Japan and Australia see upward revisions to service sector PMIs

Chris Scicluna
Emily Nicol

Markets rebound in Asia as Trump’s health appears to improve
With investor sentiment having improved throughout the day on Friday, and US equity futures continuing to move around ½% higher on reports that President Trump may be discharged from hospital as soon as today (indeed, to some criticism from medical professionals, Trump saw fit to take a short ride in his motorcade on Sunday to wave at his assembled supporters), Asian markets have started the week on the front foot. In Japan, the Topix climbed 1.7%, with revisions to services PMI for September marginally supportive (see below). Hong Kong and South Korea returned from holiday breaks and posted gains of around 1½%, whilst Australia’s ASX200 rallied 2½% as the AFR seemingly confirmed wide-spread expectations that tomorrow’s expansionary Budget will include the bringing forward of previously-legislated tax cuts, with the first tranche to be backdated to 1 July. PM Morrison also confirmed that the Budget will see increased funding for ‘shovel-ready’ infrastructure projects. Given that activity on the fiscal front, however, the RBA’s monetary policy announcement tomorrow seems likely to be less eventful.

More generally, of course, attention this week is bound to remain focused on the health of the US President, as well as any progress towards an agreement on US fiscal stimulus. Speeches from Fed Chair Powell and NY Fed Chair Williams, as well as the latest FOMC minutes, might also be worth watching. In terms of economic data, euro area retail sales figures, as well as final services PMIs from Europe and the US and the services ISM survey come today. While the rest of the week will be relatively low-key for US data and China will be quiet given the national holidays, manufacturing sector data from euro area member states will be published over coming days along with several Japanese economic surveys. And Friday will bring the release of UK monthly GDP for August, where another month of substantive economic growth supported by fiscal incentives seems likely.

Japan’s services PMI revised higher
The only significant economic report in Japan today was the final services and composite PMI results for September. Encouragingly, the headline services index – which measures business activity – was revised up a solid 1.3pts to 46.9, bringing the gain for the month to 1.9pts and just pipping the February reading to mark the best outturn since January. And similar revisions were also seen across the other key components. For example, the new orders index was revised up 1.1pts to a 2-month high of 46.8 and the business expectations index was revised up 1.5pts to a 9-month high of 53.3 – the latter actually slightly above the long-run average. The news on inflation was more mixed, with the input prices index revised down 0.2pt to 49.5, whereas the output prices index was revised up 0.4pt to a 7-month high of 49.3. So, taken together with the improvement in last week’s manufacturing PMI, the composite PMI was revised up 1.1pts to a 7-month high of 46.6 – still a couple of points shy of its longer-term average but now more than 20pts above the April low-point. So while last quarter the economy appears to have only reversed about half of the 7.9%Q/Q slump that occurred in Q2, the economy seems well positioned to make further forward progress in the current quarter.

In other news, the BoJ reported that growth in banks’ outstanding lending to corporates – which had jumped sharply at the onset of the pandemic – slowed 0.2ppt to 8.5%Y/Y in August. Growth in lending to individuals, which has been much steadier, was unchanged at 2.0%Y/Y. And following on from the final release of the Q2 national accounts last month, the BoJ also released its latest estimates of the output gap and potential growth. Not surprisingly the BoJ’s calculation suggests that the output gap turned negative to the tune of 4.8% of GDP in Q2 – the first negative reading since Q316 and the largest in 11 years. And given the ongoing decline in average hours worked and slower growth in the capital stock, the Bank now estimates that Japan’s potential growth rate is a barely positive 0.1%Y/Y.

Looking at the week ahead, the next scheduled release is on Wednesday when the BoJ will publish its Consumption Activity Index for August, providing one of the more reliable indicators of developments in the national accounts measure of private consumption. In common with last week’s retail sales report, the BoJ’s index should point to a lift in spending during the month not least due to much more favourable weather. Also on Wednesday the Cabinet Office will release its preliminary business indices for September, with the leading index likely to continue its ascent from its May low-point. A day later the Cabinet Office will follow this up with the Economy Watchers Survey for September, providing further insight into how Japan’s economic recovery is progressing. Further clues might be provided by the BoJ’s quarterly Regional Economic Report, which will also be released on Thursday. On Friday a relatively quiet week for Japanese data will conclude with the MIC’s household spending and income survey for August and the preliminary MHLW Monthly Labour Survey for August. The labour cash earnings figures in the latter report are likely to remain depressed due in particular to the slump in overtime hours worked in the wake of the pandemic.

