Chinese recovery continues, UK labour market data mixed

Chris Scicluna
Emily Nicol

Asian markets mixed despite more good economic news from China
Aided by better news regarding the prospects for a timely coronavirus vaccine, Wall Street started the week with solid gains on Monday. At the close the S&P500 was up 1.3%, while the outperformance of the technology sector saw the Nasdaq gain an even larger 1.9%. But against that background, equity markets were somewhat mixed in the Asia-Pacific region today as attention turned increasingly to the looming Fed, BoJ and BoE policy meetings. Benchmark indices have increased about ½% in China, with sentiment boosted by a number of stronger-than-expected economic reports (more on these below). These data also saw the yuan continue its trend appreciation, today breaching 6.80 against the US dollar for the first time since May last year. At the other end of the spectrum, equity markets were down about ½% in Japan, probably not helped by a stronger yen. Following yesterday’s election of Yoshihide Suga as the LDP’s leader, media reports have continued to focus on the possibility that Suga will seek a public mandate as Prime Minister in a general election that might be held as soon as late next month – 12 months ahead of the required poll.

Elsewhere, Australian equities and ACGBs were little changed while investors factored the positive China news by bidding up the Australian dollar. This extended gains that had been recorded earlier as investors responded to some sanguine commentary in the RBA’s Board minutes (more on this below too). So far in Europe, equities are making modest gains, but major government bonds, including USTs, are little changed. Gilts are a touch weaker even as UK labour market data showed a modest pickup in the pace of decline in payrolls last month.

UK payroll losses pick up slightly in August, redundancies set to accelerate
This morning’s UK labour market data showed a drop in the number of workers on furlough and a rise in working hours in July as conditions in many sub-sectors of the economy started to normalise after the lockdown. Moreover, the number of job vacancies rose in August. But at the same time, the number of payrolls fell again last month. And with unemployment and the number of redundancies having been rising even before the government’s Job Retention Scheme was being phased out, today’s data seem to be merely the prelude to a significant jump in joblessness in the autumn.

In terms of some of the detailed numbers, the number of employees on payrolls was down only around 36k on the month in August. But that was the biggest drop since May. And it left the number of payrolls 711k (2.5%) below the peak at the start of the year and at the lowest level in more than three years. The Claimant Count – which includes people in work on very low incomes and working hours as well as those out of work – rose 0.2ppt last month to 7.6%, up from 3.4% at the start of the year, to represent 2.7mn people.

Meanwhile, the number of people estimated to be temporarily away from work, including furloughed workers, fell about 1mn in July, but remained about 5.5mn at the end of the month, compared to the peak above 9mn in late April. Within that total at end-July, over 2.2mn of workers temporarily away from work had been absent for three months or more. There were also around 250k away from work because of the pandemic and receiving no pay that month.

Given the return to work of some employees, average nominal regular pay growth (i.e. ex bonuses) returned to positive territory in the three months to July. But with the average number of hours worked still relatively low, it was up just 0.2%3M/Y from -0.2%3M/Y previously. (By contrast, median monthly pay was up 2.3%Y/Y in July.) And including bonuses, total pay was still down 1.0%3M/Y, representing a drop of 1.8%3M/Y in real terms. More happily, the number of vacancies in the three months to August rose to 434k, up about 30% from the record low in the three months to June, but still down sharply from 818k in the three months to February.

Of course, the Job Retention Scheme has – for the time being – helped to keep the headline ILO unemployment rate low. However, this rate still rose 0.2ppt in the three months to July to 4.1%. And the three-month average masked a rise of 0.6ppt in the single-month estimate in July to 4.4%. The number of redundancies was up 48k over the three months to July, the most since the global financial crisis in 2009. Unfortunately, firms over that period had already given the government insolvency Service notifications of risks of 380k redundancies, and the total number of coming months could be twice as much as that.

China’s factory recovery continues in August
Turning to today’s Chinese data flow, the industrial production report confirmed the continued factor sector recovery that had been indicated by the PMI and trade reports released earlier this month. Indeed, growth in industrial production increased by a greater-than-expected 0.8ppt to 5.6%Y/Y, so that production for the year-to-date rose 0.4%YTD/Y – the first time this year that year-to-date growth has been positive. In the detail, growth in manufacturing activity was steady at 6.0%Y/Y, with growth in auto production slowing to 14.8%Y/Y but growth strengthening across a number of other major industries, including metals smelting, pharmaceutical products and general equipment. Given steady growth in the manufacturing sector, the improvement in overall IP growth owed to a roughly 4ppt increase in growth of mining activity and power generation (now up 1.6%Y/Y and 5.8%Y/Y respectively).

Chinese retail spending and capex and also firmer in August
The news from the demand-side of the Chinese economy also improved in August. First up,growth in retail spending was a touch stronger than expected at 0.5%Y/Y in August – an improvement on the 1.1%Y/Y decline reported in July and the first positive reading this year. And with CPI inflation having eased 0.3ppt during the month, the real improvement is probably slightly greater than indicated by the nominal growth data. Stronger growth was recorded across most goods, with growth in spending on communications equipment more than doubling to just over 25%Y/Y. Nonetheless, given the dreadful start to the year, retail spending was still down 8.6%YTD/Y in August.

