German consumer confidence subdued; Australian retail sales decline sharply

Chris Scicluna
Emily Nicol

Asian markets mixed despite rebound on Wall Street
Wall Street broke a 4-day losing streak on Tuesday with the S&P500 gaining 1.1% and the Nasdaq rising 1.7%. Treasury yields remained fairly range-bound but, having overcome some technical resistance, the US dollar continued its recent mover higher. Against that background, markets in Asia were rather mixed today. While Japanese equities reopened from the two-day holiday in the red, a late recovery as US equity futures moved higher saw the TOPIX close only 0.1% lower, with a modest improvement in Japan’s flash PMIs for September perhaps providing some support (see below).

But there was unsurprisingly little market reaction to BoJ Governor Kuroda’s comments today reiterating that, after his first meeting with Suga as Prime Minister, the central bank will continue to conduct policy in line with the joint statement, issued with the government shortly after Abe’s re-election in 2013, which had first committed to strengthen policy coordination significantly. Indeed, there was also little new in Kuroda’s latest speech on economic developments and monetary policy, which was given to a meeting of business leaders in Osaka. So, we certainly continue to expect no material change to Japanese monetary policy in the aftermath of the succession from Abe to Suga.

At the other end of the spectrum in Asia-Pacific markets, Australia’s ASX200 rallied more than 2%, with industrials and consumer stocks in the vanguard. Stocks were helped by lower bond yields and a weaker Aussie dollar after one of the country’s more influential domestic banks forecast that the RBA would lower its cash rate and 3-year bond yield targets to 0.1% at next month’s meeting following yesterday’s speech by RBA Deputy Governor Debelle. In New Zealand bond yields also moved lower as the RBNZ retained its key policy settings, but again signalled a willingness to deploy additional easing measures if required (more on this below). Meanwhile, despite some typically hawkish noises from the ECB Executive Board member Mersch (who might be considered an outlier in Frankfurt), suggesting that the flexibility applied to the PEPP programme should not be extended to the regular Asset Purchase Programme facility, a rather subdued German consumer confidence survey has coincided with European govvies opening a touch firmer this morning.

Japan’s PMIs post only modest improvement in September
This week’s Japanese dataflow began today with the release of the flash PMI reports for September. Unfortunately, while firmer than last month, the PMIs continue to point to a relatively tepid recovery, especially in the services sector, with the major indices remaining below pre-pandemic levels. At the aggregate level, the composite PMI rose 0.3pt to 45.5 in September – a 7-month high but still more than 3pts below the average for this series. More positively, the more forward-looking composite new orders index increased 0.8pt to an 8-month high of 45.6 while the composite output prices index edged up 0.2pt to 48.8.

In the detail, the manufacturing PMI rose just 0.1pt to 47.3, albeit still the highest reading since February. But the output index actually fell a disappointing 0.6pt to 45.2. Some consolation was offered by a 1.3pts lift in the new orders index to 45.3 and a 0.7pt increase in the new export orders index to 48.0 – in both cases the best readings since January. However, these indices remain below their historic average levels by about 5pts and 2pts respectively. The employment index rose 0.7pt to a 4-month high of 49.1. The inflation news from the factory sector was unfavourable, with the input prices index falling 0.2pt to 51.1 and the output prices index falling 1.0pt to 48.7 – the latter a 3-month low.

Turning to the services sector, the headline business activity index increased 0.7pt to 45.6. While this amounted to a 7-month high, the index has in fact improved little since rebounding sharply to 45.0 in June. The new orders index also rose 0.6pt to 45.7, but this remains below the levels seen in June and July and more than 3pts below its historic average. Respondents seem to be hoping for better times ahead, however, with the business expectations index rising 2.1pts to an 8-month high of 51.8 and the employment index rising 0.3pt to a 3-month high of 49.2. The news on inflation was more favourable than in the factory sector, with the input prices index rising 0.4pt to 49.7 and the output prices index rising 0.7pt to 48.9.

