French and Spanish Q4 GDP data stronger than expected; Japan's IP falls

Chris Scicluna

US equities rebound Thursday, bond yields rise and greenback falls as risk aversion wanes
With no major surprises from yesterday’s US data, including confirmation of continued respectable GDP growth in Q4 (4.0%Q/Q AR), Wall Street opened in the black on Thursday following the previous day’s heavy decline. The S&P500 rallied for most of the session to be up more than 2% at one point, but slipped in the last two hours of trading to eventually close with a 1.0% gain (the Nasdaq posted a modest 0.5% advance). The recovery in equities weighed on the Treasury market, with the 10Y UST yield rising as much as 7bps to 1.07% at one point before declining to 1.05% as stocks came off their highs. The reduction in risk aversion saw the VIX close a little lower at around 30 and took some of the wind out of the greenback’s sails, with the Aussie and Kiwi dollars and sterling rebounding strongly. GameStop eventually closed down 44% for the session, triggering 19 trading halts along the way. But this stock has again surged in after-market trade, while Bloomberg reports that broker Robinhood tapped credit lines and raised $US1bn of investor funds in order to meet clearinghouse deposit requirements. Incoming Senate Banking Committee Chair Sherrod Brown announced that he would be conducting a hearing into recent developments in the stock market, arguing that “People on Wall Street only care about the rules when they’re the ones getting hurt” – comments that probably didn’t help sentiment on the Street in the closing hours.

US equity futures weaken sharply in Asia, helping to drive local markets lower again today
Unfortunately, US equity futures continued to weaken in Asia today, with the S&P mini down around ¾% as we write. The 10Y UST yield has ticked down to 1.04% and the return of risk aversion has seen the greenback claw back some of its earlier losses. As a result, equity markets in the Asia-Pacific region weakened steadily as today’s session has progressed. In Japan, the TOPIX closed down 1.6% with news of unexpected resilience in the labour market countered by a disappointing – but anticipated – decline in industrial output during December, a further decline in consumer confidence and the weakest housing starts in eight years (details below). JGB yields have nonetheless nudged higher – the 10Y yield rising 1bps to 0.05% – thanks to higher UST yields and a Tokyo CPI that strengthened more than markets had expected. In addition, the “Summary of Opinions” from last week’s BoJ Board policy meeting confirmed that members had discussed widening the allowable trading band for 10Y JGBs, with one member arguing that more flexible YCC and ETF buying would have limited impact on the economy and another arguing for the re-examination of the side-effects of current policy on financial intermediation and market functioning.

In China, where investors are awaiting Sunday’s official PMI reports, the CSI300 declined 0.5% as the PBoC allowed the overnight interbank repo rate to increase further to the highest since 2015 – a move that likely also weighed on stocks in Asia, amidst talk of the PBoC initiating a “stealth tightening”. Indeed, in South Korea the KOSPI fell 3% despite a much stronger-than-expected December IP report. Stocks also closed weaker in Australia, while Aussie bond yields were dragged higher by the selloff in the US Treasury market.

French GDP drops less than expected in Q4 while Spanish GDP posts positive growth
Ahead of the release of the first estimate of German GDP in Q4, which was put back to 9am UK time and we expect to report little change on the quarter, the equivalent French and Spanish figures were significantly better than expected, suggesting that euro area economies are coping much better than feared with renewed covid containment measures. In particular, having rebounded by a vigorous 18.5%Q/Q in Q3, French GDP fell 1.3%Q/Q, a far more modest decline than the consensus expected drop of 4.0%Q/Q. That left GDP down 5.0%Y/Y in Q4, compared with the drop of 18.8%Y/Y in Q3, and over the whole of 2020 French GDP fell 8.3%Y/Y.

Within the detail, the decline in French GDP in Q4 came predominantly from household consumption, which plunged 5.4%Q/Q following growth of 18.2%Q/Q the prior quarter. In contrast, fixed investment rose 2.4%Q/Q following growth of 24.0%Q/Q in Q3. And for a second successive quarter, exports (up 4.8%Q/Q) outpaced imports (up just 1.3%Q/Q) so net trade added 0.9ppt to GDP growth. With inventories adding 0.4ppt to growth too, final domestic demand subtracted 2.7ppts to GDP growth in Q4. While the smaller than expected decline in GDP last quarter gives cause for optimism about the French economy’s resilience to the pandemic, we still expect a further modest contraction in GDP this quarter before – Covid-19 permitting – recovery resumes in Q2.

