Dovish ECB-speak continues

Chris Scicluna

Chinese equities lead Asian markets higher
Wall Street advanced further on Friday, with the S&P500 gaining 0.9% to close the week up a very strong 3.8%. And the Nasdaq rose an even larger 1.4%, taking its weekly gain to 4.6%. By contrast, the Treasury market remained broadly steady. However, the US dollar continued its renewed weakening trend, with DXY breaking back down through its 50-day moving average to close at its lowest level since 21 September. Of course, most of the focus remained on the prospects for further US fiscal stimulus, with newswires reporting that the President was prepared to approve an expanded package of US$1.8trn – albeit still short of the US$2.2trn package already passed by House Democrats. And with Senate Majority Leader McConnell describing the differences of opinion between the two parties as ‘vast’, it remains far from clear that a deal will be done this side of the election.

Turning to Asia, a key focus on the open today was a weekend move by the PBoC to remove a rule that had required banks to hold reserves against customers’ FX forwards – a rule that had previously been imposed to discourage speculation again the yuan. This suggests that Chinese policymakers were becoming a little uncomfortable with the yuan’s recent strength, notwithstanding the fact that it reflects the relatively strong recovery in China’s economy compared to those seen elsewhere. Even with this move, and a lower-than-expected fix, the yuan has declined only modestly from Friday’s close and is still more than 1% firmer than where it had traded ahead of China’s Golden Week holiday. Still, the move was welcomed by Chinese equity markets, with the CSI300 following up Friday’s 2% advance with another 2½% gain, while shares in Hong Kong also rose 2%. Elsewhere in Asia the gains have been somewhat smaller, while Japanese equities have bucked the trend and moved slightly lower as the latest machine orders data pointed to subdued capex in the domestic private sector (see below). The Treasury market is closed for the Columbus Day holiday, but the exchanges will open as normal.

Japanese core machine orders steady in August 
With business capex having trended downward since last year’s consumption tax hike – a trend exacerbated by the pandemic – a key focus today was the Cabinet Office’s survey of firms’ machinery orders for August. The survey indicated that total machinery orders rose a very strong 19.8%M/M, but even so remained down 16.5%Y/Y. Unfortunately, all of the increase could be accounted for by a rebound in government and foreign orders. Government orders, which are especially volatile, rebounded over 28%M/M in August but were still down over 19%Y/Y. Meanwhile, foreign orders increased by almost 50%M/M – likely reflecting the recovery taking place in the Chinese and US economies – reducing the annual decline to 7.4%Y/Y.

More importantly, the closely-followed measure of core private domestic orders – which excludes volatile items such as ships and capex by electricity companies – was essentially little changed, recording a negligible increase of just 0.2%M/M. This outcome, which was broadly in line with expectations, left orders down 15.2%Y/Y – only a modest improvement on the 16.2%Y/Y decline reported in July. In the detail, manufacturing orders edged down 0.6%M/M in August, with a more than 20%M/M rebound in orders in the general machinery and ICT sectors offset by a weak outcome in the iron and steel sector and an especially large decline in the chemical. As a result, manufacturing orders were still down 13.2%Y/Y, although this did represent an improvement on the 19.0%Y/Y decline reported in July. Unfortunately, core orders in the non-manufacturing sector declined 6.9%M/M in August, not least due to a 38%M/M decline in the finance and insurance sector, and so were still down 16.6%Y/Y.

With the more-or-less steady reading in August, the level of core machinery orders during the current quarter is now tracking 1.3% above the average recorded during Q2. This compares favourably with the 1.9%Q/Q decline that firms had forecast at the beginning of the quarter, but still represents a poor return considering the close to 13%Q/Q slump registered in Q2. So at this point, while the level of investment is showing signs of stabilizing, it remains on course for a large decline in the current fiscal year.

Japan’s bank lending slows; producer prices weaker than expected
In other news, the BoJ reported that total new bank lending declined 0.1%M/M in September, causing annual growth to slow to 6.4%Y/Y from 6.7%Y/Y in August. Lending by the major city banks – which had increased sharply at the onset of the pandemic, as firms sought to bolster liquidity – fell 0.4%M/M, causing annual growth to slow 0.7ppts to 7.3%Y/Y. By contrast, new lending by the regional banks rose 0.3%M/M, but growth still slowed fractionally to 5.3%Y/Y. On the other side of the ledger, growth in bank deposits increased to a new record high of 9.0%Y/Y, as precautionary behavior continued to cause many households to sit on their government stimulus payments.

