Japan's IP nudged lower in August

Chris Scicluna

Asian markets take cue from US softness as Xi speech gains attention
Following a strong advance at the start of the week, Wall Street suffered a modest pull-back yesterday with the S&P500 closing down 0.6%. That loss was about as indicated earlier in the day by the response of futures to the report that Johnson & Johnson had paused its vaccine trial. But the news regarding near-term prospects for fiscal stimulus was also unsupportive, with House Speaker Pelosi still objecting to the proposal put forward by the White House and rejecting out of hand an even less generous proposal put forward by Senate Leader McConnell (the latter even prompting rebuke from President Trump). Moreover, the greatest weakness was seen in bank stocks, with Citigroup falling 4.8% following its quarterly earnings report. The bank reporting season will continue today with reports from Wells Fargo, Bank of America and Goldman Sachs.

That soft tone in the US followed through to the Asia-Pacific today, with most of the region’s equity markets in the red in the absence of additional cause for optimism. For example, the Topix fell 0.3% as Japan’s IP data were revised down, while Korean markets were down closer to 1% as the BoK left policy unchanged and downplayed the likelihood of further near-term easing.

In China, focus today was on a speech given by President Xi in Shenzhen to mark its 40-years as a special economic zone. But rather than outline any new policies ahead of the CPC plenary session later this month, Xi’s comments were largely consistent with his economic philosophy espoused previously. This included reiterating his comments about maintaining an outward focus while also building the domestic economy in an environment characterized by growing unilateralism and turbulence caused by the pandemic. And he again called for an “unswerving focus” on reform to develop Shenzhen into a “Model City” with the help of talented people from the Greater Bay area (i.e. Hong Kong) and overseas, emphasising the importance of protecting “legitimate rights and interests of entrepreneurs, property rights as well as intellectual property rights in accordance with the law”. For the most part China’s markets were unmoved, maintaining the losses of about ½% or less than were already registered before Xi began his address (and recorded despite US futures staging a partial recovery since the Wall Street close). And Chinese equities weakened a little further after the speech, with the Hang Seng down too.

Japan’s IP in August revised down but on track for 8%Q/Q rebound in Q3
A quiet day for Japanese economic data was highlighted by the final results of METI’s industrial production survey for August. Disappointingly, growth in overall output was revised down to 1.0%M/M from the 1.7%M/M lift estimated previously, leaving output down 13.8%Y/Y. That means that still only a little less than the peak-to-trough decline in production since the start of the year caused by the pandemic had been reversed. Within the detail, the rise in output on the month was now more than fully explained by transport equipment (up 8.6%M/M, with autos production rising 9.3%M/M) with machine goods output also firmer but output of ICT and electrical items down. Given the more modest rise in total production, firms’ operating rate rose 2.9%M/M but remained almost 12% below where it stood in February before the pandemic took hold. Growth in shipments was revised down a similar 0.6ppt to 1.5%M/M to leave them down a still steep 14.2%Y/Y. And so, the final report estimated a 1.3%M/M decline in inventories – just 0.1ppt smaller than estimated previously – leaving them down 5.9%Y/Y. The inventory-shipments ratio fell a revised 2.0%M/M but was still up 13.0%Y/Y underscoring the importance of a further recovery in shipments over coming months to reduce the overhang.

Looking ahead, the survey of manufacturing firms expectations released with the preliminary IP report, the sharp (near-50%M/M) lift in foreign orders observed in Monday’s machine orders report for August, and yesterday’s Chinese trade data – which showed accelerated growth of 13.4%Y/Y in imports from Japan – all point to further growth in manufacturing output in September. So, while today’s downward revision was unhelpful, given the sharp 8.7%M/M lift in July it still appears likely that output has grown about 8%Q/Q during Q3. Of course, this reverses less than half of the 17%Q/Q slump in output that occurred in Q3.

Judging by yesterday’s Reuters Tankan survey, however, the recovery is likely to slow noticeably in Q4. The overall manufacturing diffusion index (DI) increased a disappointing 3pts to -26 in October, leaving the index still about 20pts below the pre-pandemic level (and even further below the historic average for the series, which is close to 0). Moreover, the DIs for the electrical and precision machinery sectors actually declined for the month. And the forecast DI, which measures expected business conditions three months ahead, was only 9pts firmer at -17. The same survey pointed to a disappointing 2pt rise in the DI to -16 for non-manufacturing firms – the smallest improvement since the index troughed in May – with the DI for retailers declining to a 4-month low.

