10.5%Y/Y respectively, but growth in M1 picked up to 9.1%Y/Y.

CPI inflation the main focus in the US today
The key economic release in the US today is the CPI report for October. Pricing seems to be settling back into a trend-like pattern following the pandemic-induced volatility of recent months, so we expect core prices to have advanced 0.2%M/M, leaving annual inflation steady at 1.7%Y/Y. In addition, today also brings the release of Federal budget data for October. While outlays are likely to have declined somewhat as pandemic-related support is withdrawn, the sub-par economy is likely to continue to weigh on revenue. As a result, we anticipate a budget deficit of $US275bn – around double the deficit recorded in the same month last year. Finally, as usual, the weekly jobless claims report will also be analysed closely, especially given the somewhat conflicting outcomes of last Friday’s household and establishment employment surveys.

Kiwi house sales and prices rise vigorously in October
Following on from yesterday’s announcement that the RBNZ will likely soon reinstate loan-to-value ratio restrictions on investor lending, today REINZ reported a 25.1%Y/Y lift in house sales in October with sales in Auckland up a mammoth 51%Y/Y. Nationwide, this was the busiest month for realtors since May 2016 and the busiest October since 2006. Not surprisingly, therefore, the REINZ house price index increased a very strong 3.5%M/M, lifting annual growth to 13.5%Y/Y – information the RBNZ would have been privy to when it made yesterday’s announcement.

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