Equity markets and bond yields lift, US dollar weaker, as stimulus hopes reignited
Yesterday’s trends have been extended since the close on Wall St, with US futures up a further 0.5%, the dollar weakening again, and the 10Y US Treasury yield up a further 3bps to 0.82% – the highest since early June. The driver was comments made by House Speaker Pelosi, who told reporters she was hopeful of a fiscal deal before the weekend. Meanwhile, a Pelosi spokesman added to optimism with his comment that “both sides are serious about finding a compromise”. That said, separately, White House Chief of Staff Meadows stressed that the remaining differences were not simply about language and a few dollars (the White House offer now stands at US$1.88trn – still short of the US2.2trn sought by Democrats). And while Senate Majority leader McConnell has said that he will put any Democrat-White House deal to a vote on the Senate Floor, it remains uncertain whether the deal would be passed given the reservations expressed by some Republican senators.
With little in the way of local macro news today, markets in the Asia-Pacific region have largely tracked higher with those in the US. In Japan, where the BoJ’s latest survey of banks pointed to some signs of normalization in credit demand and supply (see below), the TOPIX increased 0.7% and JGB yields drifted higher. Bloomberg reported that the BoJ might look to remove the impact of the Government’s ‘Go-to-Travel’ subsidy from the CPI forecasts in next week’s revised Outlook forecasts for inflation, a move that would provide a boost the headline numbers for the current fiscal year. But external Policy Board member Sakurai rightly suggested that it’s currently hard to see where a rapid acceleration of inflation would come from, and also noted that the BoJ might have to add stimulus – most likely via an extension of its corporate sector support measures – if the pandemic took longer than expected to subside. Elsewhere, in Australia equities rose modestly despite a decline in retail spending in September, while the weakness in the US Treasury market caused the yield on 10Y ACGBs to increase 4bps to 0.80%. Bucking the trend, stocks were largely little changed in China as the yuan continued to appreciate, with the onshore yuan rising to levels last seen in July 2018.
BoJ survey points to some normalization of credit demand; credit standards ease again
Today the BoJ released its quarterly Senior Loan Officer Survey, which amongst other things provides information on how Japan’s largest banks are viewing the demand and supply of credit. The previous survey, taken after the first wave of the pandemic, had pointed to a liquidity-driven dramatic increase in demand for credit by firms – but a slump in demand from households – which banks had accommodated by easing their credit standards (with the support offered by government guarantees). Encouragingly, today’s survey suggests much less stress than was the case three months ago.
Turning to the key detail, a net 14% of respondents reported increased loan demand by firms over the past three months, down from 59% in the previous survey. The increased demand was driven mostly by small firms (24% vs 54% previously), whereas just 1% of respondents reported increased demand by large firms – down from 46% previously and now back to pre-pandemic levels. Unsurprisingly, the most commonly reported drivers of increased business loan demand were a decline in internally-generated funds or reduced availability of funding from other sources. Prior to the pandemic the need to fund capex had been the most important driver of increased loan demand, whereas a decline in capex is now one of the factors driving reduced loan demand at some banks. Looking ahead, a net 9% of respondents forecast an increase in loan demand by firms over the next three months. Elsewhere in the survey, on balance fewer banks reported an easing of credit standards on business loans compared with the prior survey. This was especially so with loans to small firms, where the share of banks easing standards fell to 16% from 35% previously. Looking ahead, respondents expect to ease credit standards further over the next three months, but once again in fewer numbers than over the past three months.
Meanwhile a net 3% of respondents reported increased loan demand from households over the past three months, contrasting sharply with the net 24% of respondents that had reported a decline in demand in the previous survey. The increase was driven by a recovery in demand for housing loans, with 7% of respondents seeing increased demand, compared with the 19% that had reported reduced demand previously. A net 13% of respondents reported reduced demand for consumer loans, although this still compared favourably with the 31% who had reported reduced demand in the prior survey. Amongst those banks seeing weaker demand for consumer loans, the key driver was a decrease in household consumption. Looking ahead, respondents forecast that loan demand by households would be steady over the next three months. As far as the supply of credit is concerned, in contrast to the situation with business loans, the share of banks easing credit standards on household loans increase to 8% from 4% previously. And banks anticipated that credit standards would ease further over the next three months.
Tomorrow the BoJ will release its semi-annual Financial System Report, which will detail the Bank’s assessment of how the financial system is coping with the pandemic. As in April, when financial conditions were much more stressed than at present, the BoJ will undoubtedly conclude that the system remains broadly stable and – as evidenced by today’s Senior Loan Officer Survey – continuing to play its necessary role in supporting the economy.
UK inflation temporarily ticks higher in September
There were no major surprises from today’s UK CPI figures, which showed that headline inflation ticked higher in September as the disinflationary impact of the Government’s Eat Out to Help Out scheme in August – which the ONS estimated accounting for around 0.4ppt to headline inflation – fell out of the calculation. Indeed, having fallen to its lowest level since 2015 in August (0.2%Y/Y), the headline CPI rate rose 0.3ppt to 0.5%Y/Y. This left inflation at 0.6%Y/Y in Q3, unchanged from Q2 but 0.4ppt higher than the rate assumed by the BoE in its August Monetary Policy Report.