Australian consumer confidence posts another steep increase in October
The main economic news in Australia today concerned consumer sentiment, with Westpac’s monthly index increasing a further 11.9%M/M to 105.0 in October, reinforcing the message of greater optimism left from the weekly ANZ/Roy Morgan survey. Indeed, this marks the highest reading on the Westpac survey since July 2018 and means that the index is now slightly above its long-run average. The largest increases were in the components measuring the outlook for the economy, with the year-head outlook increasing particularly strongly. Undoubtedly this result appears to owe significantly to the backdated tax cuts that were announced in last week’s Federal Budget. Confidence has likely also been bolstered by the reduction of new coronavirus cases in Melbourne – the largest increases in confidence were in Victoria and New South Wales – and an expectation of further policy easing from the RBA next month. Looking ahead to tomorrow’s very significant economic data, it will be interesting to see whether further unexpected resilience in the labour market has also been a factor driving confidence higher over the past month.

Euro area data to confirm more moderate growth in production as gap with pre-lockdown level narrows 
Today brings the release of euro area industrial production figures for August, which we expect to show growth of more than 1%M/M in output, marking the third successive monthly slowdown, with improvement in the auto sector a driver of the latest growth. Friday’s surprisingly strong increase in Italian industrial output (up 7.7%M/M following growth of 7.0%M/M to rise above the pre-pandemic level) more than offset an unexpected fall in German IP (down 0.7%M/M excluding construction). But while growth in France also provided a boost (manufacturing output rose 1.0%M/M), declines across certain other member states – not least Ireland (down more than 13%M/M in a notoriously volatile series) – acted as a drag. The further growth in August will mean that about four-fifths of the initial peak-to-trough decline in production related to lockdowns has been reversed, leaving it down a little more than 5% from February’s level.

Meanwhile, after yesterday’s final September CPI figures from Germany confirmed the drop of 0.3ppt in the flash EU-harmonised measure to a more than five-year low of -0.4%Y/Y, the equivalent numbers from Spain are expected to confirm the preliminary estimates, which saw the EU measure move sideways at -0.6%Y/Y.

In terms of ECB-speak, President Lagarde and Chief Economist Lane will maintain their current communications offensive, taking part in online conferences. This time around, Lagarde’s comments look set to have an ESG flavour, with the event being related to the UN’s Environment Programme Finance Initiative (UNEP FI). Lane’s, however, will focus on the pandemic and ECB monetary policy, providing an opportunity to repeat his recent dovishness, and make the case for further stimulus if the inflation outlook doesn’t materially improve. ECB Governing Council representatives from the Bank of France (Villeroy de Galhau) and Spain (Hernandez de Cos) will also be speaking publicly today.

Johnson and von der Leyen to take stock of Brexit progress ahead of Summit
Ahead of tomorrow’s EU Summit, Commission President von der Leyen and UK PM Johnson will discuss progress in the negotiations on the post-transition arrangements. There appear to remain clear obstacles in terms of state aid rules, governance and – absurdly given its tiny contribution to economic activity – fisheries. But while Johnson previously threatened to walk out of the talks at this stage if no deal had been reached, it is hard to see how such a stunt would be in the UK’s interests. Indeed, Johnson’s struggle to get to grips with the pandemic, and the increasing loss of support within and outside of his party, for his policy response to Covid-19, suggests that he might no longer have the political capital for such a battle. Likewise, the EU remains first and foremost preoccupied with the pandemic, with the Netherlands yesterday announcing the closure of bars and restaurants. So, we expect the two sides to agree simply to note progress and commit to further intensive negotiations. And, on balance, we still expect a deal to be reached, albeit probably not until next month.

Producer prices in focus in the US
After yesterday’s CPI data broadly met expectations with increases of 0.2%M/M in both the headline and core measures, to leave them up 1.4%Y/Y and 1.7%Y/Y respectively, today’s producer price report is also expected to show increases of 0.2%M/M in the final demand and core indices. The September Federal Budget statement might also see the light of day today, while several FOMC members – including Vice Chair Clarida – will speak publicly. 

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