Meanwhile, the BoJ also released the producer goods price indices for September which, unsurprisingly, continued to point to little underlying inflationary pressure. Indeed, the headline index posted an unexpected 0.2%M/M decline, weighed down by lower utilities prices but also a decline in prices for electronic components. As a result, the annual pace of deflation picked up 0.2ppts to 0.8%Y/Y, although that decline owes to a near 14%Y/Y slump in fuel prices and a 5.5%Y/Y decline in chemical prices. Final good prices declined 1.7%Y/Y while consumer goods prices were down 2.2%Y/Y. Measured in yen, import prices rose 0.2%M/M but were still down 10.1%Y/Y, again led by weakness in fuel and chemicals prices.

A relatively quiet week ahead in Japan
Looking ahead to the remainder of the week, the main focus tomorrow will be the Reuters Tankan survey for October. Considering last week’s notable improvement in the Economy Watchers Survey, anything less than a solid increase in the headline manufacturing and non-manufacturing indices would be disappointing. On Wednesday METI will release the final IP estimates for August, which should largely confirm last month’s preliminary estimate of a 1.7%M/M increase in output. On Thursday, METI will release the Tertiary Industry Index for August, which should point to a solid lift in service sector activity following a disappointing contraction in July. The Cabinet Office Synthetic Consumption Index for August – which has the closest correlation with the national accounts measure of consumer spending – may also make an appearance late in the week.

The steady flow of dovish ECB-speak continues
After last week’s account of the September Governing Council meeting maintained the dovish tone of commentary out of the ECB, the past weekend maintained the trend. Most notably, in an interview with the WSJ yesterday Chief Economist Phillip Lane flagged concerns about possible longer-lasting economic damage from the pandemic, and also highlighted the weak inflation outlook, suggesting that if it didn’t improve more stimulus would be required. Fellow Governing Council members Schnabel and Visco also highlighted the case for ongoing highly accommodative macro policy. And this week will bring plenty more ECB-speak, which could similarly seek to prepare the ground for more monetary action, with President Christine Lagarde set to speak publicly today, Wednesday and Thursday. ECB Vice President De Guindos and Executive Board members Panetta and Schnabel will also speak publicly today, with other Governing Council members, including Lane, in action as the week unfolds.

A mixed bag of data from the euro area this week
The coming week’s euro area economic data calendar, meanwhile, brings the release of the euro area industrial production figures for August on Wednesday, which we expect to show growth of about 1½%M/M in output, marking the third successive monthly slowdown. A surprisingly strong increase in Italian output (up more than 7%M/M to back above the pre-pandemic level) and a further advance in France (1.3%M/M) more than offset an unexpected but modest fall in German IP, but several other member states also weighed. Meanwhile, euro area goods trade figures (due Friday) are also expected to reflect improving demand at home and abroad in August, but leave volumes still a long way down from the pre-pandemic level.

Of course, momentum in spending in the region has more recently slowed in the face of the renewed pandemic. So, tomorrow’s German ZEW investor confidence survey for October might suggest little further improvement in investor optimism about either current and future economic conditions. Thursday’s French retail sales estimate for September from the Bank of France might also be expected to point to a levelling off in spending. And euro area new car registrations numbers (also due Friday) will confirm that auto sales remained extremely subdued last month. Among other data from the region due, final inflation figures for September are also out throughout the week with the euro area numbers out on Friday. According to the preliminary estimate, euro area inflation fell 0.1ppt to -0.3%Y/Y, the weakest reading since early 2015. While that in part reflect a steeper pace of decline in energy inflation, core inflation fell 0.2ppt to a series low of 0.2%Y/Y underscoring the ECB’s challenge.

More BoE-speak due, as EU-UK negotiations continue
Like the ECB, there’s plenty of BoE-speak due this week, with Governor Andrew Bailey and external MPC member in action today and Chief Economist Haldane (Wednesday) and Cunliffe (Thursday) also scheduled to make speeches. Following Friday’s significant downside surprise to the UK’s August GDP data – which suggested that the BoE’s latest growth forecast was overoptimistic – the comments will be watched for further hints at the likelihood of a further loosening of monetary policy, presumably via extra QE, next month. Also on the policy front, the EU-UK negotiations on the post-transition arrangements will continue this week ahead of the European Council meeting on Thursday and Friday. With little evidence of an imminent breakthrough on the key outstanding issues of the level playing-field (i.e. state aid), fisheries and governance, we still expect no deal to be reached before next month.

Labour market the UK data focus this week
The coming week’s UK economic data calendar is relatively thin on the ground. But tomorrow’s labour market data will be watched. With the transformation of the Government’s Jobs Retention Scheme into a less generous support programme fast approaching, these seem bound to show a worsening of conditions in the jobs market. The ILO unemployment rate is expected to jump in August by 0.2ppt to 4.3%, which would be the highest rate since January 2018. But, being a three-month average as well as a lagging indicator, that will still not provide an adequate reflection of current conditions. Indeed, the single-month rate is expected to rise 0.3ppt to 4.7% in August. And the timely payroll data – which showed a drop of more than 700k from the pre-pandemic peak in August – are likely to show a renewed acceleration in job cuts last month, albeit with still almost 10% of workers still furloughed. Meanwhile, wage growth is likely to remain extremely weak. Separately, tomorrow will also bring the BRC’s retail sales monitor for September, while the BoE’s credit conditions survey for Q3 will be published on Thursday.