While GDP in Spain was always thought to have fared better than in France, this morning’s first estimate also significantly beat expectations. Contrasting with the consensus expectation of a drop of around 1½%Q/Q, Spanish GDP actually managed to grow in Q4, rising 0.4%Q/Q following growth of 16.4%Q/Q in Q3. That, however, still left Spanish GDP down a steep 9.1%Y/Y, again likely representing the biggest drop from the pre-Covid level of output in the euro area. Unlike in France, no detail of the expenditure breakdown of the Spanish figures was published. But, as in its neighbour, weakness in household consumption was likely offset by continued growth in investment and positive contributions from net trade and inventories. Unlike in France, an improvement in recent survey indicators points to the possibility of continued Spanish growth in Q1.

Japan’s IP declines 1.6%M/M in December, much as expected, but firms expect big rebound in January
During a very busy day for Japanese data, the key release as far as activity was concerned was the preliminary IP report for December. Much as firms had forecast last month, overall production fell 1.6%M/M – just 0.1ppt weaker than the consensus estimate in Bloomberg’s survey – and so was down 3.2%Y/Y. While this followed an unrevised decline of 0.5%M/M in November, production still increased a very solid 6.1%Q/Q in Q4 thanks to the strong growth recorded during September and October. Elsewhere in the report, shipments also fell 1.6%M/M in December and so were down 3.4%Y/Y. Inventories increased 1.1%M/M – the first increase since March last year – but were still down 8.4%Y/Y. Meanwhile, the inventory-shipments ratio increased 2.0%M/M – the first increase since May last year – but was down 3.1%Y/Y.

In the detail, the decline in production in December was driven by capital goods, which fell 6.1%M/M to be down 8.9%Y/Y (9.2%Y/Y excluding transport equipment). While production of electrical machinery fell just 1.3%M/M, production of ICT equipment fell 8.5%M/M and production of general machinery fell 11.7%M/M. Production of consumer durable goods fell 2.7%M/M – with production of autos down 3.0%M/M – but was nonetheless up 3.2%Y/Y. Production of non-durable consumer goods increased a modest 0.4%M/M but was still down 5.3%Y/Y, whereas production of construction goods fell 2.2%M/M and 7.4%Y/Y.

Looking ahead, METI continues to describe the sector as “picking up”, which is supported by both the resilience of various manufacturing indicators – such as recent PMI and Reuters Tankan readings – and the latest forecast made by respondents to METI’s survey. Firms now predict a whopping 8.9%M/M increase in output – up from the already strong 7.1%M/M increase forecast last month – likely due in large part to the front-loading of orders ahead of next month’s Lunar New Year holiday in China. As usual firms forecast is likely to be far too optimistic, but METI’s estimate – which corrects for the upward bias – still points to a robust 4.4%M/M increase in output during the month. At this stage, firms expect only a modest pullback in output in February. Given those forecasts, at present we think that a further increase in industrial output of around 2.0%Q/Q is possible in Q1, which will provide at least a partial offset to the reduction in output that is certain to occur in the service sector as a result of pandemic-driven restrictions on activity.

Japan’s unemployment rate and job-applicant rate steady in December; housing starts
In other activity news, Japan’s labour market exhibited greater-than-expected resilience in December with MIC’s survey reporting that household employment fell just 60k following a very strong 430k advance in November. The annual decline in employment stands at 700k – driven by losses in the agricultural, retail trade and hospitality sectors – but nonetheless employment is 700k above the pandemic-low reached in April last year. With the labour force declining 10k in December, in rounded terms the unemployment rate was steady at 2.9% – 0.1ppts below market expectations. Resilience was also evident in the data issued by the MHLW, which reported that the effective jobs-to-applicant ratio was steady at 1.06x in December (the market had expected a modest decline). After increasing during the previous two months, the number of outstanding job offers fell just 0.1%M/M in December (reducing the annual decline to 21.4%Y/Y), while the number of new job offers fell 0.5%M/M (reducing the annual decline to 18.6%Y/Y).

In construction news, housing starts declined a disappointing 4.4%M/M in December to the lowest level since October 2011. As a result, starts were down 9.0%Y/Y and down 1.1%Q/Q in Q4. Meanwhile, Japan’s largest construction companies reported that construction orders fell 1.3%Y/Y in December. As a result, orders were down 2.7%Y/Y in Q4 with a 42.3%Y/Y jump in public orders providing only a partial offset to an 8.2%Y/Y decline in private orders.

Tokyo CPI rises sharply in January as travel subsidies suspended, food prices rebound
Turning to inflation, as expected the advance Tokyo CPI for January was significantly influenced by the suspension of the Government’s ‘Go-to-Travel’ subsidy programme. Indeed, this suspension resulted in a 40%M/M rebound in measured hotel charges to the highest level since February 2020. Given this move, which appears to have been a bit larger than the market had expected, hotel charges were down just 2.1%Y/Y in January, compared with the 33.5%Y/Y decline reported in December. This alone contributed 0.4ppts to an increase in annual headline inflation during January and even more to the core inflation measures given that the relative weighting of hotel charges increases as items are removed from the headline CPI.

