German GDP a touch firmer than previously thought in Q4

Chris Scicluna

While Powell gave succour to US equities yesterday, China leads Asian markets sharply lower today
With the 10Y UST having reached a yield of 1.39% in early trade yesterday, Wall Street opened on the back foot with the S&P500 quickly down more than 1.8% and the Nasdaq down almost 4%. But the tone changed once Fed Chair Powell began to deliver his semi-annual Monetary Policy Report testimony before the Senate Banking Committee. Indeed, once again the Fed appeared to save the day, with Powell telling Senators that the US economic recovery is “uneven and far from complete, and the path ahead is highly uncertain”. Continuing, Powell reminded that the Fed remained “a long way” from achieving its inflation and employment goals and restated an unchanged outlook for both the Fed Funds rate and its asset purchase programme from that communicated at last month’s FOMC meeting.

With the reassurance that the outlook was not so improved as to require a reassessment of the Fed’s policy stance, Treasury yields receded from their earlier highs (the 10Y falling to 1.35% as Wall Street closed and moving a fraction lower since). As a result, with the Conference Board’s survey also pointing to a modest lift in consumer sentiment, Wall Street staged a substantial rebound that saw the Nasdaq close down just 0.5% and the S&P500 eke out an unlikely 0.1% gain – the first advance for six sessions. The greenback inched lower during the US session, but has weakened further in Asian trading.

US equity futures have weakened a few tenths since the close, perhaps causing investors in Asian markets to doubt that Powell’s reassuring words will prevent downward pressure on equity markets remerging over coming days. Indeed, equity markets opened lower in the region and have trended sharply lower throughout the day. While a loss of 3½% in Hong Kong owed in part to a since-deleted Hong Kong Economic Times report that the city would soon increase its stamp duty on stock trades, sizeable losses were also recorded elsewhere across the region. In China, the CSI300 continued to erase its pre-LNY gains, falling 2.7% to the lowest close since 1 February. The KOSPI also fell almost 2½%, while the TOPIX reopened from yesterday’s holiday with a fall of 1.8% to the lowest level since 5 February.

In the Antipodes, the RBNZ’s attempt to hold a dovish line proved futile. Investors responded to the Bank’s sharply improved baseline outlook by driving the 10Y bond yield up a further 5bps to a new high of 1.67% and rallying the Kiwi dollar to a fresh two-year high. Bond yields also made new highs in Australia as wage growth – while still very low – proved more robust in Q4 than analysts had expected, although disappointing construction figures provided a partial offset to the good wage news. The ASX200 was one of the better performing stock markets in the Asia-Pacific region today, but still fell 0.9%.

Japan’s labour cash earnings fall a revised 3.0%Y/Y in December; underlying inflation measures point to no lift in inflation pulse in January
The only macroeconomic data released in Japan today were the final results of the Monthly Labour Survey for December and the BoJ’s underlying inflation measures for January. As far as the former were concerned, total average labour cash earnings (per employee) are now estimated to have declined 3.0%Y/Y in December – 0.2ppts less than estimated previously, but still much worse than the 1.8%Y/Y decline reported in November. Both bonus earnings (now down 5.1%Y/Y) overtime earnings (now down 8.6%Y/Y) fell by 0.3ppts less than indicated in the preliminary report, while the 0.1%Y/Y decline in regular earnings was unrevised. Meanwhile, regular employment increased an unrevised 0.6%Y/Y in December. However, as usual, revisions have impacted the composition of that employment with growth in the number of full-time employees now estimated at 1.1%Y/Y (revised up 0.1ppts) but the number of part-time employees now estimated to have declined 0.2%Y/Y (revised down 0.1ppts).

Turning to the BoJ’s underlying inflation measures, the 10% trimmed mean, which the BoJ regards as best correlated with the state of the economy, fell 0.3%Y/Y in January – unchanged from the prior month and thus still at levels last seen previously in 2013. The weighted median lift in prices was 0.0%Y/Y, also unchanged from last month. Meanwhile, the net proportion of items recording a price rise over the past year increased to 10.5% in January – an improvement from last month (which had been the lowest reading in more than seven years) but still running at just half the pace seen prior to the pandemic.

Aussie wage growth rebounds in Q4, but still much too low to comfort the RBA; construction activity declines in Q4
Over recent months, the RBA’s Board has made clear that a substantial increase in wage inflation is likely to be required if a sustained increase in CPI inflation to levels consistent with the Bank’s 2-3% inflation target is to be achieved – a necessary condition for the Bank to contemplate lifting its cash rate target. Understandably, therefore, the key focus in Australia today was on the release of the Wage Price Index for Q4, especially in light of the record low growth seen in Q3. The good news is that overall wages increased 0.6%Q/Q in Q4 – double market expectations – so that annual growth remained steady at last quarter’s record low of 1.4%Y/Y.

It is likely that this outcome represents a degree of payback following two quarters of little growth, as this was the strongest quarterly outcome since Q219. Indeed, growth was driven by a 0.7%Q/Q lift in private wages, which had increased just 0.1%Q/Q in each of the prior two quarters. Public sector wages, which had not experience such restraint, increased 0.3%Q/Q in Q3. Compared with a year earlier, private wages increased 1.4%Y/Y and public sector wages increased 1.6%Y/Y – probably no more than half as strong as would be required to generate the CPI inflation that the RBA is seeking. It is worth noting that these headline figures exclude bonus earnings. Unsurprisingly, private sector wages grew a weaker 1.2%Y/Y in Q4 once bonus earnings are included.