Within the detail, the increase was more than fully accounted for by higher contributions from transport (boosted by a much smaller drag from airfares) and catering services, up 1.9ppts to 0.9%Y/Y and 3.7ppts to 0.9%Y/Y respectively – although the latter remained well below July’s rate as some restaurants and hotels continued to offer discounts equivalent to those provided under the Government’s scheme. So, despite ongoing weakness in other subsectors – i.e. a much steeper pace of decline in accommodation services costs (down 4.4ppts to -6.2%Y/Y) as the summer staycation boom came to an end – overall services inflation jumped 0.8ppt to 1.4%Y/Y, admittedly still the second-softest reading on the series. Meanwhile, non-energy industrial goods inflation edged lower for the second successive month, principally due to falls in the prices of furniture and computer games (the latter component of which is particularly volatile and possibly impacted by delayed game releases due to Covid-19). Overall, core inflation rose 0.4ppt to 1.3%Y/Y.
While the drag from energy prices might well ease slightly over coming months, food inflation (which fell to a more than 3½-year low of 0.5%Y/Y in September) is likely to remain relatively subdued. And with non-energy industrial goods inflation set to remain weak and services inflation likely to fall back – not least as renewed containment restrictions will undoubtedly weigh on demand – underlying price pressures will remain absent. Indeed, notwithstanding some potential inflationary risks associated with Brexit, risks to economic activity remain skewed significantly to the downside, not least due to the resurgence of the pandemic. So, the MPC will continue to look through the recent inflation volatility. And with the recovery seemingly slightly softer than had been previously anticipated by the Bank and inflation likely to remain below the 2% target over the coming two years, there appears to be a strong case for additional monetary stimulus at next month’s MPC meeting when it will have updated economic forecasts. Certainly, we would expect a further increase in the Bank’s asset purchase target by £100bn to £845bn.
UK public borrowing above consensus in September but still trending below OBR forecast
The September UK government borrowing figures came in a little above expectations, with an inevitable record for the month, but still suggested that the fiscal deficit was on track to undershoot somewhat the OBR’s most recent forecast in FY20/21 as a whole. In particular, public sector net borrowing (excluding public sector banks) came in at £36.1bn, up £28.4bn from a year earlier and the third-highest deficit for any month. Nevertheless, cumulative net borrowing in the first six months of FY20/21 still reached £208.5bn, almost £175bn more than in the same period last year. And public sector net debt (excluding public sector banks) rose by £259.2bn in the first six months of FY20/21 to £2.06trn, estimated at about 103.5% of GDP, the highest such ratio in 60 years.
Cumulative borrowing in the first six months of FY20/21, however, was some £54bn less than predicted by the OBR in its most recent projections published in June, which had predicted total borrowing of £372.1bn over FY20/21 as a whole. The lower-than-expected path of borrowing largely appears to reflect a higher profile for GDP than assumed by the OBR, supporting tax revenues. However, the revival in the pandemic is bound to have an impact going forward – and today see Boris Johnson announce new restrictions in Sheffield after yesterday’s confirmation of tighter rules for Greater Manchester. And additional fiscal support measures, including the new Job Support Scheme and extension of the VAT cut for the hospitality sector to end-March, which weren’t reflected in the original arithmetic, could well see the OBR’s forecast reached by the end of the fiscal year. Overall, however, with the new Job Support Scheme less generous than its predecessors, and discretionary spending – such as on the NHS – also set to be tighter, the overall fiscal stance looks set to be less than supportive than following the immediate shock from Covid-19.
Indeed, about two-thirds (£18.1bn) of the increase in borrowing in September from a year earlier was due to increased central government spending, not least reflecting the £5.9bn cost of the government’s original Job Retention Scheme and income support for the self-employed. Meanwhile, central government tax receipts were down £6.0bn from a year earlier reflecting steep falls in Value Added Tax (VAT), partly due to the temporary cut for the hospitality sector, as well as lower Business Rates and Corporation Tax receipts. Looking at the first six months of the fiscal year, the picture was broadly similar, with government receipts down 11.6%Y/Y but spending up 34.0%Y/Y.
Given the major ongoing shock to the public finances from Covid-19, the government pulled its plans for tax changes in a Budget announcement this autumn. And the FT has reported that it could also now drop plans for its comprehensive spending review to set new departmental spending plans for the coming three years. However, once the pandemic is out of the way, public expenditure seems bound to be tight, while tax increases will be firmly on the table, as the government will seek to regain control of borrowing.
Australian retail sales estimated to have declined 1.5%M/M in September
Today the ABS released its preliminary estimate of retail sales for September using data provided by businesses that make up about 80% of total turnover. Those data indicated that spending declined 1.5%M/M, following on from the 4.0%M/M decline that occurred in August. But whereas the decline in August was impacted by a more than 12%M/M slump in spending in the state of Victoria – reflecting the imposition of lockdown restrictions – the decline this month was broad-based, with spending down in every state and territory aside from the Northern Territory (and spending was down only slightly in Victoria). So the drop this month appears to reflect a correction from the earlier post-lockdown bounce, with national sales still up 5.2%Y/Y. And if the decline is confirmed when the final report is released next week, this means that retail spending increased a whopping 6.8%Q/Q in Q3, more than reversing the 2.3%Q/Q contraction in Q2. Of course, to a large extent this reflects the diversion of consumer spending towards goods and away from the services that sit outside the retail sector.
Fed’s Beige Book due to be released in the US
US politics aside, it should be a relatively quiet day for US economic news, with the Fed’s Beige Book set to provide an update on economic activity over the past month.