Chinese PMIs exceed market expectations

Emily Nicol
Chris Scicluna

US equity futures weaker as Trump stokes post-election worries; Chinese PMIs offer some support
Following two days of solid gains, Wall Street suffered a minor setback on Tuesday with the S&P500 eventually closing down 0.5%. Subsequently, US equity futures initially drifted a little higher during today’s Asian session, as some very encouraging Chinese PMI data – discussed further below – made a welcome distraction from a very chaotic first US presidential debate that, predictably, was characterized by constant interjections and bluster by President Trump. However, the futures market subsequently relinquished those gains, probably not helped by Trump again indicating that he might not accept the results of the election. And the futures market has continued to move lower since the debate concluded, with S&P500 minis down as much as 1% at one point. Even so, given the strong Chinese PMI data, investors still saw fit to drive equity markets higher in Hong Kong and Taiwan, if not in mainland China itself ahead of the national holidays. But the slide in US futures appeared to weigh heavily on Japanese markets, where the TOPIX went from roughly flat to down about 1½% despite some mildly encouraging IP and retail spending data. Meanwhile, rather than greeting the Chinese data as would normally be the case, the ASX200 fell almost 2% as expectations of a near-term RBA rate cut continued to cool. South Korean markets were closed for the first day of a three-day holiday.

Moving to Europe, what should be a busy day for economic news has got underway with some very strong German retail sales data but some softer-than-anticipated French inflation figures. Given the weak price outlook, Christine Lagarde is likely to be dovish mood when she addresses the ECB Watchers’ Conference in Frankfurt shortly.

China’s PMIs continue to strengthen in September, exceeding market expectations
Ahead of the Golden Week holiday, which begins tomorrow, the focus in China today was on the release of the country’s official PMI reports for September. And the news for investors was very encouraging, with further improvement recorded across both the manufacturing and non-manufacturing sectors, so that the composite PMI rose 0.6pt to 55.1 – exceeding market expectations and the highest reading in three years. And for the first time since May, companies of all sizes reported an expansion in September, with the small firm PMI rising 2.4pts to 50.1 – an outcome that might suggest some improvement in the hitherto lagging domestic economy.

Turning to the sector detail, the closely-watched manufacturing PMI increased a further 0.5pt to 51.5, marking the highest reading since June 2018. The output index increased 0.5pt to 54.0, although this only reversed the decline that was recorded in August. However, more encouragingly, the new orders index rose 0.8pt to 52.8, which was the highest reading since May 2018. And the new export orders index increased an even greater 1.7pts to an expansionary 50.8, which was also the highest reading since May 2018. Improving prospects for the economy appeared to be reflected in stronger upward pressure on input prices, with the respective index rising to a 2-year high of 58.5. The output prices index fell 0.7pt to 52.5 in September, but this still remains 9pts higher than was the case in March.

Perhaps more surprising was a further 0.7pt lift in the non-manufacturing PMI to 55.9 – boosting the already elevated August reading to the highest level since November 2013. And as with the manufacturing sector, the more forward-looking components of the survey were especially encouraging. In particular, the new orders index increased 1.7pts to 54.0, which was the highest reading since December 2012. The new export orders index rose an even stronger 4.0pts to 49.1 – a 13-month high – and the business expectations index rose 0.9pt to 63.0. The employment index also increased to a 25-month high. Despite the improved activity indicator the pricing measures in the survey were somewhat softer, however, with the inputs index falling 1.3pts to 50.6 and the output prices index falling 1.2pts to 48.9.

Finally, the preliminary Caixan manufacturing PMI for September was also released today. And in contrast to the improvement in the small firm component in the official survey, the Caixin PMI – which is focused on the SME sector – edged down 0.1pt to 53.0. Of course, the August reading had been the highest since January 2011. And even though the headline index did nudge down a little, the new orders index rose 0.9pt to 55.5 and the new export orders index increased 3.6pts to 54.4 – new 9-year and 6-year highs respectively.

Japanese IP continues to recover in August; further improvement expected in the near term
The main economic news in Japan today was the release of the preliminary IP report for August. In summary, coming off a very weak base, the report pointed to a third consecutive lift in activity during the month, together with some optimism that further recovery is likely in September and October. Even so, output remains well below pre-pandemic levels, with business surveys suggesting that it is likely to remain so in the near term at least.

Turning to the key aggregates, total production rose 1.7%M/M in August – very slightly above market expectations and building on the 8.7%M/M rebound that was reported in July. Even so, output remains down 13.3%Y/Y, reflecting the heavy declines recorded at the peak of the pandemic disruption back in April and May. Shipments rose a slightly firmer 2.1%M/M in August but remained down 13.8%Y/Y. As a result, inventories declined 1.4%M/M in August and were down 6.0%Y/Y, while the inventory ratio fell 2.5%M/M but still increased 12.3%Y/Y.

