Asian & European markets weaker as fiscal stalemate drive Wall Street lower
After a day’s respite, considerable nervousness returned to Wall Street yesterday as investors again questioned whether a post-pandemic recovery was already more than fully priced. This is so especially given the past week’s uptick in new US cases of Covid-19 and ongoing doubts about the prospect of Congress passing a further timely fiscal stimulus – the case for which was again articulated by Fed Chair Powell during his congressional testimony. The S&P500 closed down 2.3%, on its session low, which left the index at its lowest level in almost two months and almost 10% below the peak reached earlier this month. While the losses were broad-based, technology stocks were again at the forefront of the declines. As a result, the Nasdaq fell an even larger 3%, extending its own correction lower to almost 12%. Treasury yields were steady despite the losses in the equity market. Meanwhile, the return of risk off sentiment did nothing to deter demand for the US dollar, which continues to plough higher after breaking technical resistance earlier this week.
Against that background, with US equity futures moving lower after the close and with virtually no local data to provide a distraction, it should be no surprise that equity markets also moved sharply lower across almost all of Asia today. The largest declines have come in China, Hong Kong, Taiwan and South Korea (where escalating tensions with North Korea haven’t helped), with losses spanning 1½-2½ %. Markets fell closer to 1% in Japan and Australia with both markets seemingly benefitting from local currency weakness against the US dollar. Amid the risk-off mood, the Kiwi dollar also fell to its weakest level since late August despite New Zealand reporting the largest annual merchandise trade surplus in 6 years. And major European stock indices have largely opened around 1% lower, with euro area govvies (this time with the exception of BTPs) largely a touch firmer too.
No surprises in the BoJ minutes; department store sales weak; underlying inflation steady
Today’s release of the minutes from the BoJ’s July Board meeting contained little of note for investors. The minutes did, however, indicate ongoing contentment by most members with the economic and financial impacts of the policy measures that the Bank had taken in March in response to the pandemic (a degree of satisfaction that appeared to have been retained at this month’s meeting).
Meanwhile, Japanese nationwide department store sales fell 22.0%Y/Y in August – even worse than the 20.3%Y/Y slump that had been reported in July. Department stores continue to suffer from the absence of foreign visitors (indeed Tokyo department store sales were down a steeper 29.1%Y/Y) and the reluctance to shop of those groups of people most vulnerable to the pandemic. And the year-on-year sales comparison looks all the more unfavourable given growth this time last year ahead of the consumption tax hike. Indeed, for that reason, September’s numbers will look very weak, sales having leapt 23.1%Y/Y that month in 2019.
Separately, following on from last week’s national CPI report, today the BoJ also released its statistical measures of “underlying inflation” for August, which are calculated so as to remove the effects of changes in the consumption tax rate and this year’s introduction of free higher education. Its gauge of the trimmed mean CPI – which the Bank’s research suggests is correlated with the output gap – recorded no change in prices over the past 12 months. This result was unchanged from that reported in July, which further demonstrates that the sharp decline in the BoJ’s forecast measure of core inflation during August was attributable to the reduction in hotel charges associated with the ‘Go to Travel’ campaign, rather than the result of a sudden onset of deflationary pressure. The weighted median CPI – which is less correlated with the business cycle – was similarly steady at 0.1%Y/Y. However, it is worth noting that only a net 10.1% of goods and services reported prices rises over the past 12 months – the smallest proportion since November 2013. And inflation pressures are unlikely to build in the near-term given the impact of the pandemic on the economy.
INSEE French business survey more upbeat than yesterday’s PMIs
Contrary to yesterday’s downbeat French flash PMIs, which suggested notable weakening in the services sector and saw the headline composite index fall to a four-month low consistent with renewed contraction, this morning’s French business survey from INSEE pointed to ongoing recovery in the current month. Perhaps inevitably, given both the vigour of the recent rebound as well as the renewed pandemic, today’s survey did suggest a slowing of growth. But it pointed to ongoing improvement in all main sectors nonetheless, with the headline business climate index rising 2pts to 92, and the equivalent indices for services and manufacturing up 2 and 3pts respectively to 95 and 96.
It’s worth emphasising, however, that the headline INSEE business climate index, and the main sectoral indices, remain well below their long-term averages (100) and thus also well below the rather elevated pre-lockdown levels (105 for the headline index). Similarly, the other main indicators report on partial progress in closing the gap from February across most subsectors too. And while the employment climate was judged to have improved, the positive news on jobs was not seen in every sector, e.g. with retailers signalling downwards revisions in this respect.
Indeed, the rise in the headline business climate figure was thanks in no small part to improved perceptions of recent growth over the past three months in services, manufacturing and construction. While the business climate in retail and wholesale trade activity was also judged to have improved, the pace of recovery was judged to have slowed. And most notably perhaps, the general outlook for activity in services was judged to have deteriorated against the backdrop of the rise in the pandemic, with new restrictions on activity in hospitality and leisure announced yesterday for Paris and Marseille. We anticipate a weakening in the INSEE next month.
German ifo & UK retail surveys; ECB TLTRO-iii take-up; and UK labour support announcement to come
In a short while, the German ifo business survey is also due with the PMIs having suggested that significant further improvement in services might offset only some of the renewed weakness in services However, the Bloomberg survey suggests an expectation of further improvement in all of the headline indices, with the improvement largest with respect to current conditions, but expectations anticipated to be the firmest since late 2018.
Separately, the ECB will announce the take-up of its latest TLTRO-III operation. Following the extremely high level of participation at the prior operation in June, when 742 banks borrowed €1.31trn, we expect significantly lower take-up – perhaps no more than one tenth that level – from fewer banks this time around. In addition, ECB Chief Economist Lane will participate in a twitter Q&A session and the ECB’s latest Economic Bulletin will be published.
In the UK, the CBI will publish its September distributive trades survey, which is expected to show a fall back in the headline retail sales balance to -15, from -9 in August to suggest a drop in spending on the high street after four consecutive months of growth. In addition, Chancellor of the Exchequer Sunak will announce new policy support for the labour market, seemingly inspired by the German part-time working (Kurzarbeit) scheme. And in the afternoon, BoE Governor Bailey is due to speak at a webinar hosted by the North East England Chamber of Commerce, although he might see unlikely to diverge from his views on policy, including negative rates, voiced at the BCC earlier this week.
US home sales and jobless claims figures on the docket
The regular weekly jobless insurance claims data – which last week reported a decline in total initial claims following successive weeks of increases – will today be accompanied by August new homes sales figures, which are expected to post a modest drop following three successive months of strong double-digit percentage growth, and the September Kansas City Fed manufacturing activity indices. Fed Chair Powell will yet again be before a Congressional committee with FOCM members Williams, Bullard, Bostic, Evans and Barker all set to speak publicly.