BoJ consumption index rebounds, German IP disappoints

Emily Nicol
Chris Scicluna

Asian markets resilient despite confusion over Trump’s fiscal intentions
Perhaps inevitably, markets continue to be largely driven by the news flow generated by President Trump. With his health seemingly improving and Fed Chair Powell using his NABE address to amplify his call for erring on the side of too much fiscal stimulus, rather than too little, the initial tone for much of yesterday’s US session was positive. But by the close the S&P500 had lost 1.4%, with the dollar stronger and the yield on 10Y USTs down 5bps to 0.73%, with the market mood darker following a tweet by Trump announcing that he had instructed his representatives to cease negotiating on a fiscal stimulus package until after the election. Trump added that he would pass a major stimulus bill “immediately after I win”. Of course, it wasn’t clear whether the tweet was just a stunt to try to force Democrats to lower their US$2.2bn spending demand towards the $1.6bn envelope proposed by the White House. Indeed, additional tweets by Trump – perhaps motivated by market reaction to his earlier message – suggested that he might still be willing to approve aid for airlines, small businesses and direct payments of $1200 to individuals.

Given the confusion over Trump’s intentions, and on another relatively quiet day for local data, Asian investors largely decided to take the President’s tweets in their stride, with key equity benchmarks little changed or higher (China’s markets remained closed). Indeed, some markets – such as Hong Kong and Korea – have posted solid gains. This was also especially so in Australia, where the ASX200 increased 1¼%, seemingly endorsing yesterday evening’s expansionary federal Budget plan (summarized below). And Japan’s Topix was effectively unchanged on the day, even with the BoJ’s Kuroda telling the NABE audience that economic conditions remain severe in Asia – albeit less so than in many other regions – with a full-fledged global recovery likely to be still some way down the road. Some comfort could be taken from the latest Japanese consumption and leading indicator reports, which continue to point towards economic recovery – albeit one that lacks vigour. Meanwhile, consistent with the steady mood in Asian markets, US equity futures and UST yields have ticked higher. But euro govvies are a touch firmer, and European sticks mixed, after the latest German IP data missed expectations.

BoJ consumption Index rebounds in August; leading index rises to 6-month high
Today the BoJ released its Consumption Activity Index, providing the first reliable estimates of how overall consumer spending evolved in August. In common with last week’s retail sales report, the BoJ’s measure pointed to a rebound in spending following a decline in July. In particular, the real index rose 1.1%M/M in August, albeit failing to fully reverse a 1.4%M/M decline in July that was smaller than estimated previously. In the detail, spending on durable goods rebounded 4.6%M/M and spending on non-durable goods rose 3.6%M/M. However, spending on services fell 1.8%M/M. Given these movements, total real spending remained down 11.0%Y/Y, led by a 19.2%Y/Y decline in spending on services. And after declining 12.4%Q/Q in Q2, total real spending is on track for a rebound of about 8%Q/Q in Q3.

In other news, today the Cabinet Office released its preliminary composite index for business conditions for August. The coincident indicator increased 1.1pts to 79.4 – the highest reading since March but still 15pts short of pre-pandemic levels. More optimistically, the leading index rose 2.1pts to a 6-month high of 88.8 – now just a couple of points shy of the levels leading up to the pandemic and close to the long-term average of 91.6.

German IP recovery pauses for breath in August
While yesterday’s German factory orders exceeded expectations and pointed to ongoing output growth ahead, the figures for manufacturing turnover had suggested that the recovery in industrial output might have paused in August. And today’s data implied just that, with IP down 0.2%M/M, the first monthly decline in four months. So, having recovered only a little more than 50% of the initial post-pandemic slump, output was still almost 11% below February’s peak and down more than 9½% compared with a year earlier. And when excluding the 6.7%M/M increase in energy production, the drop in manufacturing output stood at a steeper 0.7%M/M, to leave it more than 12% lower than the pre-pandemic level.

Within the manufacturing detail, the weakness was caused by declines in production of capital (-3.6%M/M) and consumer goods (-1.3%M/M) while production of intermediate goods continued a gradual upwards trend (but had still recovered less than half of the decline between February and April). Most notably, autos production fell 12½%M/M following a near-9%M/M increase in July to be still around one-quarter below the pre-pandemic level in August. But there were also falls in production of pharmaceuticals (-10½%M/M), chemicals (-2.6%M/M) and machinery and equipment (-1.8%M/M).

Moreover, after yesterday’s construction PMI suggested that the sector continued to struggle in September, today’s figures confirmed a further drop in output in the sector in August (-0.3%M/M) following a near-4 ½%M/M drop in July. So, while manufacturing output in the first two months of Q3 was still more than 12½% higher than the Q2 average, construction activity was down more than 3% on the same basis.