In the detail, following an exceptionally heavy contraction earlier in the year, a further 6.2%M/M increase in the production of consumer durables was again the key driver of overall growth in output. Even with this growth, output remained down 18.0%Y/Y. Production of non-durable consumer goods, which understandably has shown greater resilience, increased just 0.2%M/M but was down just 4.1%Y/Y. The news regarding capital goods was much less positive, with output falling 4.5% M/M in August (and an even greater 7.1%M/M excluding transportation goods) to be down 21.0%Y/Y. Production of construction goods rose 0.2%M/M but was down 12.7%Y/Y. At the industry level, the strongest gains this month were seen in the production of iron, steel and non-ferrous metals (6.5%M/M) and transport equipment (8.6%M/M). Reflecting the softness in the capital goods sector, areas of particular weakness included production machinery (-9.8%M/M) and information and communications equipment (-8.5%M/M).

Looking ahead, METI’s assessment is that output is “picking up”, and that assessment is supported by the results of this month’s survey of manufacturers’ near-term expectations. According to the survey firms expect output to have increased 5.7%M/M in September – better than the 1.9%M/M forecast made last month – with further growth of 2.9%M/M forecast for October. At face value, assuming no historical revisions, firms’ forecasts imply a 9.9%Q/Q rebound in output in Q3 following the 16.9%Q/Q contraction recorded in Q2. But firms’ forecasts are typically over-optimistic, so an increase of about 8.5%Q/Q would seem more likely. Attention will now turn to tomorrow’s Tankan survey which will cast some light on whether firms expect this recovery to continue through Q4.

Japan’s retail spending rebounds in August; housing starts and construction orders still soft
Reports from listed retailers had pointed to a rebound in consumer spending in August following a weak July, and this was confirmed today by METI’s retail sales report. Indeed, total retail spending increased a greater-than-expected 4.6%M/M in August, more than erasing the 3.4%M/M decline registered in July, although this still left spending down 1.9%Y/Y. Consistent with the detail of the IP report, growth was led by an 8.9%M/M lift in spending on household appliances. That said, strong growth was recorded across all major categories, with increases of at least 6%M/M for both spending on apparel and fuel. Of course, the retail sales report can sometimes provide a false indicator of overall consumer spending, so we will await more reliable indicators – such as the BoJ’s Consumption Activity Index on 7 October – before drawing stronger conclusions about how consumer spending is tracking in Q3.

In other news, the number of housing starts nudged lower to an annualised 0.819m in August, leaving them down 9.1%Y/Y. This continues the weakening trend that has been evident since around Q219, and subsequently exacerbated by the pandemic. Meanwhile, after being down almost 23%Y/Y in July, the MLIT’s survey of Japan’s 50 largest contractors reported a 28.5%Y/Y lift in construction orders in August. However, it is worth noting that the August 2019 reading was exceptionally soft and orders remain down 7.6%3M/Y.

German retail sales roared ahead in August
With high-frequency data having hinted at a loss of momentum in Germany’s recovery over the past couple of months, and having edged lower in June and July, today’s retail sales figures offered a welcome upwards surprise, perhaps boosted by a delayed reaction to the 3ppt VAT cut at the start of July. Indeed, today’s release suggested that total sales (in real terms) rose a stronger-than-expected 3.1%M/M in August, to leave them 3.7% higher than a year ago and an impressive 5.8% higher than the pre-pandemic level in February. And on average in the first two months of Q3, total sales were up more than 4% compared with the Q2 average.

Within the detail, in nominal terms, sales of food and pharmaceutical goods led the rebound last month (up 5.6%M/M and 6.8%M/M), while sales of information technology (-8.3%M/M) and clothing (-0.4%M/M) remained extremely subdued. Indeed, when adjusting for price effects, turnover in clothing and footwear was still down more than 10%Y/Y, to leave them down more than 25%YTD/Y. In contrast, sales of furniture and household appliances were up by more than 8%Y/Y, to leave then 2½%YTD/Y higher. Meanwhile, the shift to increased online shopping brought about by the pandemic remained intact, with internet and mail order sales up 23%Y/Y, compared with growth of just 1.2%Y/Y in stores. German September figures for jobless claims are due later this morning.

French inflation follows German CPI lower ahead of keynote Lagarde speech
After yesterday’s flash German CPI figures surprised on the downside, this morning’s release of the equivalent French data did likewise, with a drop in the EU-harmonised measure of inflation of 0.2ppt in September to 0.0%Y/Y, the lowest since April 2016, and a decline of 0.1ppt in the national measure to 0.1%Y/Y. The detail on that national measure suggested that the weakness was only partly accounted for by a sharper drop in energy inflation (down 0.9ppt to -8.0%Y/Y), with services inflation also weaker (down 0.3ppt to 0.6%Y/Y). The Italian data, due later this morning, will be watched for further evidence as to what to expect from the euro area figures, due on Friday. But a further decline in both headline and core euro area inflation now seems likely. Against that backdrop, the ECB and Its Watchers conference will commence shortly with a keynote speech from Christine Lagarde. The themes of the conference are the ECB’s mandate, its instruments for crises and normal times, and monetary policy strategy. Other Governing Council members to speak at the event include Weidmann, Villeroy de Galhau, and ECB Chief Economist Lane.

