Asian markets mixed following yesterday’s widespread risk-off mood
After yesterday’s risk-off mood in the wake of tighter restrictions on activity in Europe, continued stimulus stalemate in the US, and a surge in US initial jobless claims to the highest since August, markets in the Asia-Pacific were mixed as investors struggled for direction on a quiet end to the week for news from the region. Many of Asia’s main bourses followed the decline in the US, e.g. Japan’s Topix dropped for a third day, closing down 0.8% to be 1.8% lower over the week as the yen reversed yesterday’s weakening. But while shares were also down in Korea and Taiwan, China’s CSI300 was down just 0.15% and the Hang Seng is currently up around 1%. And US futures have turned for the better with European markets largely opening higher too. Nevertheless, while the dollar has been largely stable overall, USTs and euro area govvies have made further modest gains. But JGBs remained relatively immune to yesterday’s rally in other major government bonds.
Johnson’s response to EU awaited; any pause in talks unlikely to be terminal
Having depreciated yesterday, sterling has so far been stable today as investors wait to see how UK PM Boris Johnson will respond to yesterday’s statement by EU leaders about progress (or lack thereof) in the negotiations on the post-transition Brexit arrangements. Indeed, the EU expressed concern about that lack of progress, but also stated that they are willing to continue negotiations, with chief negotiator Barnier talking of his readiness to resume ‘intensive’ talks in London in next week. The EU leaders also called for the UK to make the next move to make an agreement possible, and reiterated that the UK government will need to amend its controversial Internal Market Bill to be consistent with the Brexit Withdrawal Agreement before any FTA can be agreed. Finally, they also committed to increase their own preparations for no deal, calling on the European Commission to make concrete proposals for contingency measures.
The initial response of UK chief negotiator to the statement was, unsurprisingly, not favourable. And given his capricious nature, and clear preference for presentation over substance, it is certainly not clear how Johnson will respond today. With this week having represented his own self-declared deadline to reach an agreement on a new free trade agreement (FTA), Johnson could simply walk away and commit to no deal. But that would be reckless, certainly economically and possibly politically too, particularly at a time of national crisis due to the pandemic. Indeed, Johnson’s Covid response has never been under greater pressure, as Northern political leaders reject his push for selective local lockdowns with diminished fiscal support. And the fissures within the Union are deepening rapidly – with an unprecedented large majority of Scots now seemingly favouring independence from the UK – and could prove irreparable if Johnson was to move decisively to no deal.
So, we do not expect Johnson to walk away for good from the negotiations today. For presentational purposes at least, however, he might well want to give the impression that such an option remains a significant possibility. So, he could well choose to put the negotiations on ice for a period of reflection, before eventually restarting talks in due course. Alternatively, he could choose to be magnanimous and commit to continue negotiations next week in London, setting a new target for the end of the month for a deal. Such a constructive approach, of course, would not be in character and some degree of provocation – if only to play to his Brexity political base and attempt to shift his pandemic policy troubles off the newspaper front pages – is well within the bounds of possibility.
Euro area car registrations rise for the first time this year
Today will bring the publication of a handful of euro area data releases following this morning’s release of total September car registrations. These reported the first annual rise in car registrations in the EU (3.1%Y/Y) since December. Admittedly, the increase in the euro area was more modest (1.9%Y/Y) and both figures were flattered by soft readings last September due to the impact of new regulation regarding emissions testing. Indeed, in the first nine months of the year, car registrations were still down 29.4%YTD/Y at just over 6mn units, the lowest equivalent reading since the series began in 1989.
There were notable differences between performances of member states last month. Indeed, Germany and Italy appeared to be leading the race, with registrations rising 8.4%Y/Y and 9.5%Y/Y respectively, contrasting markedly with the losses recorded in France (-13.5%Y/Y) and Spain (-13.5%Y/Y) where the second wave of pandemic has been most severe. And so, with the number of new daily coronavirus cases having started to creep higher in Germany and Italy over recent days (albeit still remaining well below those seen in France and Spain), we might expect this improvement in demand for big ticket items to be short-lived.
Looking ahead, today will also bring the release of the Bank of France’s latest retail sales estimates for September, which are likely to report weakness last month. Meanwhile, the euro area’s final CPI reading for September is also due this morning. But this seems highly likely to align with the preliminary estimate showing that headline 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. Finally, euro area goods trade figures are expected to reflect improving demand at home and abroad in August.
US retail sales and IP data on the docket
It will be a busy end to the week for US economic releases, with September retail sales and IP reports set to provide further insight into the extent to which GDP has rebounded in Q3. We expect stronger auto spending to dominate a further modest rise in retail spending. But core spending seems set to have remained much more subdued, admittedly having rebounded pretty strongly over recent months, with sales in several key areas having already moved above pre-pandemic levels. Meanwhile, the jump in manufacturing payrolls last month bodes well for a further lift in factory output for the fifth consecutive month. In addition, the preliminary results of the University of Michigan’s consumer survey for October will also be worth watching.
Kiwi manufacturing activity picks up in September; attention turns to tomorrow’s NZ General Election which should affirm Ardern's eminence
On a quiet day for economic reports from the Asia-Pacific region, the latest Kiwi manufacturing PMI was consistent with the improving tone of other business indicators. In particular, the headline BNZ-Business NZ manufacturing PMI increased 3.0pts to 54.0 in September, doubtless boosted by the stepdown in pandemic alert levels during the month. The production index increased 4.9pts to a solid 56.5 and the new orders index increased 3.9pts to 58.1. And encouragingly, the employment index picked up 2.4pts to 51.6, marking the first reading above 50 since February.
Attention in the Antipodes now turns to tomorrow’s Kiwi General Election, with the final opinion polls strongly suggesting the left-of-centre Labour Party, led by Jacinda Ardern, will be returned to lead the next government. Indeed, given the sizeable gap in the polls, the only real interest is whether the Labour Party will be the first party in the MMP (Mixed Member Proportional) era to have the option of governing alone, or whether they will be forced to form a coalition with the socialist Green Party in order to command a parliamentary majority. The business sector might well prefer a right-of-centre government. But, a continued Labour-led administration, which has been far more competent in dealing with the pandemic than most other OECD governments, with no more than minor Green Party influence, is unlikely to illicit much reaction when markets re-open on Monday, being effectively priced in already.