German IP up for seventh successive month, while French IP falls

Chris Scicluna

US equities, bond yields and USD firmer; Asian equities mostly stronger
An unexpected increase in the ISM services index and continued reaction to the Democrats’ belated ‘blue wave’ drove Wall Street to new highs yesterday. The S&P500 advanced 1.5% to a new record high, while the Nasdaq increased an even larger 2.6% to also set a fresh high. In the bond market the upward march in UST yields continued, with the 10Y up 3bps to a new 10-month high of 1.08% and the 5Y5Y forward breakeven rising to a new 18-month high of 2.04%. In the FX markets the relentless sell-off in the greenback paused, with the dollar index rising about ½%. In political news, an under-fire President Trump issued a scarcely believable video in which he berated the same rioters that he had expressed love for the previous day. House Speaker Nancy Pelosi said that House Democrats may begin a rapid-fire impeachment of Trump if VP Pence fails to invoke the 25th Amendment to remove Trump early (there is no sign of the latter occurring). Others, including the WSJ, have called for Trump to resign.

Against that background, and with S&P futures rising a further ½% since Wall Street closed, for the most part it has been a very positive day for equity markets in the Asia-Pacific region. In Japan, on the first day of Tokyo’s soft lockdown, the TOPIX increased 1.6%, even as the Nikkei newspaper reported that the leaders of the Osaka, Kyoto and Hyogo prefectures were set to ask PM Suga to extend the state of emergency declaration to their region too. The yen depreciated further against the USD, briefly moving through 104/$ - a three-week low - a little while ago after yesterday's verbal action from the authorities, stating that the 'government and BoJ will work together as needed while carefully watching markets and the economy'. Elsewhere, of particular note, the high-flying KOSPI advanced a further 4.0% – extending the year-to-date gain to almost 10% – helped by news that Hyundai was in early discussions with Apple regarding collaboration in the production of electric vehicles (Hyundai’s stock surging more than 17%).

After a strong start to the year, however, China’s CSI300 bucked the trend with a loss of almost 1% as Shijiazhuang, a city of 11 million people near Beijing, was placed into lockdown by authorities due to a growing cluster of coronavirus cases. Meanwhile, pressured by the further sell-off in USTs, bond yields continued higher in most markets, with Australia’s 10Y yield rising 4bps to 1.12% (the highest since March) and the Kiwi 10Y yield up 5bps to 1.04% (the highest since April).

Japanese consumption data paint mixed picture, but Q4 on track for growth
Today’s Japanese economic data presented a mixed picture of consumer spending in the middle of Q4. Most importantly, the BoJ released its Consumption Activity Index – second only to the Cabinet Office’s synthetic consumption index as the most reliable indicator of the national accounts based measure of private consumption. Following a 0.7%M/M lift in October that was 0.4ppts smaller than estimated previously, the real index increased a further 0.9%M/M in November but remained down 3.7%Y/Y. In the detail, spending on durable goods increased 4.2%M/M and so was up 13.6%Y/Y. By contrast, spending on non-durable goods increased just 0.4%M/M and 0.6%Y/Y. Meanwhile, despite a further 0.6%M/M increase in November, spending on services – hit especially hard by the pandemic – remained down 10.0%Y/Y. Given November’s reading, the level of spending over the first two months of Q4 sits 2.7% above the average level through Q3, boding well for a private consumption making a positive contribution to growth during the quarter.

In related news, the MIC released its monthly survey of household spending and incomes for November. In contrary to the robust picture presented by the BoJ’s measure, but in line with earlier soft data from the retail sector, the MIC’s estimate of total real household spending fell 1.8%M/M – the first decline since July – causing annual growth to slow 0.8ppts to 1.1%Y/Y. Moreover, MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, fell a somewhat larger 2.9%M/M and so was down 1.8%Y/Y. That said, while the monthly pattern stands in contrast to the BoJ’s series, the MIC’s series still implies that spending is likely to have increased at a robust pace in Q4. Meanwhile, consistent with developments in yesterday’s Monthly Labour Survey, the survey’s measure of workers’ real disposable incomes fell 0.4%Y/Y in October – down from the 2.6%Y/Y increase reported in October and the first annual decline since April.