China’s trade report a key focus for investors this week
There were no major economic reports in China today. However, tomorrow will see China release its closely-watched merchandise trade report for September – important both for economic and political reasons. Surveys suggest that analysts expect China’s trade balance to be close to the US$59bn surplus recorded in August – an outcome that will doubtless attract negative comment from President Trump. Reflecting weak fuel prices and ongoing weakness in the domestic economy, imports are expected to again be little changed from a year earlier. By contrast, growth in exports is expected to have remained steady at around 10%Y/Y. On Thursday attention will turn to inflation, with the release of the CPI and PPI reports for September. A further decline in food price inflation will likely see headline CPI inflation fall below 2%Y/Y, while analysts expect the PPI to have continued to deflate at around a 2%Y/Y pace. The money and credit aggregates for September are likely to be released at some point later in the week. Finally, ahead of the CPC’s plenary session in Beijing at the end of this month, there will be some interest in a speech that President Xi is expected to deliver in Shenzhen on Wednesday.

Labour market data to be the focus in Australia this week 
It was a quiet start to the week in Australia with no major economic reports released today. Looking ahead, the key day this week is Thursday, when RBA Governor will give an online speech to an investor group, followed a couple of hours later by the release of the Labour Force report for September. As far as the latter is concerned, Bloomberg’s poll indicates that analysts expect a 35k decline in employment, following three months of surprising triple digit increases. As a result, the unemployment rate is expected to rise 0.3ppt to 7.1%, thus reversing some of last month’s very surprising decline. A further unexpected decline in unemployment may cause the market to re-evaluate the probability of the RBA delivering additional policy stimulus next month. The only significant data this week concerns consumer sentiment, with the ANZ-Roy Morgan weekly index released tomorrow and the Westpac monthly index released on Wednesday. It is worth noting that Westpac’s index rose strongly to a 7-month high last month. Should the index move higher again, this could foreshadow another upside surprise in the following day’s labour market report.

A quiet week ahead in New Zealand as General Election looms
The only economic report released in New Zealand today concerned international travel and migration. Of course, with the border closed to foreigners, it was not surprising to see that foreign visitor arrivals remained down 97%Y/Y in August, while a continued inflow of returning Kiwis lifted the net migrant intake to just over 1,100 people – about a quarter of the pre-pandemic trend.

The diary over the remainder of the week is sparsely populated. Most interest will centre on tomorrow’s consumer spending and housing market reports for September, while the manufacturing PMI for September will follow on Friday. And then on Saturday, New Zealand will hold a General Election. Opinion polls strongly suggest that the left-of-centre Labour Party – which leads the current 3-party coalition government – and its Prime Minister Jacinda Ardern will be returned to power with a considerable pick-up in representation. Indeed, there is some possibility that the Labour Party will be in a position to govern alone if it chooses, which no party has been able to do since the MMP electoral system was introduced in 1994. But even if this becomes technically possible, with a mind to longer-term relations, we expect the Labour Party will continue to find a role for the Green Party in the government (polls suggest the third member of the current coalition is unlikely to gain either an electorate seat or the 5% share of the party vote, and therefore will not gain representation in the next parliament).

US retail sales and IP reports ahead; CPI and fiscal news also in focus
While last week was dominated by political news, especially regarding the prospects for fiscal stimulus, the coming week sees the resumption of important economic data. Following today’s Columbus Day holiday – exchanges remain open – the initial focus will be on tomorrow’s CPI report for September. Over the past couple of months prices have rebounded somewhat as pandemic-induced discounting has faded. But even given a further 0.2%M/M increase in September, core inflation will remain close to the 1.7%Y/Y pace see in August – much too low for the Fed’s liking, especially considering the elevated unemployment rate. The NFIB small business survey will also be released tomorrow, while the September PPI report will follow on Wednesday. On Thursday both the New York and Philadelphia Fed will release their respective manufacturing surveys for October, while the weekly jobless claims report will attract attention too.

But possibly this week’s most important releases are the September retail sales and IP reports, both due on Friday, which will go some way to helping analysts to estimate the extent to which GDP has rebounded in Q3. We expect stronger auto spending to dominate a further modest rise in retail spending, while the jump in manufacturing payrolls during the month bodes well for a further lift in factory output. The preliminary results of the University of Michigan’s consumer survey for October are also released on Friday, together with business inventory data for August. Aside from data, investors will also have a number of Fed speeches to digest, include one on the economic outlook by Governor Clarida on Wednesday. With the election fast approaching, political headlines will clearly continue to be a strong driver of markets too.

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