US fiscal doubts re-emerge as Trump tests positive for Covid-19

Chris Scicluna
Emily Nicol

Futures weaken as US fiscal doubts re-emerge, Trump tests positive for Covid-19
US stocks moved higher yesterday as sentiment was boosted by continued optimism that Congress might find a way to break the current impasse over further fiscal stimulus. However, while the Democrat-led House has now passed its version of a $2.2trn stimulus bill, US futures weakened during early Asian trading after House Speaker Pelosi reminded investors that there were still areas of disagreement to be bridged. The bigger driver of markets overnight, however, has been news regarding the health of President Trump that, after a close aid had contracted the coronavirus, he (and the First Lady) had tested positive for Covid-19 (confirmed at around 6am London time). The immediate market response was about a further 1% decline in US equity futures, a strengthening of the US dollar against most currencies other than the yen (which strengthened) and a 2bps decline in the 10-year Treasury yield. At this early stage President Trump is reported to be “well”, but clearly the progress of the President’s infection will remain a focus for markets on a day when the latest non-farm payrolls report might have dominated trading. And it remains to be seen what this means for the upcoming election.

After yesterday’s embarrassing closure, Japan’s TSE reopened today with the key indices initially little changed, before turning lower to close down 1% after President Trump’s diagnosis was confirmed. Both Chief Cabinet Secretary Kato and Finance Minister Aso expressed dismay at the TSE’s closure. Interestingly, Aso was also reported to have said that the government still had funds in reserve from its second supplementary budget, so at this stage there is no talk of a third budget. Meanwhile, markets remained closed today in China, Hong Kong, Taiwan and South Korea. Predictably, European equity futures are lower and govvies have followed Treasuries higher on opening. And this trend might well be continued as today’s key euro area data release – September’s flash CPI estimate – is expected to show that headline inflation fell further into negative territory last month, with core inflation declining to a new series low too.

Japan’s unemployment rate edges higher in August
As far as economic data were concerned, the main focus in Japan today was on the labour market, with the MIC releasing its household-based Labour Force Survey for August and the MHLW also releasing its suite of labour market indicators. The former survey revealed a second consecutive 110k lift in employment in August, reducing the cumulative decline since February to 840k but leaving the annual decline in employment steady at -1.1%Y/Y. However, with the labour force growing by a somewhat-larger 200k, the unemployment rate edged up a further 0.1ppt to 3.0% – now 0.8ppt above the cyclical low-point and at the highest level since May 2017. Of course, as is typically the case, the increase in unemployment in Japan in response to such a sharp contraction of output compares very favourably with that seen in most industrial countries, with employers’ usual reluctance to shed staff – especially give pre-pandemic labour shortages – reinforced by government measures to help firms to retain workers.

Separately, data from the MHLW revealed that the job-to-applicant ratio fell a further 0.4ppt to 1.04 in August – a level last seen in January 2014. While the number of job offers rose 0.9%M/M in August – the second consecutive increase – the level remained down 26.3%Y/Y, reflecting the very steep pandemic-induced declines seen earlier in the year. Similarly, while the number of new job offers increased 2.5%M/M, the level remains down 24.9%Y/Y.

Against this backdrop, the latest consumer confidence survey reported a modest improvement in September, with the headline index up 3.4pts to 32.7, its highest level since February and suggesting that roughly two-thirds of the initial post-pandemic drop in sentiment has been recovered. But while households appeared more upbeat about their employment prospects in September, the relevant index (+4.8pts in September) had reversed less than half of the decline seen between February and April. But with households also less pessimistic about their income expectations (despite declining wage growth), they also appeared more willing to make big-ticket purchases – indeed, this survey component has now recovered almost 90% of the initial slump, albeit leaving the index still down on levels seen before the consumption tax hike went up a year ago.

The only other data release in Japan today was the BoJ’s monetary base figures for September. Predictably growth in the monetary base increased a further 2.8ppts to 14.3%Y/Y – the fastest pace since October 2014. This mostly reflects banks’ rising current account balances at the BoJ – now up 16.6%Y/Y – arising from the BoJ’s accelerated programme of asset purchases in the wake of the pandemic.

Euro area flash inflation expected to fall to a record low
The main focus in the euro area today will be on the flash September inflation estimate. Following downside surprises in the equivalent German, French and Italian releases earlier this week, aggregate euro area inflation is expected to have fallen further into negative territory last month, by 0.2ppt to -0.4%Y/Y. And while the national releases suggest that this in part reflected a steeper drop in energy prices, core inflation is also expected to have declined to a new-series low of 0.2%Y/Y or lower. Spanish labour market data for September are also due for release shortly.

US non-farm payrolls in focus later
President Trump’s Covid-infection aside, the key US data release today will be September’s employment report. The ongoing decline in the number of unemployment benefits suggests that the recall of previously furloughed workers will easily offset layoffs, so we expect a further 900k lift in non-farm payrolls in September following a 1.37m increase in August. The unemployment rate – taken from the household survey – may not budge much from August’s 8.4% reading, however, while the return of lower-paid workers could weigh on average earnings during the month. This afternoon will also bring final factory orders figures for August, as well as the revised University of Michigan’s consumer sentiment survey for September.

Australian retail sales confirmed to have declined sharply in August
Today the ABS released its final estimate of retail spending for August, which revealed a decline of 4.0%M/M. As previously indicated, the aggregate result was heavily influenced by a 12.6%M/M slump in spending in the state of Victoria, reflecting the strict lockdown in Melbourne. In Australia’s other major states the decline in spending was smaller and not unexpected given the sharp rebound in spending in previous months. Indeed, overall spending was still up 7.1%Y/Y despite the weight of an 11.5%Y/Y decline in Victoria, with spending rising 12.8%Y/Y in Queensland and 8.6%Y/Y in New South Wales. Not surprisingly spending on food was little changed in August, but down steeply across all other industry groups due to the impact of Victoria’s lockdown. Indeed, spending on food remained up 14.3%Y/Y in August, representing the flipside of a 17.5%Y/Y slump in spending at cafes and restaurants. And with more people working from home and overseas holidays no longer on the agenda, the boom in household good retailing continued in August with spending rising a whopping 21.0%Y/Y.

In other news, in a bid to boost tourism, Australia’s Deputy Prime Minister announced that the country will begin to allow quarantine-free travel to visitors from New Zealand, starting in a fortnight with the opening of entry into New South Wales and the Northern Territory. However, New Zealand’s PM reaffirmed that for now any travellers from New Zealand would be required to quarantine for two weeks upon their return, at their own expense. So travel to Australia is likely to remain unappealing for Kiwis until the border is open to quarantine-free travel in both directions.

Consumer confidence stabilises in New Zealand in September
After declining in August – doubtless reflecting the imposition of some lockdown restrictions – consumer sentiment appears to have stabilised in September. The ANZ consumer confidence index nudged down a negligible 0.2%M/M to 100.0 – still almost 15pts above April’s historic low-point but over 20pts below the pre-pandemic level. By far the biggest weight on confidence is significant concern about the near-term outlook for the economy, while longer-term expectations remain positive on balance.

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