German consumers inevitably more downbeat

Chris Scicluna
Emily Nicol

Equities weaker on reports of Russia/Iran interference in US elections
Following a rollercoaster session, the S&P500 eventually closed down 0.2% on Wednesday. Headlines continued to be dominated by news of progress – or sometimes lack thereof – in finding a fiscal stimulus package that might satisfy Democrats, the Administration and Senate Republicans. According to House Speaker Pelosi’s office, talks on Wednesday had brought Democrats and the Administration closer together, with further talks scheduled for today. White House Chief of Staff Meadows reiterated that President Trump is prepared to ‘lean’ on Senate Republicans if a deal is agreed in the next 48 hours. But even if a deal is done, any vote in the Senate seems unlikely to occur before the election.

More importantly, an eventual bill – that will still cost US$1.9trn even if the Administration’s latest offer is accepted – may yet be rejected by Republican Senators. And since Wall Street closed market attention has turned to another US story, this time concerning the US elections. At an evening press conference, John Ratcliffe, Director of National Intelligence, told reporters that he had learned that both Iran and Russia had accessed some publicly available voter registration data, with Iran said to have already used this data to convey threats to potential Democrat voters. This news – which might just further encourage President Trump to dispute the eventual outcome of the election – has seen US equity futures drop by about 0.7%. US Treasury yields have nudged lower – the 10Y declining 2bps from yesterday’s high to close to 0.81% – while the US dollar has moved off yesterday’s lows.

As a result, in a day again largely devoid of local macro news, most benchmark equity indices declined across the Asia-Pacific region, with Japan’s Topix among the worse performers, closing down 1.1%. In Australia there was no monetary policy content in a speech delivered by RBA Deputy Governor Debelle. However, it is worth noting that former RBA Board member John Edwards yesterday added his voice to the call for the RBA to buy bonds further out along the yield curve, primarily as a means of leaning against the appreciation of the Aussie dollar.

Finally, with some more downbeat sentiment surveys published in Germany and France this morning as the pandemic continues to worsen across the continent, the weaker tone has carried through to Europe, where most major bourses are down roughly 1% or more although euro area govvies are only slightly firmer. Yesterday evening’s confirmation of the resumption of EU-UK negotiations later today, however, has seen Gilts weaken a little further, although sterling is broadly stable after yesterday’s gains.

BoJ Financial System Review says financial system remains stable and supportive
A short time ago the BoJ released its semi-annual Financial System Report, which detailed the Bank’s assessment of how the financial system is coping with the pandemic. Back in April, the BoJ’s previous report had concluded that the financial system was broadly stable and continuing to play its necessary role in supporting the economy. So, with financial conditions less stressed today, thanks in large part to concerted fiscal and monetary policy intervention across the globe, today’s report also concluded that Japan's financial system “has been maintaining stability on the whole”, while “the smooth functioning of financial intermediation has been maintained”.

Looking ahead, the BoJ judges that the financial system is likely to remain “highly robust” in an environment of moderate recovery. However, under a severe stress scenario – one characterized by a persistently stagnated pace of economic recovery and significant adjustments in financial markets (e.g. a more-than-halving of the Topix) – the Bank warns that a deterioration in financial institutions' soundness and the resultant impairment of financial intermediation could pose a risk of further downward pressure on the real economy. In this regard, the Bank highlighted three risks that warrant particular attention.

First, the Bank warns that credit costs could rise if an extended period of economic weakness exhausts firms’ capital and cash reserves. As a result, the BoJ suggests that close attention should be paid to the impact on lending to areas where vulnerabilities had already accumulated prior to the pandemic, such as lending to middle-risk firms with lower returns, the real estate industry, and high-leverage projects related to large-scale M&A deals.

The second risk highlighted is that associated with possible future moves in financial asset prices. The Bank notes that local financial institutions have been actively taking on market risk to search for yield. As financial markets have started to regain stability, the losses on financial institutions' securities investments have been limited so far. However, the Bank warns of cases where unrealized losses on particular products have increased.

The third risk concerns the destabilization of foreign currency funding due to the tightening of foreign currency funding markets, mainly for the U.S. dollar. As foreign currency funding markets are still vulnerable to shocks, the BoJ advises that Japanese banks need to make continuous efforts to strengthen their foreign currency funding bases and liquidity management.

BoJ survey suggests that households remain pessimistic in Q3
Earlier in the day, the BoJ also released the results of its quarterly survey of household opinion. A net 76% of the just over 2,200 respondents reported that they perceived economic conditions to be weaker than a year earlier, up from 71% in the prior survey. And a net 27% of respondents said that they expected conditions to weaken further over the coming year, little changed from the previous survey. Surprisingly, given actual developments in inflation, a net 62% of respondents reported a rise in prices over the past year, up from 60% previously. And a net 57% expect prices to rise over the coming year. But sadly for the BoJ, 43% of respondents said that they had still never heard that the BoJ was targeting 2% inflation, with a further 37% of respondents indicating that they knew little about the Bank’s goals. Perhaps less surprisingly, 51% of respondents had no knowledge at all of the nature of the Bank’s easing measures. Given those responses, it is also unsurprising that across recent surveys close to half of respondents have not felt able to say whether they had confidence in the BoJ!