Elsewhere in the euro area, this morning’s Spanish IP figures also came in a bit softer than expected, but nevertheless still posted a modest rise in August of 0.4%M/M. This suggested that 90% of the drop in output earlier in the year had now been recovered to leave output just 3% below February’s level. Within the detail, there was a further notable improvement in production of capital and intermediate goods (up 3.8%M/M and 1.9%M/M) in August. But while output of consumer durables posted another solid increase (5.1%M/M) to take it back above the pre-pandemic level, production of non-durables fell for the second successive month. Of course, the recent surge in coronavirus cases in Spain will likely weigh on demand going forward. And so this might well mark the high point for the manufacturing sector for the time being.

Looking ahead, Irish IP figures – which are typically highly volatile and can thus have a material impact on the aggregate euro area figures – are due later this morning, as are the latest Italian retail sales data. Boosted not least by summer discounting, these are expected to show that sales were up almost 4%M/M in August, just a touch softer than the rise in the euro area of 4.4%M/M reported on Monday, after falling 2.2%M/M in July.

Australia’s budget deficit to rise to 11% of GDP in FY20/21
The most notable news over the past 24 hours in Australia was the release of the federal Government’s Budget for FY20/21, delayed from May due to the disruption caused by the pandemic. In summary, the Budget largely conformed to what had been indicated in pre-announcements and leaks covered in the media, albeit with the bottom line fiscal deficit widening by slightly less than the market had expected. With the economy now expected to contract 1½% this year, and given additional fiscal measures, the Government now expects an underlying cash deficit of $A213.7bn or 11.0% of GDP in FY20/21 – about A$29bn larger than had been estimated in the July Economic and Fiscal Update (JEFU) and a sharp contrast to the small surplus that had been forecast in last December’s Mid-Year Economic and Fiscal Outlook (MYEFO). Just over a quarter of the deterioration since the MYEFO is attributable to the weaker economic outlook, with the remainder due to explicit policy decisions, and in particular the JobKeeper wage subsidy, that have boosted planned spending by nearly A$150bn – most of which was announced prior to the JEFU.

Looking further ahead, given a forecast 4¾% rebound in GDP, and the winding down of the JobKeeper payment which will finish at end-March next year, the deficit is forecast to almost halve to 5.6% of GDP in FY21/22. And further declines are expected to 4.2% of GDP in FY22/23 and 3.0% of GDP in FY23/24. Given this profile, net debt is estimated to rise from 24.8% at the end of FY19/20 to a peak of 43.8% of GDP in FY23/24 – still very low by international standards, and very affordable considering record low interest rates. This will see the face value of AGS on issue rise from just over A$807bn at present to around A$870bn by the end of FY20/21 and A$1,140bn by the end of FY23/24.

As expected a key centrepiece of the Budget was the bringing forward of previously legislated tax cuts to July this year – a move, mostly implemented by raising income thresholds for the 19% and 32.5% tax rates, that will cost almost A$18bn over the forecast period. Business investment and cashflow is supported significantly by allowing firms with revenue of up to A$5bn to temporarily fully expense their investment in depreciable assets, costing almost A$27bn over the period. And the same firms will be able to offset losses against previous profits, so as to generate a tax refund, which will cost A$4.9bn over the forecast period. On the expenditure side, the Budget allows for almost A$16bn to fund the previously-announced extension of the JobKeeper payment. And over the forecast period the Government will spend A$4bn to encourage firms to hire younger workers, about A$4.6bn on aged care and support for payments for welfare recipients and about A$11bn on additional infrastructure spending.

Aussie employment indicator firmer
In other news, today the ABS released the latest data from its tax-based weekly tracker of employment and wages – an initiative to gather high-frequency data on the impact of the pandemic. Encouragingly, the data showed that the number of payroll jobs increased 0.3% between 5 and 19 September. However, the number of jobs was still 4.1% lower than had been the case in mid-March. Total wages rose 0.8% over the fortnight but were down 2.9% from mid-March. Meanwhile, the extremely volatile AiG services index fell 6.3pts to a 3-month low of 36.2 in September, contrasting sharply with the CBA services PMI which picked up to a slightly expansionary 50.8 during the month.

UK house price figures due for release
A relatively quiet day in the UK will bring the ONS house price index for July, which is expected to show a further tick higher in annual growth, as well as the latest unit labour costs data for Q2.

Fed minutes from mid-September meeting due
In the US, finally, today will bring the latest FOMC minutes from the mid-September meeting, which might well give greater clarity on the degree of wiggle room and appropriate time frame related to the Fed’s updated guidance that it will maintain an accommodative stance until inflation is moderately above two percent and is on track to average 2% over time. Indeed, later in the day, John Williams from the NY Fed will give a speech on the new average inflation target framework, which might well elaborate on the FOMC’s thinking.

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