Japan’s All Industry Activity Index rises in July, driven by the manufacturing sector
The other economic report released in Japan was METI’s All Industry Activity Index for July – a report that has been discontinued with today’s release. This pointed to a 1.3%M/M increase in overall economic activity – an outcome that was in line with market expectations – but still leaving the index down 10.6%Y/Y. As a result, activity in July stood just over 4% above the average level recorded during the prior three months – an outcome that confirms that during the current quarter Japan will likely reverse only about half of the record 7.9%Q/Q contraction experienced in Q2.

In the detail, the result was driven by the 8.8%M/M lift in manufacturing activity, which was more than sufficient to offset a 0.5%M/M decline in activity in the services sector (both figures published earlier this month). So as always the main news contained in today’s report concerned the performance of the construction sector. Overall construction activity rose 0.5%M/M in July, led by growth in public spending. Private construction activity fell 1.0%M/M, with a rebound in engineering activity more than offset by a reduction in both residential and commercial building activity. Despite the increase on the month, however, the total level of construction output in July was still more than 1.5% lower than the Q2 average.

German consumer confidence remains subdued
Despite the steady uptrend in new coronavirus cases in the region, yesterday’s Commission flash consumer confidence indicator reported a further improvement, albeit only modest, in household sentiment this month, to suggest that little more than half of the peak-to-trough lockdown deterioration in sentiment has been reversed. Meanwhile, this morning’s German GfK survey suggested that the consumer climate in the euro area’s largest member state was little changed this month. The headline survey index – presented as a forecast for October – rose just 0.1pt to -1.6, leaving it still some way down from August’s post-Covid high of -0.2, which itself was well down from the levels close to +10 at the start of the year. So, overall, this index would suggest that consumer sentiment in Germany is now levelling off after reversing a little less than two-thirds of the post-lockdown deterioration.

The GfK survey detail was rather mixed. Consumer income expectations improved in September as did broader expectations for the economic outlook, for which the respective indicator rose to a two-year high, supported by evidence of a gradually improving labour market and diminished short-time working. But while still favourable, willingness to buy fell back to a three-month low, suggesting a fading boost from the temporary VAT cut and perhaps wariness over the impact of the renewed rise in the number of coronavirus cases. And like elsewhere in Europe, today’s survey would point to a slowing in the pace of economic recovery in the fourth quarter, with the trajectory of the pandemic suggesting the risks are skewed to the downside.

European flash PMIs to be released shortly
We also start to see the release of the flash September PMIs from the euro area and two largest member states shortly. Having fallen back in August as concerns about a resurgence in coronavirus cases weighed on confidence, the headline euro area composite PMI is expected to have moved broadly sideways (from 51.9 in August) this month implying a moderation in the pace of recovery at the end of Q3.

In the UK, meanwhile, the flash PMIs are likely to have slipped back in September, not least as conditions in the services sector might have been impacted by the conclusion of the government’s “Eat out to help out” scheme at the end of August. This notwithstanding, the headline indices are expected to remain consistent with ongoing solid growth across the sectors at the end of Q3. But high-frequency data point to a loss of momentum, and – not least given the resurgence in the pandemic – we would expect to see a drop in the PMIs next month.

Australian composite PMI returns to expansionary territory in September
Today Australia also released its flash PMIs for September, with the news somewhat more encouraging than that seen in Japan. At the aggregate level the composite PMI output index rose 1.1pts to 50.5 – an expansionary reading that suggests that the economy is making forward progress despite the negative impact of the lockdown in the state of Victoria. The composite new orders index rose 3.0pts to 50.6 and the composite export orders index rose 6.2pts to 49.4. The brightening outlook was also reflected in a 4.5pt rise in the future output index to 79.2 – the best reading since August 2018. However, the news on inflation was much less encouraging, with the output prices index falling 1.0pts to a 4-month low of 49.4.

