German retail sales fall sharply

Chris Scicluna
Emily Nicol

Asian equity markets begin the new month mostly firmer; bond yields up, especially in the Antipodes
A relatively quiet day on Wall Street saw the S&P500 trade modestly in the red for most of the session, before eventually closing with a 0.1% loss. The run of somewhat softer economic data continued, with the Conference’s Board consumer confidence index slumping more than 11pts to a six-month low and the Chicago PMI sliding almost 7pts, albeit to a still very robust reading of 66.8. Importantly with the August employment report looming, the steep decline in consumer confidence did not appear to reflect any negative developments in the labour market, as respondents continued to perceive jobs as very plentiful. In the bond market, the 10Y note unwound the previous day’s decline in yield to finish 3bps higher at 1.31%, dragged up by the sell-off in bunds following stronger than expected euro area inflation data and comments from two ECB Governing Council hawks, who called for a scaling back of the Bank’s asset purchases from Q4.

As we write, the new month has begun with US equity futures a few tenths firmer and the yield on the 10Y note a couple of basis points higher too. The tone in Asia is also positive, especially in China where the CSI300 is up 1.4 %. This is despite a downside surprise in the Caixin manufacturing PMI – indeed the first contractionary reading in 16 months – that appears to have simply consolidated opinion that policymakers will bring forth more stimulus before long. In Japan, the TOPIX has rallied 1.0% to the highest level since April, with the MoF’s corporate survey for Q2 reporting both a larger than expected lift in capex and a further increase in corporate profits. Japan’s manufacturing PMI for August also received a small upward revision, although the detail of the report continued to look weaker than the new 52.7 headline reading would ordinarily suggest. In political news, PM Suga denied media reports that he was planning to dissolve parliament mid-month in order to facilitate a 17 October election, saying that his top priority was to deal with the current virus outbreak. Some media reports, citing unnamed sources, have also suggested that Suga might seek to delay the LDP presidential election – expected for 29 September – until after the general election, given doubts about his ability to win the former. There was little reaction to a speech by BoJ Deputy Governor Wakatabe, who in light of the rise in virus cases delivered a cautious speech on the economic outlook while also touching on the Bank’s climate change strategy.

In the Antipodes, despite a stronger than expected GDP report (more on this below) and a rally in energy stocks, Australia’s ASX200 declined modestly today. In part this probably reflects an especially marked sell-off in the Australian bond market, with the 10Y AGCB yield rising 9bps to 1.24% as investors shook off their earlier gloom. The virus news included a further 1,116 cases in New South Wales. In Victoria, which recorded 120 new cases today, the state’s Premier said that the current restrictions would only ease materially once 70% of residents had received at least one dose of the vaccine – a target that is forecast to be met on about 23 September. In New Zealand, new virus case numbers moved higher today, but the 10Y NZGB still jumped 10bps to a more than two-month high of 1.90% as house price inflation hit a new all-time high of 27%Y/Y in August.

MoF survey confirms solid lift in business capex in Q2; also points to a lift in profits despite patchy sales
Today the MoF released the results of its quarterly survey of company performance, in this case pertaining to Q2. As usual, most interest centred on the survey’s findings regarding firms’ capex, which will guide revisions to the national accounts that are due to for release next Tuesday. Encouragingly, the survey reported that total business investment increased 3.2%Q/Q in Q2, so that spending was up 5.3%Y/Y. By contrast, respondents to Bloomberg’s survey had expected spending to have increased by around 3.5%Y/Y. Excluding software, investment spending also increased 3.2%Q/Q, but annual growth was slightly weaker at 3.6%Y/Y (but still slightly above the consensus survey). So, these figures bode well for next week’s revisions, at least confirming the preliminary 1.7%Q/Q lift in capex spending that alone was sufficient to drive the 0.3%Q/Q lift in GDP during the quarter.