Japanese department store sales remain very weak in September
In other news, Japan’s Department Store Association reported that nationwide sales declined 33.6%Y/Y in September, even worse than the 22.0%Y/Y decline reported in August. The decline this month is especially exaggerated due to the boom in purchases made in September last year ahead of the consumption tax hike on 1 October. However, the underlying trend remains very weak, with spending down about 30% relative to the average level of spending during 2019. This reflects very sharp declines in spending on clothing, accessories and cosmetics – all of which have suffered from the new ‘stay at home’ economy and continued absence of tourists.

German consumers inevitably more concerned about Covid-19
While the second pandemic wave seen across Europe had been relatively well contained in Germany over the past month, the number of new daily coronavirus cases surged yesterday to a record high above 12k. Of course, this figure won’t have been reflected in the latest consumer confidence survey. But in any case October’s survey suggested that rising concerns were already taking their toll on sentiment, with the GfK suggesting that around three-quarters of consumers feel that Covid-19 poses a ‘major or very major threat’, with roughly half ‘concerned or very concerned’ about their personal future outlook. Indeed, GfK today suggested that these weekly readings have never been more negative since they began in April.

Within the detail of the monthly report, there was a notable decline in households’ economic expectations (the relevant index fell 17pts to 7.1) as income expectations also fell back to a four-month low and thus remained well below the level seen a year ago. But, for now at least, there were only mild losses in consumers’ willingness to buy goods, with the survey component still well above levels seen earlier in the year. This notwithstanding, the overall headline confidence index was forecast to decline 1.4pts in November to -3.1, although this might well be revised lower should the rise in infections steepen and containment measures tighten over coming weeks.

Given that the number of Covid cases has been significantly higher in other major member states (e.g. in France daily cases have averaged a whopping 25k over the past seven days to surpass 1mn cases since the start of the pandemic along with Spain, while new cases in Italy tripled to above 15k yesterday) and tougher restrictions have been in place for several weeks in France and Spain, the Commission’s flash consumer confidence survey (due this afternoon) seems likely to report a more severe deterioration in sentiment than that reported in Germany.

INSEE flags new hit to French services from the pandemic
Certainly, today’s INSEE business confidence survey flagged the increasingly darkening cloud over business prospects in France over the past month, with a particularly marked (but nevertheless predictable) decline in services sentiment as the hospitality sector was further hit by tighter containment measures, including night-time curfews in Paris and several other large cities. Indeed, the survey’s measure of the business climate in services declined a hefty 5pts to just 89 (well below the long-run average of 100) with significant drops in services firms’ expectations for activity and demand over the coming three months, for which the indices fell to their weakest since May. And while overall confidence among retailers reportedly moved broadly sideways, the survey detail flagged concerns about expectations for future sales. As such, the survey indicated that the employment climate had deteriorated, particularly in the tertiary sectors. The recent improvement in the business climate also reportedly stalled in the manufacturing sector at the start of Q4 (the respective index dropped 1pt to 93), with firms seemingly much more downbeat about their production expectations – the relevant index fell 9pts to -12 the lowest since June – and weakening order books. Overall, the INSEE business climate index dropped 2pts to 90.

Brexit negotiations resume after bout of political theatrics
After a few days of passive aggression, the EU and UK yesterday evening agreed to start a new phase of formal negotiations from today on a post-transition FTA. The plan, based on ten new ‘organising principles’, is that the talks will now take place on a daily basis, including weekends, focusing for the first time on proposed legal texts. A small joint secretariat will be established that might, if things proceed constructively, eventually facilitate the iteration of the new Treaty. And, importantly, there is recognition that the most difficult political issues, including the Level Playing Field (including state aid rules), governance, fisheries, energy, and goods and services provisions, will all now need to be considered. So, to some extent, the plan re-opens the door to finding a compromise.

If it is to be agreed, however, the final Treaty will in due course also require far more intensive engagement at the highest level, i.e. the European Council of EU leaders and Boris Johnson, to commit to the extremely political compromises required. So, while yesterday’s developments tallied with our expectation that a deal will eventually be reached, and the firming of sterling and Gilt sell-off was thus arguably merited, there will still likely be significant political noise and theatrics – most likely in early November – to endure before we know one way or the other whether an FTA can actually be agreed.

On the domestic UK policy agenda, Chancellor Sunak is set later today to announce more fiscal support for workers affected by the tightening of restrictions to counter the second pandemic wave. Data-wise, later this morning will bring the UK’s CBI industrial trends survey for October, which will provide an update on manufacturing conditions at the start of Q3. This survey will be accompanied by its more detailed quarterly indicators, including for business optimism about the year ahead, employment and investment intentions. Given persistent uncertainty related to the negotiations with the EU and the pandemic, we expect manufacturers to remain downbeat about the near-term outlook. Finally, BoE Governor Bailey and Chief Economist Haldane are due to speak at online events.

US data focus on jobless claims and home sales
Today will bring several US economic releases, including the latest weekly jobless claims figures – which last week surprised on the downside to flag the risk of a drop in payrolls in October – existing home sales data and the Conference Board’s leading index for September.

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