In the detail most of the improvement over the past month occurred in the factory sector, with the manufacturing PMI rising 1.9pts to 55.5 – the best reading since April 2018. Importantly, the new orders index rose 2.2pts to 54.0 and the new exports orders index rose 6.8pts to 51.6 – the best readings since February 2019 and January this year, respectively. By contrast the services PMI rose a relatively modest 1.0pts to an even 50.0. However, firms were more optimistic about the outlook, perhaps looking forward to an easing of lockdown restrictions in Victoria, with the future activity index rising 5.3pts to 79.5 – the best reading since April 2018.

Australian retail sales decline sharply in August as Victoria lockdown weighs
Today the ABS released its preliminary estimate of retail spending in August, based on data from businesses that account for around 80% of all retail trade. With the state of Victoria imposing new lockdown restrictions in late July, the ABS estimates that nationwide spending dropped 4.2%M/M, thus more than reversing the 3.2%M/M lift in spending recorded in July. Even so, spending in August rose an encouraging 6.9%Y/Y. In the detail the ABS noted that spending in Victoria had declined 12.6%M/M, whereas spending elsewhere in Australia fell a relative modest 1.5%M/M – the latter perhaps not too surprising given the catch-up in spending made by Australians in recent months following the nationwide lockdown in April. While there was a decline in spending on household goods in August, such spending was still up a whopping 20%Y/Y. A large fall in spending at cafes and restaurants was also noted by the ABS, with spending down not only in Victoria but also in neighbouring New South Wales.

RBNZ leaves policy settings unchanged; still readying further easing options if required
The RBNZ today announced that its Monetary Policy Committee (MPC) had decided to retain the Official Cash Rate at 0.25% – the level that it had been lowered to in March – and continue to implement its plan to purchase up to NZ$100bn of government securities. This outcome was widely anticipated by the market, with any decision on whether to pursue further easing more likely to be made at the next meeting on 11 November, when the Bank will also publish new projections (informed by, amongst other things, updated inflation and employment figures that are scheduled for release over the coming weeks).

In summarizing the economy the Bank noted that the level of economic activity in New Zealand and abroad remains significantly below that experienced prior to the pandemic. Moreover, any significant change in the outlook depends on the containment of the virus, which is highly uncertain. For now, the MPC views the balance of risks to the global economic outlook as biased to the downside. Domestically, at least some MPC members recognized the surprising strength in the housing market – historically well correlated with economic activity – but other members were sceptical that this would be sustained. So despite considerable fiscal support, the MPC continues to expect a rise in the unemployment rate and firm closures, with risks to domestic and inflation still viewed as lying to the downside. As a result, the Bank’s MPC believes that “…monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability”.

More interestingly, the MPC also agreed that they are prepared to provide additional stimulus, although at this stage further policy action is described simply as a “possible” need. And in this regard, the Bank said that it has made progress in its ability to deploy the additional policy options that it has signalled previously. Of particular note, the Bank stated that a Funding for Lending Programme (FLP) – providing cheap financing directly to banks, along the lines of that implemented in a number of other countries – would be ready for deployment before the end of this year. So if the MPC judges that further stimulus is warranted, as appears to be its leaning, in the first instance it seems most likely that this will take the form of an FLP. It is possible that this will be combined with a small drop in the OCR to a non-negative rate, especially if the RBA were to lower its cash rate target in the interim (not least due to the RBNZ’s obsession with the exchange rate). The options of a negative OCR and foreign asset purchases seem less likely to be implemented this year, although the MPC did note an expectation that the banking system will be operationally prepared for negative interest rates by year-end.

US PMIs in focus too
Today will also bring the flash PMIs from the US, which are expected to show that the headline manufacturing and services activity indices were little changed on the month and therefore implying ongoing recovery at the end of Q3. The FHFA house price index for July is also due for release. In terms of Fed speak, Chair Powell will appear before a House select committee to discuss the coronavirus crisis, while Evans, Rosengren, Kashkari and Quarles are due to speak on the US economy and/or monetary policy.

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