Turning to the business sector, investment spending on non-rural fixed assets declined 0.3%YTD/Y in August – also slightly firmer than market expectations and an improvement on the 1.6%YTD/Y drop reported in July. Encouragingly, all of the improvement came from the private sector, where the decline in investment slowed to 2.8%YTD/Y from 5.7%YTD/Y previously. Growth in state investment slowed slightly to 3.2%YTD/Y. Coming off sharp declines earlier in the year, improving trends were evident across most industries, albeit with spending still down on a YTD basis in most cases. Understandably, some of the strongest growth remains in the pharmaceutical sector (18.3%YTD/Y) and healthcare/social works sector (16.5%YTD/Y). Finally, with the economy now back on an expansionary path, the urban unemployment rate nudged down 0.1ppt to 5.6% in August – now just 0.3ppt above where it stood in January.

German manufacturing employment well down in July
Germany’s ZEW investor confidence survey, due later this morning, is expected to show an improvement in perceptions of current economic conditions in September. And we will also see the release of euro area labour costs data for Q2. In this respect, with firmer wage growth over the past year, labour costs rose 3.4%Y/Y in Q1, the strongest rate since Q209. While this headline growth rate will remain firm in Q2 – indeed German labour cost growth accelerated a further 0.4ppt to 5.1%Y/Y in Q2 – weak demand has prevented a pass-through to inflation, and wages will slow over coming quarters slow in response to rising labour market slack.

Certainly, today’s manufacturing employment figures illustrated the underlying softness in the German labour market, with the number of people employed in firms in the sector (of 50 or more workers) down 164k (2.9%) at the end of July compared with a year earlier, with broad based weakness across subsectors – e.g. the number of people working in metal production was down a little more than 5½%Y/Y (14k), while the number employed in the autos sector was down 4.1%Y/Y (35k). But the drop so far has been clearly limited by the government’s “Kurzarbeit” short-time work scheme. Indeed, the number of hours worked were down a sharper 8.5%Y/Y, with double-digit annual declines in metal production (-18.6%Y/Y), mechanical engineering (-12.0%Y/Y) and production of rubber and plastic goods (-10.9%Y/Y).

This morning, Destatis also published turnover data from the hospitality sector in July, which continued to indicate ongoing recovery in the sector since the relaxation of Covid-19-related restrictions. Indeed, sales were up 21.9%M/M in July, after growth of 65%M/M in June and 41%M/M in May. Of course, this followed a significant slump during the height of the outbreak, with sales in the sector still down 28.7% compared with the pre-crisis peak in February, and therefore down 37.2% in the first seven months of the year compared with a year earlier.

RBA minutes give no signs of near-term easing; AUD judged at fair value
Today the RBA released the minutes of the September Board meeting – one at which the Bank retained its key overnight cash rate and 3-year yield target but expanded its Term Funding Facility (TFF). As usual the minutes contained only a modicum of additional information relative to the expansive statement that was released by the Bank with the policy decision. However, following the release of the minutes the Aussie dollar nudged a little higher, probably underpinned by the Bank’s observation that the currency’s appreciation had been consistent with the increase in commodity prices over recent months. And while noting that a weaker currency would help the recovery, the Board acknowledged that the Aussie dollar was “broadly aligned with its fundamental determinants”.

Meanwhile, investors may also have been expecting the minutes to focus a little more on downside risks to the economy and perhaps contain some discussion opening the door to future easing moves. Instead, the minutes reaffirmed that to date Australia’s downturn had not been as severe as the Board had earlier expected and that a recovery was under way in most of the country. And in considering future policy options, the minutes did not expand on the Board’s statement that it would maintain highly accommodative settings as long as is required and that it would “…continue to consider how further monetary measures could support the recovery.”

Australian house prices confirmed to have declined in Q2
The ABS measure of existing home prices fell in Q2, as had been suggested by more timely indicators, thus interrupting a year-long recovery. The average price across Australia’s eight capital cities fell 1.8%Q/Q, led by a 2.3%Q/Q decline in Melbourne and a 2.2%Q/Q decline in Sydney – cities that had seen particularly strong growth over the summer. As a result, annual growth in house price inflation slowed to 6.2%Y/Y, with prices still up 8.8%Y/Y in Melbourne and 8.1%Y/Y in Sydney. Monthly indicators for the first two months of Q3 suggest that prices have continued to decline at a similar pace to that seen in Q2.

US IP in focus later today
In the US, this afternoon will bring the latest industrial production figures for August, which, in line with a firm reading in the ISM survey and strong order flows, are expected to record the fourth consecutive monthly increase (circa 0.7%M/M). Meanwhile, the Empire Manufacturing survey is likely to point to further recovery in the sector in September too.

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