Asian markets mixed after subdued US session as Fed decision awaited
With today’s FOMC meeting looming large, trading on Wall Street was relatively subdued yesterday with the S&P500 erasing early modest gains in late trade to close with a small loss of just 0.2%. The Treasury market traded sideways but the greenback weakened moderately. Since the close, Nasdaq futures have rallied slightly following Microsoft’s better-than-expected earnings report (Apple will report its earnings today), but S&P minis have moved a little lower (Treasuries are again unchanged, with the 10Y UST yield stuck at 1.03%).
Against that background, after recording heavy losses yesterday, Asian equity markets have been mixed today. After falling by at least 2% yesterday, markets were little changed in China and Hong Kong but South Korea’s KOSPI fell a further 0.6%. Japan’s TOPIX increased 0.7% on another quiet day for local economic news. But after being closed during Asia’s funk yesterday, Australia’s ASX200 fell 0.7%, with losses limited by another positive NAB Business Outlook survey and a lift in the weekly consumer sentiment index back to last year’s high. Meanwhile, despite a stronger than expected inflation report, longer-term Aussie bond yields have edged down a couple of basis points or so, reflecting the previous day’s rally in the US Treasury market.
Consumer confidence plunges in Germany, falls in France too
With Germany’s lockdown last week extended to mid-February, and rising concerns about the sluggish rollout of the national Covid-19 vaccination programme, consumer confidence in the euro area’s largest member state has tanked. This morning’s GfK survey suggested that German consumer sentiment weakened for a fourth successive month heading into February, with the headline index dropping more than 8pts, the most since last May and much more than expected, to -15.6, the lowest since June. The deterioration was evident throughout the detail of the survey, with the measure of willingness to make major purchases plunging in January to its lowest since the peak of the first wave of Covid-19 last April, and income expectations the worst since May.
This morning’s INSEE survey also suggested a weakening of French consumer confidence at the start of the year, albeit one that was by no means quite so marked as in Germany. In particular, following a rebound last month, the headline index fell 3pts in January to 92, back in line with the average in the three months to November. Within the detail, however, the survey reported a much larger drop (of 6pts) in the share of households considering it is a suitable time to make major purchases. In addition, the survey measure of savings intentions leaped 11pts back close to the series high registered at the time of the euro crisis. And household fears of unemployment rebounded too. Both the German and French surveys certainly point to a weakening of consumer spending at the start of 2021.
Impact on retail prices from lockdown hit to demand more than offsets increased costs from Brexit and shipping
Today’s BRC-Nielsen UK shop price index for January suggested that the negative shock to demand from tighter lockdown restrictions trumped the impact of increased cost pressures from Brexit and shipping freight tariffs to result in an acceleration in the pace of decline in prices on the UK high street. In particular, extra discounting in the winter sales pushed inflation on the survey down 0.4ppt to -2.2%Y/Y, the lowest since the initial lockdown in May. With the current restrictions on non-essential retail likely to last throughout the coming month and probably for much of March, deflationary pressures seem likely to persist on the UK high street through to the spring. Headline UK inflation, however, will soon take a step up not least due to higher prices of fuel and energy as well as the reversal of last year’s temporary VAT cut in the hospitality and tourism sector from 1 April.
FOMC meeting likely to maintain the status quo; durable goods report of interest ahead of tomorrow’s GDP report
Today we will learn the outcome of the first FOMC meeting of the year. Given the absence of significant new information since the last meeting, the Fed seems bound once again to indicate that it is content with current policy settings. During the press conference, Chair Powell will doubtless continue to express concern about recent developments in coronavirus case numbers and the risks this poses to the near-term outlook for activity, and continue to plea for the significant assistance that the fiscal stimulus currently proposed by the Biden Administration – but is facing push-back from Republican senators – would provide. Powell is also likely to reinforce the notion that any talk of tapering the Fed’s asset purchases is premature.
On the data front, most interest will centre on the advance durable goods orders report for December, with information on shipments providing some further insight on activity ahead of tomorrow’s GDP report.