Q2 drop in UK GDP revised slightly as current account deficit temporarily narrows
The extent of the drop in UK GDP in Q2 was revised down slightly this morning, to a nevertheless still-huge 19.8%Q/Q, compared to the initially estimated plunge of 20.4%Q/Q. That left GDP down 21.5%Y/Y, compared to the previous estimate of -21.7%Y/Y – similarly a record pace of decline. Among the details, the drop in private consumption was bigger than previously thought, down 23.6%Q/Q, but gross fixed investment was a touch firmer than originally estimated, falling 21.6%Q/Q. Of course, these data are history, and more interesting will be the August GDP figures due on 9 October – supported by the Government’s Eat Out to Help Out scheme, further significant growth of more than 5%M/M seems highly likely for that month, but that will still likely leave the level of GDP down 6% or so from February’s pre-lockdown level.

Meanwhile, with imports having dropped to the lowest level since Q310, and at a faster rate than exports (down to the lowest level since Q216), this morning’s data revealed a significant narrowing in the UK’s current account deficit in Q2 to £2.8bn or 0.6% of GDP, the smallest since Q211. Excluding non-monetary gold and other precious metals, however, the improvement was not so marked, down £7.5bn to £12.1bn, or 2.5% of GDP. Given the recovery in imports over recent months, we fully expect the current account deficit to widen once again in Q3.

Australian dwelling approvals fall in August, led by the volatile apartment sector
Today the ABS reported a 1.6%M/M decline in the number of new dwelling approvals in August – a relatively modest pullback considering the 12.2%M/M increase seen in July. And so despite the pandemic, the number of approvals remained fractionally higher than at the same time last year. Notably there was no obvious impact from the lockdown in the state of Victoria, where the number of approvals rose 1.8%M/M and 22.7%Y/Y. The headline numbers would have been even firmer were it not for an 11.0%M/M decline in approvals for apartments, which are very volatile from month to month. In fact, private sector house approvals – which tend to be more substantial dwellings – rose a further 4.8%M/M in August to the highest level since January 2019. So the value of all residential approvals rose 4.4%M/M and 8.4%Y/Y. Non-residential approvals, which are especially volatile, increased 41%M/M in August to the highest level since January. And while this left them down 28.9%Y/Y, this owed to an exceptionally onerous base effect.

Australian private sector credit soft in August as business/investor credit remains subdued
In other news, the RBA reported that private sector credit was unchanged in August, causing annual growth to decline 0.2ppts to 2.2%Y/Y – the slowest growth recorded since April 2010. Housing credit rose 0.2%M/M for a fifth consecutive month, thanks to continued growth in lending to owner occupiers. Indeed lending to owner occupiers rose 0.4%M/M and 5.4%Y/Y, whereas lending to investors was unchanged in the month and down 0.6%Y/Y. Meanwhile, business lending fell 0.4%M/M in August. While this marked a fourth consecutive decline, this does follow a large precautionary lift in lending back in March. As a result, annual growth in business lending remains positive at 2.9%Y/Y.

Kiwi businesses a little less downbeat in September; dwelling approvals lift in August
The final results of the ANZ Business Outlook survey for September pointed to a modest improvement in the business environment in September. While the headline index nudged lower, the own activity index – which has the best correlation with economic activity – increased 12.1pts to -5.4. This outcome, which was 4.5pts firmer than the preliminary reading, amounted to the best outcome since February. Unfortunately, this still leaves the index about 28pts below its historic average. Employment, profit and investment intentions all improved during the month despite the partial lockdown in Auckland, with investment intentions actually nudging back into positive territory.

In other news, the number of new dwelling approvals issued rose 0.3%M/M in August following a 4.6%M/M decline in July. While still down 3.6%Y/Y, the level of activity remains very high by historical standards – surprisingly so considering the sharp decline in population growth that has occurred due to the closing of the country’s borders. After a slow start to the year prospects for the non-residential sector also remain encouraging, with the value of approvals rising 19.4%Y/Y in August.

US – ADP employment report due later today
In the US, meanwhile, ahead of Friday’s payrolls report, today will bring the private sector ADP employment report, which is expected to show an increase of around 650k in September. Pending home sales figures for August and revised Q2 GDP data are also due for release, with the latter expected to broadly align with the previous estimate of an annualised drop of 31.7%Q/Q.

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