The headline CPI index reported a seasonally-adjusted 0.5%M/M increase in average prices so that annual inflation increased 0.7ppts to -0.5%Y/Y, 0.4ppts firmer than the median estimate in Bloomberg’s survey of analysts. In addition to the scale of the rebound in hotel charges, some of the upside surprise may have been due to a sharper-than-expected rebound in prices for fresh food, which increased 5.7%M/M – albeit a smaller increase than usually seen in January – to be down 2.2%Y/Y, rather than 6.6%Y/Y previously.

The BoJ’s forecast measure of core inflation increased a seasonally-adjusted 0.6%M/M, raising annual inflation by 0.5ppts to a 4-month high of -0.4%Y/Y, 0.2ppts above market expectations. Energy prices fell 0.6%M/M – the seventh consecutive decline – and so were down 10.9%Y/Y. Nonetheless, the BoJ’s preferred measure of core prices – which excludes both food and energy – also increased a seasonally-adjusted 0.6%M/M and so annual inflation for this measure increased 0.6ppts to 0.2%Y/Y, 0.2ppts above expectations and the first positive reading since July last year. The narrower measure of core prices used overseas – which excludes all food and energy – increased 0.8%M/M, raising annual inflation by 0.8ppts to 0.3%Y/Y. In the detail, thanks to higher food prices, goods prices increased just 0.1%M/M in November and so remained down 1.4%Y/Y (excluding fresh food, goods prices fell 0.5%M/M with industrial goods prices down 0.4%M/M). Services prices increased 0.6%M/M – in large part reflecting the rebound in hotel charges – but were up just 0.2%Y/Y.

Japanese consumer confidence falls to 5-month low in January
In other news, the Cabinet Office consumer confidence index fell a further 2.2pts to 29.6 in January. This marks the lowest reading since August, but leaves the index still 8pts above the historic low visited in April. In the detail, all components of the survey were weaker this month, with a 2.5pt decline in the employment index and a 2.7pt decline in the overall livelihood index likely reflecting the rising incidence of coronavirus a relatively modest 1.5pts, but the index capturing respondents’ willingness to buy durable goods fell 2.2pts to a 5-month low of 31.6 – unfortunately for retailers, over 10pts below the long-term average for this series.

A busy end to the week in the US brings news on spending, inflation, wages and sentiment
Today’s US economic diary is a busy one. The personal income and spending report for December will cast light on the monthly profile of consumer spending that underpins the weaker-than-expected lift in private consumption in Q4 that was reported in yesterday’s national accounts (spending will most certainly have declined in the month of September). The core PCE deflator for December will also be of interest, with the 1.4%AR rise in Q4 fractionally firmer than had been expected (explaining a portion of the downside surprise to real consumer spending). Today will also bring the Employment Cost Index for Q4 (likely to report modest growth given slack in the labour market) and pending home sales for December (of interest in light of the modest decline reported in the previous three months). In addition, we will also receive the Chicago PMI for January and the final result of the University of Michigan’s consumer sentiment survey for January.

Australian PPI inflation remains subdued in Q4; private sector credit growth picks up modestly in December
Today saw the release of the PPIs for Q4, completing Australia’s suite of quarterly inflation measures. The final demand PPI (excluding exports) increased 0.5%Q/Q, in part reflecting the further pass-through of the lift in the price of child care services in mid-July following the end of the government subsidy. Higher prices were also recorded for building construction – where the Government’s Homebuilder programme is encouraging demand – and accommodation, consistent with the movements observed in the CPI. Even with this increase, the PPI was down 0.1%Y/Y.

In other news, the RBA reported that private sector credit grew just 0.3%M/M in December – the largest increase since March – causing annual growth to edge up to 1.8%Y/Y. Unsurprisingly, the pick-up was driven partly by developments in the housing market with a 0.6%M/M increase in loans to owner-occupiers – the most since July 2018 – driving a 0.4%M/M increase in overall housing credit (lending to investors increased just 0.1%M/M). Other forms of consumer credit remained exceptionally weak, with personal loans down a further 0.5%M/M and 12.3%Y/Y. Meanwhile, business lending increase 0.2%M/M in December, marking the first increase since April. As a result, annual growth in business lending edged up to 1.0%Y/Y after falling to an 8-year low in November.

Kiwi consumer confidence rises to 11-month high in January
The ANZ consumer confidence index increased a further 1.6%M/M in January to 113.8 – the highest reading since February and now just 4pts below the long-term average. The largest contributor to the improvement came from a further reduction in pessimism about the near-term outlook for the economy, with the proportion of optimists and pessimists now broadly in balance. Respondents remained optimistic about the outlook for their family finances – doubtless helped by record lows for mortgage interest rates – and attitudes to buying major household items improved further to also register an 11-month high.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at