Elsewhere in the survey, firms’ sales were reported to have declined 0.1%Q/Q in Q2, with 2.0%Q/Q growth in the manufacturing sector more than offset by a 0.9%Q/Q decline in the non-manufacturing sector. Even so, considering the depressed situation a year earlier, sales grew 10.4%Y/Y, led by a 20.1%Y/Y rebound in the manufacturing sector. Despite the small decline in sales, firms’ cost-cutting led to a further 1.8%Q/Q rebound in ordinary profits in Q2, which as a consequence are now up 93.9%Y/Y. As a result, in seasonally-adjusted terms, firms’ profit ratio increased by 0.1ppt to 6.4%, which is the highest reading since Q218. The quarterly growth was more than accounted for by the manufacturing sector, where profits increased 7.4%Q/Q and almost 160%Y/Y and the profit ratio increased 0.5ppts to 9.0%. Firms’ short-term borrowing declined 6.7%Y/Y, reflecting base effects associated with last year’s initial scramble for liquidity. By contrast, firms lifted their long-term borrowings by 12.7%Y/Y. Meanwhile, with economic uncertainty rising somewhat in the face of the delta virus variant, firms increased their cash and deposit holdings by 4.1%Y/Y – this following an 11.2%Y/Y increase a year earlier – and so their overall liquidity ratio increased 1.3ppts to 20.1%, which is just 0.1ppt less than the all-time high recorded a year ago.

Japan’s manufacturing PMI revised up in August, but the detail is less impressive than the headline; vehicle sales increase 4.4%Y/Y in August
In other news, today also brought the release of the final tabulation of the manufacturing PMI survey for August. After declining modestly in the preliminary report, the headline manufacturing PMI was revised up 0.3pts to 52.7. As a result, the index now stands just 0.3pts below the July reading and close to the average level over the past six months. That said, the detail of the survey still appears less robust than that headline PMI reading would ordinarily suggest. To one decimal place, the output index was unrevised at 51.0 and so still 0.8pts lower than in July. The new orders index was revised up 0.4pts to 51.7, but this remains 1.2pts weaker than reported in July. The news regarding export orders was worse, with the index revised down 1.2pts to a seven-month low of 49.3 – now down 3.0pts from July, almost certainly influenced by recent virus developments in China. Supply chain bottlenecks were in even greater evidence, with the supplier delivery index revised down 0.7pts to a new pandemic low of 39.5. With regard to pricing, the input prices index was revised up 2.2pts to 64.5, but remained 2.3pts below the previous month’s 13-year high. Meanwhile the output price index was revised up 0.6pts to 54.4 – now up 1.1pts from last month and the highest level since October 2018.

Finally, the number of vehicle sales increased 4.4%Y/Y in August, which was up slightly from 3.3%Y/Y in July. Sales of cars increased 3.7%Y/Y, but other than last this this still amounted to the weakest August month since 2008. Sales of trucks increased a steady 9.0%Y/Y. Meanwhile, sales of buses increased 4.7%Y/Y – the first positive reading since February last year but only because sales had plunged more than 57%Y/Y a year earlier.

China’s Caixin manufacturing PMI points to more widely spread slowdown in August
While yesterday’s official manufacturing PMI had suggested that the additional weakening of conditions in August was driven by large firms, today’s Caixin manufacturing PMI – which focuses on SMEs and exporters – suggested otherwise. The headline PMI fell a further 1.2pts to 49.2 in August, which was the weakest reading since the index plunged to just 40.3 in February last year and the first reading below 50 since April last year. In the detail, the output index slumped 3.0pts to a contractionary 47.8, thus also hitting an 18-month low. The new orders index fell 1.2pts to 48.0 and the new export orders index fell 2.4pts to 48.0 – the lowest levels in 16 months and six months respectively. The report also pointed to an increase in delivery times – no doubt due to curbs on activity – while upward pressure on input and output prices increased slightly but remained far below the levels reported during the first half of this year.

Euro area unemployment; final manufacturing PMIs; and new car registrations data due
Today will bring euro area labour market figures for July, which, consistent with the continued re-opening of the services sector, are likely to report a further decline in the level of unemployment that month. Indeed, the unemployment rate is expected to decline by 0.1ppt to 7.6%, which would be the lowest rate since May 2020 but still ½ppt above the pre-pandemic low.

This morning has already seen the release of German retail sales figures for July, which, similar to yesterday’s weak French consumer spending numbers (down 2.2%M/M), reported a decline last month after two consecutive months of strong growth, as households pivoted spending from goods to services. The pace of decline in Germany was significantly sharper than expected, however, with sales dropping 5.1%M/M to more than reverse the 4.5%M/M gain of the prior month. And the level of sales was 0.9% below the Q2 average.

