Asian markets react to Wall Street/Technology weakness
With there being little in the way of domestic news to respond to, markets in the Asia-Pacific region were inevitably dominated today by yesterday’s reality check on Wall Street. That said, the losses in equity markets across the region were moderate compared to the 3.5% and 5.0% slumps recorded by the S&P500 and Nasdaq indices, notwithstanding the fact that US equity futures continued to trade a little lower during the Asian time zone.
Equity markets were weakest in Australia, where the ASX200 moved 3% lower (and ACGBs were a touch firmer) despite local retail sales numbers pointing to a considerable rise in spending in July (more on these figures below). Ongoing concerns about a deterioration in China-Australia relations probably didn’t help matters although, as elsewhere, technology stocks were at the forefront of the decline. European stocks have inevitably followed Asia lower this morning, albeit with the main indices down less than 1%. And major sovereign bonds are relatively little changed so far today, with yields on 10Y USTs currently up just 1bp from yesterday’s close near 0.64%, and thus still about 13bps down from a week ago.
Recovery in German factory orders slows at start of Q3
Judging from this morning’s factory orders data, the pace of recovery in the German industrial sector slowed at the start of the third quarter. In particular, new orders in July rose a weaker-than-expected 2.8%M/M in July to be down 7.3%Y/Y and still a little more than 8% down from February’s pre-pandemic level. That, however, meant that roughly three-quarters of the initial peak-to-trough decline has been reversed.
To some extent the relative sluggishness of the recovery in July was accounted for by a drop in major orders, which are typically highly volatile. Excluding such items, new orders rose 6.2%M/M. And with manufacturing turnover up 5.2%M/M, Monday’s industrial production report should confirm overall production growth in July somewhere in that ball-park.
Today’s data did, however, suggest something of a mismatch in demand from at home and abroad. Foreign orders rose a spritely 14.4%M/M, with those from other euro area member states up 7.3%M/M and those from other countries up 19.2%M/M. But domestic orders fell 10.2%M/M, tallying with some other soft German data for the start of Q3, such as Wednesday’s retail sales numbers, which implied that the temporary VAT has provided only modest support.
At the sectoral level, there was also significant variation, with orders of intermediate goods up a firm 9.5%M/M but those of consumer goods up just 0.2%M/M and capital goods down 0.4%M/M. But new orders in the car industry continued to recover, up 8.5%M/M to be down just 2.4% from the pre-pandemic level in February, with strong growth in demand for related items, not least batteries for electric vehicles. Those stronger orders, however, failed to register significantly in yesterday’s August new car registration data. So, we expect September to be a better month for German domestic car sales.
Australian retail sales grew strongly in July
The value of Australian retail spending rose a very solid 3.3%M/M in July. This outcome was very close to market expectations – which had been conditioned by the preliminary estimate published by the ABS on 21 August – and represented a third consecutive gain following the unprecedented 17.7%M/M plunge in spending that occurred in April. As a result, the level of spending was no less than 12% higher than a year earlier and just over 10% higher than the average observed during Q2, i.e. more than compensating for earlier pandemic-related weakness.
At the state level, spending fell 2.1%M/M in Victoria, where stage 3 restrictions were reinstated during the month. However, it appears that consumers in other states elected to bring forward some spending, perhaps in fear of a possible future widening of lockdown restrictions. For example, spending rose 5.9%M/M in New South Wales, lifting annual growth to 13.5%Y/Y. Looking through the rest of the detail, spending on household goods rose a further 4.0%M/M, raising annual growth to a heady 29.4%Y/Y. Food retailing rose 1.2%M/M and 15.0%Y/Y, while spending at cafes and restaurants rose 4.9%M/M but was nonetheless still down an unsurprising 12.1%Y/Y. The strongest pickup this month was in spending on clothing, which increased 7.1%M/M and 3.5%Y/Y.
We expect that Aussie retail spending likely fell sharply in August due to the lockdown in Victoria, where vehicle sales have already been reported to have slumped by two thirds. Prospects for the current month and beyond will depend in part on any changes made to those restrictions. On that score, Victoria’s state Premier is scheduled to provide an update on his pandemic response plan on Sunday, with some extension of current restrictions likely in the short term (the state reported 81 new cases of coronavirus today, albeit well down from almost 800 a month earlier).
US labour market report tops the bill for today’s remaining data releases
All eyes today will obviously be on the latest US labour market report, with significant uncertainty about what to expect. The median forecast for the increase in non-farm payrolls on the Bloomberg survey is 1.35mn. But yesterday’s underwhelming claims data – which were flattered by the change to the seasonal adjustment methodology – and Wednesday’s weaker ADP figure (428k) point to downside risks. So, it also remains to be seen whether - as is expected - the unemployment rate will fall below 10% for the first time since March.
Before the US data are out, the euro area data calendar will end the week with the release of the latest construction PMIs. Following yesterday’s less upbeat services sector PMIs, the construction survey might similarly suggest that the sector continues to struggle to regain traction in the face of ongoing uncertainties, with the headline index expected to remain below the key-50 expansion/contraction level in August.
The construction PMIs are also due in the UK. But unlike in the euro area, the UK’s headline index has recently indicated that activity in the sector has recovered relatively vigorously since lockdown measures relaxed. Supported by a rejuvenated housing market – which nevertheless might seem unlikely to be sustained beyond the end of the stamp duty holiday next March – the headline construction PMI is expected to tick up slightly from 58.1 in July.
Also due are the UK’s new car registrations data for August, which is typically a quiet month for auto sales. Reports – likely to be accurate – suggest that these will confirm a drop of around 5%Y/Y, following the rare jump (+11%Y/Y) in July. As a result, new car registrations will still be down about 40%YTD/Y over the first eight months of the year. Finally, MPC external member Michael Saunders is due to give a speech about the economy’s recent performance and his view on the outlook.