Continuity candidate Kishida becomes Japan's new PM

Chris Scicluna
Emily Nicol

US stocks sink as debt ceiling impasse, rising bond yields and falling consumer confidence weigh; so Asian equities sharply weaker today too; continuity candidate Fumio Kishida wins LDP Presidency to become Japan’s new PM
Wall Street endured its worst session since May yesterday, with the S&P500 slumping 2% to its lowest close in more than two months, with the market weighed down by a trifecta of concerns. One such worry was a continued sell-off in the bond market, with the yield on the 10Y note moving up a further 5bps to 1.54% as real yields rose to their highest (i.e. least negative) level since late June. And while that might suggest a positive outlook for growth rather than a growing risk of stagflation, a further decline in the Conference Board’s consumer confidence index to a seven-month low stoked worries that rising US virus cases and elevated inflation might leading to an unwinding of the surprisingly strong lift in retail spending reported in August. Last but certainly not least, the continued impasse in the Senate regarding the raising of the US debt ceiling – and the only slightly more pressing need to avert a government shutdown on Friday – provided further cause for angst. Indeed, during her Senate Banking Committee hearing yesterday, Treasury Secretary Yellen warned of ‘catastrophic’ consequences – including a self-inflicted recession and financial crisis – if the debt ceiling is not raised or suspended before 18 October, which is the Treasury’s current best guess as to when it will exhaust extraordinary measures that would prevent default.

While US equity futures have since moved about 0.5% higher, overnight developments in the US have weighed heavily on markets in the Asia-Pacific region today. The previously outperforming Japanese market has been impacted most, with the TOPIX down 2.1%% at the close. Within the past half hour, former LDP policy chief Fumio Kishida – very much the establishment candidate – won the party’s leadership election, defeating the rather more maverick minister for regulatory reform Taro Kono by 257 votes to 170. With the two leading candidates near-tied in the first round, Kishida comfortably won the run-off benefiting from his far greater popularity among legislators, who accounted for the lion’s share of votes in the second round.

Of course, we doubt that the outcome will have significant medium-term implications for Japan’s monetary and fiscal policy or broader economic outlook. After all, given Kishida’s fingerprints on the recent policy agenda, his moderate views on issues from nuclear power to foreign policy, and his relatively conservative tendencies, we should expect mere incremental reform along similar lines to recent years. And while Kishida previously spoke of the need for a post-election stimulus package in the “tens of trillions” (presumably circa ¥30trn), the near-term economic outlook will be dictated principally by the pandemic. Thankfully, the relaxation of the state of emergency amid the sharp decline in new coronavirus cases and good progress with vaccinations – with a larger share of the population now jabbed than in the US – suggests that economic activity should rebound in Q4. Regardless, however, perhaps not surprisingly, global developments were the key driver of Japanese markets today, with relatively little reaction to headlines associated with today’s election.

While not as large as in Japan, most other markets in the region have also been posting material declines on another quiet day for local economic data (that will change tomorrow, with China’s September PMI data of particular interest following very soft August readings). The KOSPI is down over 1% and the TAIEX almost 2%. In Mainland China, the CSI300 is down 0.8%, while a further easing of Evergrande contagion worries has left Hang Sang up 0.6% amidst a rebound in real estate and financial stocks. In Australia, the ASX200 is down a little more than 1%, weighed down by weakness in IT stocks. Given the sell-off in UST’s, bond yields have increased a little across the region despite the weak performance of equity markets.

Looking ahead, an afternoon panel discussion at the ECB’s monetary policy forum featuring Jay Powell, Christine Lagarde, Haruhiko Kuroda and Andrew Bailey should be closely watched even as attention remains on fiscal shenanigans in Congress.

Some signs of upwards pressures in UK shop price inflation survey; bank lending to households set to remain subdued
In the UK, the overnight release of the BRC’s shop price index suggested that, while prices remain down compared with a year earlier, there are further signs of upwards price pressures further up the supply chain feeding through to the High Street. In particular, retail prices reportedly rose for the third month out of the past four in September (albeit just 0.1%M/M on the survey measure) to leave the annual rate of decline moderating a further 0.3ppt to -0.5%Y/Y, the highest since January 2020. Within the detail, food price inflation was positive (0.1%Y/Y) for the first time in six months, while the decline in non-food price inflation eased a further 0.2ppt to -1.0%Y/Y. Indeed, prices of DIY and gardening products rose at the strongest annual rate since mid-2018, while the BRC’s electrical price inflation rose to a new record high, reflecting not least the persistent supply shortages in the sector. Indeed, given ongoing supply chain disruption in a range of sectors, labour shortages and higher commodity and energy prices, we expect to see at least some of these higher input costs being passed through to consumers in due course, despite significant competition on the High Street, the end of the job retention scheme and cuts to Universal Credit welfare payments.

Later this morning the BoE’s latest bank lending data for August will be released. Coinciding with the tapering of the government’s stamp duty holiday, July brought only the second net mortgage repayment in the past decade, while the number of mortgage approvals – an indicator of future borrowing – similarly fell back to the lowest since July 2020. And against the backdrop of waning household confidence, consumer credit is likely to have remained relatively subdued too.

The Commission’s September sentiment survey takes centre stage in the euro area; Spain’s flash HICP inflation data also due
Today’s data focus in the euro area will be the European Commission’s comprehensive sentiment survey results. In line with last week’s flash PMIs, these will highly likely suggest that supply constraints are weighing a little further on business sentiment, with the headline Economic Sentiment Indicator expected to have edged lower in September for the second successive month, albeit remaining within shooting distance of July’s series high of 119.0. The consumer confidence index is expected to confirm the surprise increase to a three-month high reported in the preliminary estimate. Meanwhile, the survey’s indices of price expectations of consumers, retailers and industrial firms are likely to remain elevated as the surge in energy prices and persistent supply shortages push costs higher. We will also get the first estimate of national CPI data for September with Spanish inflation numbers to be published. Market consensus sees the EU-harmonised CPI measure rising 0.3ppt to 3.6%Y/Y in September, the highest level in thirteen years.

Pending home sales ahead in a quiet day for US data; Powell to participate in ECB forum but fiscal negotiations on Capitol Hill might be bigger focus
Today’s US economic diary is light with pending home sales figures for August and the MBA’s weekly mortgage applications the only data points of note. As noted above, Jay Powell will take part in an ECB virtual panel discussion alongside his counterparts from the ECB, BoE and BoJ, and the Philadelphia Fed’s Harker will speak on the economic outlook. However, most attention might remain focused on Capitol Hill, to see whether Democrats and Republicans can find a way forward to avert a government shutdown on Friday.

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