In other Aussie news, the value of construction work undertaken fell 0.9%Q/Q in Q4 and so was down 1.4%Y/Y. This compared unfavourably with the consensus market expectation of a 1.0%Q/Q lift in activity, although the decline in Q3 was revised down 0.8ppts to 1.8%Q/Q. The recovery in housing-related activity was evident in a 2.7%Q/Q lift in residential construction (albeit still down 0.7%Y/Y), and recent approvals data suggest that a much larger increase is likely in the current quarter. However, non-residential construction fell a further 2.4%Q/Qin Q4 and so was down 4.5%Y/Y. Engineering-related construction (i.e. infrastructure) was also soft, declining 2.8%Q/Q and 0.3%Y/Y. Further information on non-construction investment will be released tomorrow in the Q4 CAPEX survey, which will also cast light on firms’ investment intentions over the next six quarters.

RBNZ leaves OCR at 0.25% as expected, predictably tries to maintain dovish rhetoric but tellingly opts not to publish a forecast for rates
As widely expected, today the RBNZ decided to hold its OCR at 0.25%. As had also seemed likely, the Bank opted to maintain the $NZ100bn cap on its LSAP bond purchase programme and made no changes to its Funding for Lending Programme. Equally predictably, with one eye on an appreciating Kiwi dollar, the accompanying Monetary Policy Statement and the Governor’s subsequent press conference attempted to maintain a dovish tone, despite a clear upgrade to the Bank’s baseline economic outlook. Following a 2.7% contraction in 2020, 1.3ppts less than the Bank had forecast previously, the economy is now forecast to grow 3.7% this year (revised up 0.3ppts) before growth slows to 2.6% next year. And the unemployment rate, which the Bank had previously seen peaking at 6.4% in Q2 this year, is now forecast to peak at just 5.2% (it fell to 4.9% at the end of last year). However, the Bank noted that the economic outlook is “highly uncertain”, and that the forecast return to full-employment and 2% inflation would not occur without prolonged monetary stimulus.

As for ‘how prolonged’, in a break from its usual approach, the Bank elected not to publish a forecast track for the OCR. However, the published model-generated track for the “unconstrained OCR” – which estimates what OCR would be required in the absence of support from other policy instruments such as the LSAP programme – projects a gradual rise in the OCR from early next year from modestly negative levels and given its trajectory implies that an OCR above current levels would likely be appropriate from around the middle of 2023. The LSAP programme is unlikely to run that distance – while the Bank made now changes today, Governor Orr noted that the current $100bn cap is not a target and is subject to review as conditions evolve. So despite the Bank’s attempt to remain dovish – including by noting that the Bank stands ready to deliver more stimulus if required – both Kiwi bond yields and the Kiwi dollar closed sharply higher on the day.

German GDP a touch firmer than previously thought in Q4, but private consumption much weaker than the consensus expectation
This morning’s revised German GDP figures nudged up the estimate of growth in Q4 by 0.2ppt to 0.3%Q/Q, which took the annual rate to -3.7%Y/Y (working day adjusted). Given the lockdown in the middle of the quarter, that was probably as firm as anyone might have dared hope. Indeed, the expenditure breakdown, published for the first time today, showed that the drop in household consumption was roughly double the consensus expectation at 3.3%Q/Q to be down 6.5%Y/Y. Surprisingly perhaps, government consumption also dropped (down 0.5%Q/Q) following strong growth earlier in the year (it was still up 2.6%Y/Y). So, the good news came from fixed investment which rose 1.0%Q/Q to be down just 0.9%Y/Y. Investment in construction was up 1.8%Q/Q and 3.0%Y/Y with capex on machinery and equipment down just 0.1%Q/Q albeit still down a steep 6.0%Y/Y. And with exports (+4.5%Q/Q) outpacing imports (+3.7%Q/Q), net trade added 0.6ppt to growth on the quarter with inventories also adding 1.4ppts.

The French INSEE business climate survey is due shortly, and seems highly likely to suggest broadly stable confidence in February. The headline indicator is forecast to remain unchanged at 92, the highest since March. The manufacturing business climate index, meanwhile, is expected to edge up 1pt to 99, just below the long-run average. But the equivalent services index (just 91 in January) will remain weak.

Round two of Powell’s testimony ahead in the US today, together with new home sales data
Today Fed Chair Powell will deliver the second leg of his semi-annual testimony to Congress, this time before the House Financial Services Committee. This should attract less attention than yesterday’s appearance before the Senate Banking Committee, as Powell’s prepared remarks should be repeated verbatim and the subsequent discussion with committee members will likely cover similar material too. The data flow is light today, with the focus being the release of new home sales data for January. Daiwa America Chief Economist Mike Moran expects new home sales to have picked up around 4.5%M/M, playing catch-up with the vigour that continues to be evident in most other housing indicators (including the home price data releasing yesterday).

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