Euro area retail sales and services PMIs due today
Euro area retail sales data for August are due for release today, which will provide further insight into economic activity in Q3. We expect to see further growth in aggregate euro area spending, as indicated by the various national data. However, the resurgence in the pandemic in many member states, together with a deteriorating labour market, is likely to be reflected in the spending numbers in coming months. And consistent with such a weakening in momentum, the final euro area service sector PMIs (also due this morning) are expected to confirm that the headline euro area activity indicator fell almost 3pts in September to a four-month low of 47.6, suggesting that the sector went into reverse in September.

In contrast, however, manufacturing sector releases due this week will likely show continued recovery. German factory orders data, to be published tomorrow, will precede the release of German and Spanish IP data (Wednesday), with French, Italian and Dutch IP figures following on Friday. Manufacturing output is expected to have risen further in August across the member states, although survey data, including last week’s manufacturing PMIs, point to a growing divergence between countries, with German manufacturers in particular faring better than elsewhere. Meanwhile, French and German goods trade figures for September will be published on Wednesday. Other sentiment surveys due include the euro area Sentix indicator for October (today), the construction PMIs for September (tomorrow), and the Bank of France business sentiment survey (Thursday).

Separately, the ECB account from the 9-10 September Governing Council meeting will be published on Thursday. While this meeting has been followed by more recent comments from influential ECB policymakers – not least President Lagarde at the ECB watchers’ conference – suggesting more easing in on the cards, it will be interesting to see if there was any reference to potential future considerations and or preference on how policy might be eased further. Meanwhile, at today’s euro group meeting, finance ministers are likely to propose a replacement – a Dutch central banker Frank Elderson – for outgoing ECB Executive Board member Yves Mersch at the end of the year. Finally, ECB President Lagarde and Chief Economist Lane will speak publicly tomorrow.

UK – August GDP most noteworthy this week
After the weekend’s bilateral talks between European Commission President Ursula von der Leyen and UK Prime Minister Boris Johnson, where they agreed to move into a ‘new intensified’ phase of negotiations, the EU’s chief Brexit negotiator Michel Barnier is due to hold talks with various euro area ministers early this week before resuming discussions with UK officials to try to unlock differences in particular relating to fisheries – along with state aid rules seemingly the most significant remaining obstacle to a new Free Trade Agreement.

In terms of economic data, the UK highlight will come at the end of the week, with the monthly GDP release expected to report further substantive growth having risen 6.6%M/M in July. Growth is likely to be widespread across the sectors, with the services sector most notably supported by the Government’s “Eat out to help out” subsidy and hospitality VAT cut. However, GDP as a whole will likely remain more than 5% below the February level and the outlook for growth remains highly uncertain given the revival in the pandemic and – most importantly – the marked labour market shake-out now firmly underway.

Indeed, this morning’s release of the final services sector PMI for September is expected to confirm that the headline index fell 3.7pts to 55.1, a three-month low, as firms in transport services, international travel and hospitality continued to cite severely impacted operating conditions. This morning will also bring the latest new car registration figures for September. Meanwhile, tomorrow will see the release of the construction PMI, followed on Thursday by the RICS housing market survey and on Friday by the REC Report on Jobs, all for September. In other news, BoE Governor Bailey will participate in a panel discussion on Thursday, while Chief Economist Haldane will be in action today and Friday.

Australian business sentiment improves ahead of RBA meeting/Budget
With tomorrow’s RBA Board meeting coming into view, the main focus in Australia today was on the results of the NAB Business Survey for September. With the coronavirus outbreak in Melbourne now seemingly under control – there were just 12 new cases announced on Sunday – the headline business confidence index rose 4pts to -4 and the closely-followed business conditions index rose 6pts to 0, thus reversing the deterioration recorded in August. Encouragingly, the trading index rose 8pts to an 11-month high of 6 and the employment index rose 8pts to -6. However, all of the aforementioned indices remain below historic average levels, so the RBA will be hoping to see further improvement over coming months. The news regarding inflation remained discouraging, with both labour costs and output prices reported to have declined 0.2%Q/Q.

Today also saw the release of the final CBA services PMI results for September. The good news is that the headline business activity index was revised up 0.8pt to 50.8, while the new orders index revised up 0.7pt to 50.7. Less positively, the employment index was revised down 0.3pt to a 4-month low of 45.9. Combining these results with those from the manufacturing sector, the headline composite PMI index was revised up 0.6pt to 51.1 – still 2pts below the pre-pandemic average.

