Chinese inflation eases, Aussie confidence rebounds

Chris Scicluna

Riskoff continued in Asian equity markets, again driven by tech stocks
Markets in Asia were again led by a further downward move in technology stocks today. At yesterday’s close the Nasdaq was down 4.1% – and on its lows for the session – while the S&P500 was down 2.8%. But even with this loss, the Nasdaq remains up 21% YTD. And with the index still trading at 63x historical earnings – about double the average seen over the past decade – a further decline would hardly be surprising, notwithstanding the glut of liquidity currently being provided by central banks. Previous market darlings Apple and Tesla were especially hard hit yesterday, with the former falling almost 7% – reducing its YTD gain to ‘just’ 54% – and the latter an even larger 21%. Adding to the negativity was news that AstraZeneca had decided to pause its previously-promising Covid-19 vaccine trials after one recipient became ill, forcing it to investigate a possible adverse reaction to the drug – unsurprisingly its shares have fallen in London trading.

Meanwhile, US-China tensions remained in the limelight following news that the US had decided to ban imports from three Chinese companies in Xinjiang, which stand accused of employing forced labour. Even so, declines across the major Asia-Pacific bourses were less marked today than those seen on Wall Street – helped by a modest rebound in US futures – with benchmark indices down about 1% in Japan, and a little more than 2% in China and Australia. In fixed income markets, USTs have made modest gains across the curve, with 10Y yields falling back a little more than 1bp to just below yesterday’s low just above 0.66%, and a touch below their level a week ago. Euro area govvies are also firmer as are Gilts. And sterling has weakened again ahead of the publication by the UK Government of its draft internal market bill that will “break international law” and further add to the risk of a no-deal end to the Brexit transition at year-end.

Chinese inflation still very subdued in August
While most of the focus in China remains on tensions with the US, today also saw the NBS release data on inflation for August. The headline CPI rose 0.4%M/M as expected, lowering annual inflation by 0.3ppts to 2.7%Y/Y. All of the decline in annual inflation could be attributed to food prices, where inflation eased to 11.2%Y/Y from 13.2%Y/Y previously, in large part due to stabilizing prices for pork (a further sharp lift in vegetable prices providing some offset).

Non-food inflation remained largely non-existent, with prices rising just 0.1%M/M and 0.1%Y/Y. In part this reflects continued weakness in energy prices, although core inflation – ex food and energy – was also still very subdued, remaining at the 10-year low of 0.5%Y/Y reached in July. The inflation pipeline also appears relatively subdued, the PPI output index still down 2.0%Y/Y in August – a result that was marginally weaker than market expectations. The PPI for consumer goods rose just 0.1%M/M, causing annual inflation to slow to 0.6%Y/Y. And that positive result owes solely to higher food prices, with prices for durable consumer goods and clothing down 1.5%Y/Y and 1.3%Y/Y respectively.

Law-breaking UK Brexit bill out today will have key bearing on no-deal risks
With no top-tier economic data out today, the UK Government’s posturing over Brexit will dominate again, with its extremely controversial Internal Market Bill – set to be inconsistent with the EU-UK Brexit Withdrawal Agreement treaty which entered into force in February – due to be published. With a Minister having confirmed yesterday that the draft legal text will “break international law” albeit in a “specific and limited way” – an Orban-style move which has helped to push EURGBP above €0.91 this morning – the substance is likely to have a clear bearing on whether the negotiations with the EU over a new FTA remain just about alive, or whether we should now expect the Brexit transition phase to conclude at year-end with the imposition of tariffs on trade between the UK and EU.

Certainly, EU negotiators are likely to be extremely unimpressed by the gambit, which suggests that the UK Government is, at a minimum, adopting Trump-style ‘madman’ negotiating tactics in a desperate attempt to unsettle its opponents and strengthen its weak hand. Indeed, it is difficult to see the EU retaining much trust in the UK Government’s motives. But whether or not the move is a show-stopper, or simply bluster to please the Tory hard right as a prelude to (another) Johnson U-turn and eventual deal, remains to be seen. If the Government today merely reserves the right to annul parts of the Withdrawal Agreement in secondary legislation in the event that an FTA is not reached, rather than drafts explicit legal clauses overriding that international law, the negotiations with the EU might well live another day to tackle the outstanding obstacles related, most notably, to state aid and fisheries.

Australian consumers less downbeat in September
Following on from yesterday’s soft NAB business sentiment survey, today’s Westpac survey pointed to much-reduced pessimism amongst households. After falling to a four-month low last month, not least due to the resurgence of coronavirus cases in the state of Victoria, the headline index rebounded an encouraging 18.5%M/M in September, lifting the index to 93.8 – the highest reading since February but still about 10pts below the average reading for the series.

All components of the survey were firmer this month, with near-term expectations regarding the economy registering the largest improvement. This improvement doubtless reflects much-reduced numbers coronavirus cases in Victoria – although case numbers did rise to a three-day high of 76 today – and relief that Victoria’s experience has thus far not been replicated elsewhere in Australia.

Among other new data, the ABS reported a further 8.9%M/M rebound in the value of new home loan approvals (ex-refinancing) in July, with approvals for owner occupiers rising 10.7%M/M and those for investors rising a more subdued 3.5%M/M. As a result, the number of new loans was up 11.8%Y/Y, albeit still slightly below pre-Covid levels. A pull-back in loan approvals seems likely to have been recorded in August given the re-imposition of lockdown restrictions in Victoria.

Kiwi business confidence less downbeat but 3Y NZGB yields turn negative
Despite activity in New Zealand, and especially Auckland, facing renewed – albeit less stringent – coronavirus-related restrictions over the past month, the preliminary results of the ANZ Business Outlook survey for September reported a decline in business pessimism in September. The headline confidence index rose 16pts to -26 and the more important own activity index rose 8pts to -10 – an outcome that suggests some optimism amongst firms that the current small coronavirus outbreak will be contained (just 6 new cases were reported today). Even so, spurred by the RBNZ’s dovish commentary, markets continue to anticipate further monetary policy easing, causing the April-2023 NZGB yield to inch below 0% for the first time today.

In other economic data, ahead of next week’s Q2 GDP statistics, manufacturing sales volumes were reported to have slumped over 12% during the quarter. Meanwhile, Finance Minister Grant Robertson announced that if re-elected on 19 October, a Labour Party-led Government would legislate for a new top marginal income tax tier of 39%, applicable to incomes over NZ$180k. This tax, which would only impact about 2% of taxpayers, would raise a relatively paltry NZ$550m per annum (Budget forecasts point to a cash shortfall of almost NZ$15bn in FY21). At this stage polls suggest that the Labour Party is very likely to be in the box seat post-election, with less reliance on smaller parties required in order to progress its desired programme.

The day’s remaining economic data
A remarkably quiet day on the economic data front in the major economies will bring no top-tier economic data from the euro area and only JOLTS job openings data for July from the US. The Bank of Canada will, however, make its latest policy announcement, with the Governor’s pledge to keep the policy rate at 0.25% for at least two more years likely to be reiterated and its asset purchase commitment maintained.

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