In other Japanese news, the Cabinet Office released its preliminary business indicators for November. The coincident indicator decreased a modest 0.3pts to 89.1, but the leading index increased 2.3pts to a 23-month high of 96.6 signalling continued recovery momentum.

German IP up for seventh month in November while imports outpace exports
Broadly in line with expectations, German industrial production rose for the seventh successive month in November and by 0.9%M/M. Following upwardly revised growth of 3.4%M/M in October, that left the average level of IP in the first two months of Q4 5.6% above the average in Q3, all-but guaranteeing a solid contribution (perhaps in the order of 1½ppts) to GDP growth in Q4. Nevertheless, German production was still down 2.6%Y/Y and 3.8% below the pre-pandemic level in February ahead of the pandemic.

Within the detail of the report, production of durable consumer goods rose 3.7%M/M to surpass the pre-pandemic level. And tallying yesterday’s factory orders data for the same month, production of intermediate goods (up 2.4%M/M) and capital goods (up 1.3%M/M) was firm, with weakness in non-durable consumer items (down 2.9%M/M). In particular, output of motor vehicles rose for a third successive month and by 2.2%M/M to be 4.6% below February’s level. Meanwhile, growth in production of machinery (1.8%M/M), chemicals (1.5%M/M) and pharmaceuticals (3.5%M/M) was also solid. Beyond manufacturing, energy production fell 3.9%M/M to be down 4.6% from February but construction output rose 1.4% to return to that pre-pandemic threshold. Surveys point to ongoing growth in December, with this morning’s confirmation of a rise of 4.4%M/M last month in the truck-toll mileage index – which often correlates well with developments in the industrial sector – also consistent with ongoing recovery towards year-end.

Meanwhile, the value of German goods exports also rose for a seventh successive month in November and by 2.2%M/M. That left the average level in the first two months of Q4 up 4.5% from Q3. German imports, however, were firmer, rising 4.7%M/M to leave the average so far in Q4 some 4.8% above the average in Q3. Compared to February’s pre-pandemic level, exports were still down 4.7% while imports were down just 0.6%. The trade surplus narrowed by €1.8bn to a three-month low of €16.4bn, nevertheless still above the average of the first ten months of 2020.

Despite further growth in manufacturing, French IP falls on lower energy
In contrast to Germany, French industrial production fell 0.9%M/M in November to be down 4.1% from February’s pre-Covid level. The decline, however, reflected a drop of 10.1%M/M in energy production, while manufacturing (up 0.5%M/M) and construction (up 3.6%M/M) rose. Compared to February, however, manufacturing output was still down 4.2% while construction was down 3.6%. Within the detail in the manufacturing sector, production of transport equipment grew 1.6%M/M but was still down 12.0% from February while output of machinery and equipment was up 1.4%M/M but 4.3% below February’s level.

Euro area unemployment data out later this morning
Looking ahead, euro area unemployment data for November are due later this morning. The headline unemployment rate is expected to edge up just 0.1ppt to 8.5%. While the reintroduction of lockdown measures in France and certain other member states that month will likely push the jobless rate higher, short-term working schemes, such as Germany’s kurzarbeit programme, continue to have success in supporting employment.

December employment report the key focus in the US today
While the fallout from Wednesday’s developments in Washington DC will doubtless continue to generate a large number of headlines today, as always the official labour market report for December will also be a key focus for investors. Given rising coronavirus case numbers and associated lockdown restrictions, Daiwa’s Mike Moran forecasts a mere 100k lift in non-farm payrolls and an unchanged unemployment rate at 6.7% (Bloomberg’s survey suggests that the market is slightly more pessimistic, with the unemployment rate expected to edge higher). Later in the day, the release of wholesale trade and consumer credit data for November will complete the week’s US diary.

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