In other news, the Melbourne Institute’s monthly Inflation Gauge rose 0.1%M/M in September, leaving annual inflation steady at 1.3%Y/Y for a third straight month. The trimmed mean also increased 0.1%M/M but annual inflation on this basis edged down to a record low of just 0.1%Y/Y – consistent with the weak NAB pricing indicators noted above.

Looking at the week ahead, most of the interest this week will centre on tomorrow’s RBA Board meeting, followed later in the day by the Federal Government’s presentation of its Budget – delayed from May due to the pandemic. As far as the former is concerned, with the Australian economy seemingly performing better than the RBA had expected, the most likely outcome is that the Board will simply restate its existing 0.25% target for both the cash rate and 3-year bond yield, together with its existing measures to support bank lending (the latter having been extended at the September meeting). The commentary is likely to remain relatively dovish, however, so as not to close off the possibility of the Bank easing policy further at the next meeting in November, which will also be accompanied with updated economic forecasts in the Statement on Monetary Policy released three days after the meeting.

As far as the Budget is concerned, given the slump in the economy in the immediate aftermath of the pandemic, and with the Government having already announced support measures amounting to over 13% of GDP, the Budget will clearly show a sharp deterioration in the fiscal outlook compared with a year earlier. And while the economic outlook has likely improved somewhat since the Government gave an earlier assessment of the impact of the pandemic in its June Economic and Fiscal Update (JEFU), it is widely expected that the Government will use the Budget to announce a range of additional fiscal measures to boost the economy. These measures – which likely include the bringing forward of previously-legislated personal tax cuts, extensions to current wage subsidy programmes and measures to boost both private and public capex – mean that the fiscal deficit for FY20-21 is likely to be somewhat greater than the 9.7% of GDP shortfall that was projected in the JEFU, and perhaps over 12% of GDP. And with substantial, albeit smaller, deficits expected to continue beyond FY20-21, this will likely see Australia’s net debt rise from around 25% of GDP at present to a peak approaching 45% of GDP. Of course, this is still very manageable, especially considering the current historically low level of interest rates, and compares very favourably with the outlook facing many other governments around the globe.

On the data front, the full trade release for August is also due tomorrow, adding information from the services sector to the preliminary merchandise trade figures that have already been released. The ABS will publish its weekly tracker of jobs and wages on Wednesday and housing finance data for August on Friday. At the end of the week the RBA will release its six-monthly Financial Stability Review, which will provide an assessment of how the financial system is coping with the strains caused by the pandemic. The better-than-expected performance of the labour market should have moderated some of the RBA’s concerns about vulnerabilities stemming from high levels of household debt.

A quiet week ahead in the United States
This week’s US economic diary is sparsely populated. The key report today is the ISM services index for September, which is expected to remain close to the robust 56.9 reading seen in August. Tomorrow, we will receive the trade balance and JOLTS reports for August, while the release of the minutes from last month’s FOMC meeting will take centre stage on Wednesday. On Thursday we will receive the weekly jobless claims report while information on wholesale trade during August will be released on Friday.

Given the data vacuum, markets will likely remain focused on US politics, including following the health of President Trump as well as the progress of negotiations to deliver further fiscal stimulus. As far as Fedspeak is concerned, the highlight is likely to be Chair Powell’s address on the economic outlook to the NABE conference in Chicago, although we imagine Powell’s comment won’t depart from his recent script. Amongst the other speeches scheduled, Wednesday’s address by the NY Fed’s Williams on “Average Flexible Inflation Targeting” is also worth noting.

Kiwi business confidence should rise as pandemic restrictions end
There were no major economic reports released in New Zealand today. Indeed, the only report of any note over the coming week will be Thursday’s preliminary results of the ANZ Business Outlook Survey. This seems likely to point to a further improvement in business sentiment reflecting the removal of lockdown restrictions in most of the country. And once later responses are collected, the final results of the survey will likely improve further with PM Ardern today confirming that Auckland will also return to alert level 1 – the lowest level – from just before midnight on Wednesday.

Quiet week ahead in China due to Golden Week holiday
Markets remained closed in China today as the Golden Week holiday continued. When markets re-open on Friday the only economic reports scheduled are the Caixin services and composite PMIs for September, which should be consistent with the upbeat picture presented by the official PMI surveys released last week.

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