Meanwhile, August new car registration numbers from several member states are also due and seem bound to report that sales remain well below pre-pandemic levels due not least to ongoing supply constraints on the production line. Indeed, this morning’s figures published by France showed that new car registrations were down 15.4%Y/Y in August, and almost one third below the level for the same month two years ago. And while French new car sales were up 12.6%YTD/Y over the first eight months of the year, they were down more than 23%YTD from the first eight months of 2019.

Finally, the final manufacturing PMIs – also due shortly – are likely to point to a further moderation in the industrial sector recovery in August, with the flash release having seen the output PMI decline 1.9pts to 59.2, a six-month low, amid ongoing disruption from global supply bottlenecks.

Final UK manufacturing PMI due for release; BRC survey points to still-subdued price pressures on the high street
The main focus in the UK today will be on the final UK manufacturing PMI for August, which, similar to the euro area’s survey, is likely to flag ongoing difficulties in the sector not least due to supply constraints. In particular, the flash release reported a 3pt decline in the output PMI to 54.1, a six-month low, with supplier delays having risen further last month to a level only exceeded once before (at the beginning of the pandemic) and therefore suggesting that input and output price pressures remained extremely high.

Despite significantly higher operating costs, however, the BRC Shop Price Index – published overnight – reported that price pressures remain highly subdued on the high street. Indeed, despite a modest upwards move on the month, retail price inflation remained firmly in negative territory in August (-0.8%Y/Y) for the 27th consecutive month. Retail food inflation remained modestly negative in August (up 0.2ppt to -0.2%Y/Y), while retail prices of non-food items were still down 1.2%Y/Y following a decline of 1.8%Y/Y in July. While some of the upwards drift will likely reflect base effects associated with the pandemic, the BRC also suggested that there were some modest indications that rising costs were starting to feed through, with certain non-food categories reporting sharp rises in inflation due to global supply shortages and shipping delays – indeed, retail prices of electrical goods were reportedly up 0.8%Y/Y in August, the strongest annual increase since the series began in 2006, while prices of DIY and hardware items recorded the first positive year-on-year reading since October 2019. Taken together with the HGV driver shortage and additional Brexit-related red tape and checks to come, retail prices might well come under further upwards pressure over coming months.

UK house prices surprisingly strong in August despite tapering of stamp duty holiday
Meanwhile, after yesterday’s BoE lending figures reported only the second net mortgage repayment in the past decade and a notable drop in the number of approved mortgages in July as the government’s stamp duty cut began to taper, today’s Nationwide house price index reported a surprising bounce in August. In particular, Nationwide estimate that UK house price rose a sizeable 2.1%M/M – the second-largest monthly gain in fifteen years – to leave prices up 11%Y/Y in August and around 13% higher than at the start of the pandemic. The continued strength no doubt in part reflects persistent lack of supply on the market. But other surveys suggest that new enquiries have also dropped back. And as the government support initiatives – including the tapered stamp duty holiday and Jobs Retention Scheme – wind down at the end of this month, we would expect to see some weakening in housing market activity in the final quarter of the year

ISM manufacturing survey the focus in the US today; construction, auto sales and ADP data also of note
Most interest today is likely to centre on the ISM’s manufacturing survey for August, especially in light of the softening seen in some of the regional manufacturing surveys. Daiwa America’s Mike Moran expects the ISM’s headline manufacturing index to report a modest 1.5pt decline to 58.0 in August, with risks perhaps lying to the downside in light of those regional surveys. The ADP employment report will likely only be of passing interest to investors given its recent failure to track the official payrolls count. Meanwhile, the construction spending report for July will likely confirm that the sector has lost its earlier vigour. Similarly, Mike expects August auto sales to have declined to a 13-month low.

