BoJ Regional Economic Report reports improved conditions

Chris Scicluna
Emily Nicol

Risk-on sentiment returns on expectations that US fiscal boost will eventually come along
Whether due to residual hopes that piecemeal US budget support measures might yet find agreement, or, more likely, that polls increasingly point to a Biden win in early November and a Democrat-controlled Senate, investors appear to be concluding that more fiscal stimulus is certain even if its timing is not. Of course, as understood by the Fed, that support may well come too late to prevent a marked growth slowdown in Q4, although the latest FOMC minutes gave no clue as to what policymakers might do it about it if that happens. Nevertheless, seemingly given those expectations for stimulus at some point in the future, US stocks rebounded yesterday, with the S&P500 posting a 1.7% gain to mark its best close since early September. The risk-on tone also sent the US dollar lower and US Treasury yields back to the more than 3-month highs reached on Monday. And US equity futures continued to edge steadily higher during the Asian time-zone – and during a comparatively civilized debate between the US Vice-Presidential candidates – providing a positive backdrop for the region’s stock markets today and those in Europe this morning. Fixed income markets, however, are on the whole a touch firmer today.

In Japan, for example, the Topix rose about 0.6% but JGB yields nonetheless edged lower. While the latest Economy Watchers Survey showed greater-than-expected improvement in September (more on this below), earlier BoJ Governor Kuroda – speaking at a meeting of branch managers – reiterated his expectation that Japan’s recovery is likely to be gradual. Kuroda also repeated that the Bank won’t hesitate to undertake further policy easing if necessary. Meanwhile, the post-Budget rally continued in Australia with the ASX200 rising more than 1% to a 1-month high. Bucking the trend, equity markets moved lower in Hong Kong – weighed down by tech stocks in particular – while China’s markets were still closed for the final day of the Golden Week holiday. In currency markets the Kiwi dollar temporarily came under downward pressure despite an improved business survey after RBNZ Chief Economist Ha told reporters that the Bank would “rather do too much too soon, rather than too little too late”. Assistant Governor Hawkesby added that he was more worried about high unemployment and low inflation than about fuelling an asset bubble, suggesting that further policy easing remains on the agenda for next month’s MPC meeting.

BoJ Regional Economic Report suggests economic conditions improving in Japan
Subsequent to Governor Kuroda’s speech to branch managers, the BoJ released the latest edition of its quarterly Regional Economic Report. This report provides a summary of anecdotal information gathered by the Bank’s various branches in a similar manner to the Fed’s Beige Book. The good news is that, whereas all 9 regions had revised down their economic assessment in the July report, this time 8 regions upgraded their assessment. Only Shikoku retained its previous assessment, reporting that the local economy had remained weak. That said, the comments from those regions experiencing improved situations were hardly cause for celebration, with conditions generally still described as ‘severe’. While all regions reported signs of a pickup in consumer spending, investment was generally described as weak or declining. Comments on production ranged from ‘bottoming out’ to ‘showing signs of a pick-up’, but labour market conditions continued to be widely described as ‘weak’.

Japan’s Economy Watchers Survey improves substantially in September
Also today, the Cabinet Office released its Economy Watchers Survey for September. Consistent with other indicators, the survey pointed to a lift in sentiment regarding the current and prospective performance of the economy. Indeed, the headline current conditions DI recorded its fifth consecutive increase, rising a much stronger-than-expected 5.4pts to 49.3 – the highest reading since March 2018. Encouragingly, readings improved substantially across both the household and business sectors, with the former index rising 5.0pts to 50.3 and the latter index up 6.3pts to 47.4. Looking ahead, respondents indicated that they expected most of the recent improvement to be sustained, at least in the near-term, with the overall expectations index rising a much stronger-than-expected 5.9pts to 48.3 – the best reading since February 2019. And as with the current index, that optimism was shared broadly across the household- and corporate-based indicators. As with the BoJ’s Regional Economic Report, these results point to an economy that is recovering, but obviously doing so from a very weak base.

In other news, the office vacancy rate in Tokyo increased to 3.43% in September – up sharply from 3.07% in August and the highest level since March 2017. The vacancy rate has more than doubled since February’s historic low-point, but at least for now remains 1.9ppts below the historic average. Meanwhile, the BoJ reported a trade surplus of ¥413bn on a BoP basis in August, which was close to market expectations. The current account surplus increased to a seasonally-adjusted ¥1.65trn – a 6-month high – which continues to be driven by a ¥1.70trn surplus on primary income (the services and secondary income balances recording deficits that largely offset the trade balance).

