Japan's underlying inflation remains near zero in September

Chris Scicluna

Asian stocks resilient after Covid worries drive US & Europe lower
Yesterday was always looking likely to be a soft day in markets given weekend news of record coronavirus cases in many countries, together with the continued deadlock in US fiscal stimulus negotiations. As it happens, Wall Street had its worst day in over a month, with the sales forecast cut of Germany’s SAP also crystallising concerns among some investors that markets might be failing to adequately price the ongoing economic headwinds created by the pandemic. The risk-off tone drove the 10Y Treasury yield back below 0.80% but boosted the US dollar.

Against that background, unsurprisingly equity markets in the Asia-Pacific region initially came under downward pressure today. However, helped at the margin by a modest lift in US futures – even with the latest Pelosi-Mnuchin call yielding no progress on removing the roadblocks to fiscal stimulus – markets exhibited a degree of resilience. And later in the session, HSBC’s reported Q3 credit losses that were much smaller than the market had expected, which lifted the Hang Seng off its lows and provided some support elsewhere in the region.

Perhaps surprisingly, Australia’s ASX200 marked the worst performance of the major bourses in the region, falling 1.7% and led lower by IT and energy stock – this despite the country’s low coronavirus case numbers, the associated phased easing of restrictions in Melbourne from tonight, and improving consumer confidence. Elsewhere, losses of ½-¾% were seen in Hong Kong and South Korea – the latter occurring despite the BoK reporting that Korean Q3 GDP beat expectations, with growth of 1.9%Q/Q after two consecutive declines leaving it down 1.3%Y/Y. However, on a quiet day for Japanese domestic news, the Topix fell just 0.1% as investors continued to await the BoJ Board’s policy review on Thursday and key activity data due at the end of this week. Meanwhile China’s CSI300 bucked the trend and posted modest gains as industrial profits were revealed to have grown solidly in September, albeit with annual growth slowing off a high 2019 base.

Japan’s underlying inflation rate remains around zero in September
Following on from Friday’s national CPI report, today the BoJ released its statistical measures of “underlying inflation” for September, which are calculated so as to remove the effects of changes in the consumption tax rate and the 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 a 0.1%Y/Y decline in prices. While this result weaker than the 0.0%Y/Y change reported in August, the difference was tiny and mostly reflects less favourable rounding. The weighted median CPI – which is less correlated with the business cycle – was steady at 0.1%Y/Y. Meanwhile, after declining to a 7-year low last month, the net proportion of goods and services recording a 12-month price rise increased modestly.

China’s industrial profit growth slows in September, but year-to-date decline narrows
Today China released information concerning industrial profits during September. While overall profits increased almost 6%M/M, annual growth slowed to 10.1%Y/Y from 19.1%Y/Y in August. Cumulative profits for the year-to-date continued to be weighed down by the impact of the pandemic at the beginning of the year, but the decline eased to 2.4%YTD/Y from 4.4%YTD/Y previously. That decline is driven by the mining sector where profits remain down 37.2%YTD/Y. By contrast, profits in the manufacturing sector increased 1.1%YTD/Y, marking the first positive reading this year. That growth would have been higher were it not for a 66.2%YTD/Y decline in the oil refining sector, an 18.7%YTD/Y decline in the ferrous metals smelting sector and a 17.7%YTD/Y decline in the chemical sector.

Consumer confidence continues to climb in Australia
The ANZ Roy Morgan measure of consumer confidence rose a further 1.6pts to 99.7 – an eighth consecutive week of improvement that has lifted the index to its highest level since mid-March. The largest improvement was in the sub-index measuring developments in households’ financial situation (also at a six-month high) and in the sub-index measuring households’ year-ahead outlook for the economy (now at its highest level since late February).

The improvement in confidence over recent weeks doubtless owes significantly to the macroeconomic policy support being brought to bear by the Government and the RBA. It also likely reflects the improving coronavirus situation in the state of Victoria, which yesterday registered its first day of no new cases since June. The latter has allowed Victoria’s Premier to sanction that next stage of easing restrictions, starting from midnight tonight, which will see the reopening of retail stores, cafes, restaurants and bars, albeit with group limits. And if the trend remains positive, a further easing of restrictions is scheduled on 8 November, including the removal of the current 25km restriction on travel and the allowance of larger group sizes in public venues. This should further support confidence over coming weeks.

In other news, as expected given the proximity of next week’s Board meeting, RBA Deputy Governor Debelle declined to comment on the policy outlook during a testimony before a Senate committee. Regarding the economy, he did note that he expected growth to have resumed in Q3, with the drag from Victoria thought to possibly a little smaller than when the Bank last produced forecasts in August. The next key event in Australia is tomorrow’s Q3 CPI report, which is likely to confirm another quarter of sub-target inflation – indeed, the trimmed mean has been running at less than 2%Y/Y for almost five years.

Kiwi merchandise trade deficit widens in September, as expected
New Zealand’s merchandise trade deficit widened to $NZ1.0bn in September – a deficit that almost completely reflects the seasonal lull in dairy exports (the seasonally–adjusted deficit was less than NZ$0.1bn). In the detail exports were down 8.0%Y/Y, mostly due to softness in exports of various food products. Imports fell an even greater 11.4%Y/Y, reflecting ongoing weakness in imports of capital goods and passenger motor cars – the former in line with global trends and the latter influenced by the sharp slowdown in population growth and tourism that has occurred due to the closure of the country’s border to most foreign arrivals.

Bank lending conditions in focus in the euro area
Today’s economic data focus in the euro area is the banking sector, with the ECB’s monetary data for September due this morning along with the ECB’s quarterly Bank Lending Survey results. The loan data are likely to show that credit growth to non-financial corporations remained strong at the end of Q3 in part reflecting ongoing guarantee schemes provided by member state governments as well as the incentives provided by the TLTRO-iii scheme and regulatory relief measures. Loans for house purchase are also likely to have remained firm. The ECB’s lending survey should similarly suggest that financial conditions are expected to remain broadly favourable and supportive of economic recovery in the current quarter despite the second pandemic wave.

Did UK retail sales rise again in October?
Another relatively quiet day for UK economic releases will bring just the CBI’s latest distributive trades survey for October. While last week’s retail sales figures showed ongoing solid demand for goods pushing sales up for a fifth successive month in September, with new Covid containment restrictions in place and consumer confidence having weakened significantly, growth in sales of non-essentials might be expected to have slowed at the start of Q4. By the same token, household stockpiling of essentials might well provide additional support.

Capital goods orders and consumer confidence the focus in the US today
Today’s US economic diary is reasonably busy. Initially the focus will be on the advance durable goods orders report for September, both as a gauge of the health of the manufacturing sector and because shipments data from this release will allow analysts to firm up their estimates ahead of Thursday’s Q3 GDP report. With core capex orders have rebounded solidly over the past four months, we are hesitant to forecast further growth in September. This is especially so in light of the small drop in manufacturing output that occurred during the month. The other key release today is the Conference Board’s consumer survey for October. Here we feel a little more constructive, with the general improvement in the economy – especially the labour market – and a lift in stock prices from the September perhaps sufficient to lift confidence despite rising coronavirus case numbers. Even so, we expect confidence to remain substantially below the heady levels that prevailed prior to the onset of the pandemic. Rounding out today’s US diary are the S&P/CoreLogic and FHFA house price indices for August and the Richmond Fed’s manufacturing survey for October.

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