China’s industrial profits grow 20.1%Y/Y in December, up just over 4%Y/Y in 2020
The only economic report in China today concerned developments in industrial profits. According to the NBS, growth picked up to 20.1%Y/Y in December from 15.5%Y/Y in the previous month, consistent with the strong lift in IP reported earlier. Coming after pandemic-driven weakness earlier in the year, growth in cumulative profits for the year-to-date improved further to register 4.1%Y/Y for the full calendar year. In the detail, due to weakness in coal and petrochemical industries, cumulative profits were still down a whopping 31.5% in the mining sector. However, profits in the manufacturing sector increased to 7.6% despite a near 27% decline in the oil refining industry. For the full year, double-digit growth in profits occurred in the telecommunications, machinery, pharmaceutical, chemical and non-ferrous metal smelting industries.
Australia’s CPI rises slightly more than expected in Q4, but core inflation still subdued
The focus in Australia today was the release of the CPI report for Q4. The headline index increased 0.9%Q/Q – 0.2ppts above market expectations – and so annual inflation lifted 0.2ppts to a still very subdued 0.9%Y/Y. As expected the headline index was lifted by some significant one-offs, including the further pass-through of the excise tax rise on tobacco and the cessation of free child care provided as part of the Government’s ‘Early Childhood Education and Care Relief Package'. Other notable increases including a 6.3%Q/Q rise in the price of domestic holiday travel and accommodation, following the re-opening of state and territory borders and commencement of the peak summer holiday period, and a 2.5%Q/Q increase in the price of private health insurance following a previous price freeze. Tradeables prices fell 0.4%Q/Q and were down 0.6%Y/Y, whereas non-tradeable prices increased 1.5%Q/Q and 1.5%Y/Y.
The core measures favoured by the RBA recorded much smaller increases than the headline index, but were still fractionally firmer than market expectations. Most importantly, the trimmed mean increased 0.4%Q/Q and 1.2%Y/Y – the annual outcome being 0.1ppts above market expectations. Meanwhile the weighted median increased 0.5%Q/Q and 1.4%Y/Y – the annual outcome 0.2ppts above market expectations. On these measures, underlying inflation remains well below the RBA’s 2-3% inflation target (indeed, the average of these annual movements has been beneath the target range since Q116 and beneath the target midpoint since Q414). So, while today’s report was a little firmer than the RBA had forecast in the November Statement on Monetary Policy – in quarter-point rounded terms, the Bank had forecast headline inflation of ½% and trimmed mean inflation of 1% – we expect little change in the Bank’s policy stance next week when the Board issues its first post-meeting statement of the year. While the economy is rebounding more quickly than the RBA had expected, neither employment nor inflation are close to meeting the Bank’s mandate and so policy settings will remain very accommodative for the foreseeable future.
Australian trading and employment conditions improve in December; ANZ Roy Morgan consumer confidence index returns to mid-December high
Today also brought an update on Australian business and consumer sentiment. Regarding the former, the NAB Business Survey pointed to a strong ending to the year for businesses. While the headline confidence index fell 9pts to +4 – possibly reflecting the latest local and international coronavirus news – the more important business conditions index increased 7pts to +14 – the highest reading since August 2018 and about 8pts above the historic average for the series. The trading index increased a further 5pts to +20, also the highest reading since August 2018. More remarkable was the 13pt lift in the employment index to +9 – the highest reading since September 2018 and consistent with the buoyancy observed in other labour market indicators. By contrast, the capex index was little changed and continues to track at a below-average level. Perhaps not surprisingly, firms reported the biggest 3-month lift in labour costs since February last year. However, despite also reporting a notable lift in the prices of their other inputs, firms’ selling prices were said to be almost unchanged over the period.
Meanwhile, the ANZ-Roy Morgan consumer sentiment index increased 2.5pts to 111.2 last week, matching last year’s mid-December high. With the late-December coronavirus scare in Sydney fading, the indices capturing views on the economic outlook were notable firmer, with the year-ahead index rising 8.5%M/M to the highest level since August 2019.