German exports maintained upwards trend, but outpaced by imports in August
While yesterday’s German IP release came in on the soft side of expectations, today’s trade report encouragingly suggested that demand from overseas maintained an upwards trend in August. In particular, the value of exports rose for the fourth consecutive month and by a stronger-than-expected 2.4%M/M, albeit unsurprisingly softer than surge during the initial rebound. But despite having recovered more than two-thirds of the post-pandemic plunge, exports were still 10% below their February peak and their level a year earlier. This in part reflected ongoing significant weakness in demand from the US, with shipments to that country down 21%Y/Y, while exports to other euro area countries and the UK fell 8.3%Y/Y and 7.3%Y/Y respectively. In contrast, the drop in exports to China continued to moderate to just -1.1%Y/Y.

But Germany’s trade surplus narrowed in August as the value of imports jumped a stronger 5.8%M/M. But this still left them almost 6½% lower than their pre-pandemic peak. And while they were up on average in the first two months of Q3 by 10% compared with the Q2 average, this compared with a 19% increase in exports on the same basis. So, while it is difficult to measure price effects, today’s report suggests that net trade is on track to provide a significant contribution to GDP growth last quarter.

Bank of France survey implied no growth in September
The Bank of France’s (BoF’s) latest monthly economic update for September, incorporating the results from its latest business sentiment indicators, was also just published. And this implied that activity likely moved broadly sideways in September to leave activity still 5% below the pre-pandemic level. This notwithstanding, like INSEE earlier in the week, the BoF maintained its GDP forecast of 16%Q/Q growth in Q3. But this might well mark the high point for now. Indeed, respondents to the survey on the whole suggested that activity was expected to be merely broadly stable in October. And there were inevitably ongoing divergences between sectors, with the autos sector, hospitality and recreational services in particular more severely impacted. Certainly, the reintroduction of stricter containment measures (including the closure of Parisian bars, gyms and swimming pools from Tuesday) will further weigh on activity. Indeed, the BoF noted that the expectation for stability in activity in October could partly reflect a lack of visibility among business leaders regarding the outlook – the eventual outturn could well prove significantly worse. INSEE earlier this week also suggested that French growth could be zero or negative in the current quarter.

In addition, today will also bring the ECB account from the 9-10 September Governing Council meeting. While this meeting has been followed by more recent comments from influential ECB policymakers – not least President Lagarde at last week’s ECB watchers’ conference – suggesting that more easing by year-end is on the cards, the Governing Council’s October meeting will reportedly feature a discussion of the various asset purchase programmes, and so the account of the September meeting will also be watched for clues as to what to expect from that forthcoming stock-take.

UK house prices at multi-year high for now
While yesterday’s ONS house price figures suggested a moderation in growth in July (down 0.6ppt to 2.9%Y/Y), the overnight release of the RICS survey provided a broader and more timely assessment of conditions in the housing market. And this painted a starkly different picture, with the Chancellor’s announcement of the Stamp Duty holiday in July and pent-up demand following the lockdown helping to boost prices significantly over recent months. Indeed, the headline RICS house price balance – the net share of surveyors reporting rising house prices – jumped 17ppts in September to 61%, its highest reading since mid-2002. And this broadly tallied with the Nationwide price index (published last week) that saw prices jump 5%Y/Y in September, while yesterday’s Halifax release suggested growth accelerated to 7.3%Y/Y, both the strongest readings in in three years.

But while buyer enquiries and new instructions remained strong last month, the survey’s relevant indices were still down slightly from August. And surveyors were somewhat less upbeat about price expectations too, noting increasing concerns about the ending of certain fiscal policy initiatives – not least the Government’s Job Retention Scheme at the end of this month as well as the Stamp Duty holiday in early 2021. The recent spike in coronavirus cases across the UK will also likely have an adverse impact on the market’s dynamics. So, while PM Johnson this week pledged to promote the reintroduction of 95% mortgages, with a new mortgage guarantee scheme to help first-time buyers under consideration, risks to the outlook over the coming year still look skewed to the downside.

Kiwi business confidence improves further in October, inflation expectations still soft
With New Zealand having seemingly eliminated the community spread of coronavirus for a second time this year, predictably today’s preliminary results of the ANZ Business Outlook Survey pointed to a further lift in business sentiment in October. The headline general confidence index increased 14pts to -14.5, marking the best reading since December last year and the second best reading since the General Election delivered a left-of-centre Government in October 2017. More importantly, the own activity index – which has a much stronger correlation with the economy’s performance – improved 9pts to an 8-month high of 3.6. This is still miles below the long-term average, but not dissimilar to the average level over the past 3 years. And the employment index rose 8.6pts to -3.2, thus also reaching an 8-month high. However, the news regarding inflation expectations was less positive for the RBNZ, with the year-ahead expectation edging down to 1.33% – well below the midpoint of the Bank’s 1-3% inflation target.

US jobless claims figures due today
A relatively quiet day for US economic releases will bring just the usual weekly jobless claims figures, which are expected to see initial claims at a similar level to the 837k reported in the previous week, to leave continuing claims maintaining a steady downwards trend, albeit at a still extremely high level.

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