Aussie real GDP grows a firmer than expected 0.7%Q/Q in Q2; real gross domestic income up 2.2%Q/Q due to surging commodity prices
The focus in Australia today was the release of the national accounts for Q2, albeit with the subsequent virus outbreak clearly changing the economy’s trajectory in the current quarter. While recent partial indicators had led analysts to expect a relatively soft quarter, today’s figures pointed to a respectable 0.7%Q/Q lift in real GDP, notwithstanding some minor virus-related disruptions during the quarter. This outcome was 0.3ppts above the consensus expectation. Meanwhile, with growth in Q1 also revised up modestly to 1.9%Q/Q, and given base effects associated with last year’s pandemic-driven slump in activity, annual growth in GDP increased to 9.6%Y/Y – 0.5ppts above the latest consensus estimate but in line with the rounded 9½Y/Y estimate made by the RBA in last month’s Statement on Monetary Policy.

Domestic demand contributed 1.6ppts to the lift in GDP in Q2, with that growth partly offset by negative contributions from net exports and inventories. Turning to the key expenditures, led by a 1.3%Q/Q increase in spending on services, household consumption grew a further 1.1%Q/Q and so was more than 15%Y/Y above the previous year’s depressed level. The strongest growth of 2.1%Q/Q was recorded in New South Wales, whereas Victoria – which had been in lockdown for two weeks from last May – saw growth of just 0.1%Q/Q. The increase in household spending was achieved partly through a drawdown in the household savings rate, which nonetheless remained elevated at 9.7% in Q2. Gross disposable income fell 0.3%Q/Q due to the winding down of pandemic support payments, as compensation of employees increase 1.2%Q/Q due to increased wages and hours worked.

Residential investment increased 1.7%Q/Q and 15.7%Y/Y, reflecting a very active housing market and high levels of new building approvals and renovations. However, commercial construction declined a further 1.9%Q/Q and so was down 6.2%Y/Y. Encouragingly, investment in machinery and equipment increased a further 3.4%Q/Q and so was up 22.7%Y/Y. Spending on intellectual property increased 2.3%Q/Q and 9.1%Y/Y. Meanwhile, as indicated yesterday, public demand made a positive contribution to growth, with government consumption spending rising 1.3%Q/Q and 3.7%Y/Y, while government investment spending increased 7.4 %Q/Q and 14.2%Y/Y. As yesterday’s BoP data had also indicated, net exports subtracted 1.0ppt from growth in Q2, reflecting a 3.2%Q/Q decline in exports and a 1.5%Q/Q increase in imports. Inventories made a small 0.2ppts negative contribution to growth in Q2.

Elsewhere in the accounts, rising export commodity prices resulted in a further 7.0%Q/Q lift in the terms of trade, which are now up a substantial 24.1%Y/Y. As a consequence, nominal GDP grew a whopping 3.2%Q/Q in Q2 and so was up 16.4%Y/Y. In addition, real gross domestic income increased 2.2%Q/Q and 15.0%Y/Y. The sharp improvement in the terms of trade also resulted in a 3.3%Q/Q lift in the GDP deflator. However, the domestic final demand deflator increased just 0.7%Q/Q and 1.4%Y/Y. Finally, the lift in hours worked during Q2 exceeded the increase in output. As a result, labour productivity fell 1.2%Q/Q and 0.7%Y/Y (the latter reflecting the high base in Q2 last year).

Australia’s manufacturing PMI revised fractionally higher but still down sharply in August; Australian house prices continue to increase rapidly in August
Turning to the rest of today’s Aussie data, the final results of the manufacturing PMI for August largely confirmed the marked weakening of conditions that was evident in the preliminary findings. The headline index was revised up just 0.3pts to 52.0 and thus still down 4.9pts from the July reading, clearly reflecting the virus outbreak and thus curbs on activity in around half of the country. The output index was revised up 1.2pt to a still contractionary 45.6, but was still 6.6pts below the July reading. However, the new orders index was revised down 0.7pts to 46.1 – now down 8.3pts since July – and the new export orders index was revised down slightly to 50.5. With the lockdown leading to a re-lengthened of supplier delivery times, the output prices index was revised up 2.0pts to 61.8 and so now just 1.1pts below July’s historic high.

Finally, despite the virus outbreak, the CoreLogic house price index increased a further 1.5%M/M in August. While this was the smallest increase since January, given that prices had declined in the same month a year earlier, annual home price inflation increased to 17.5%Y/Y from 15.1%Y/Y in July. Prices in Sydney grew 1.8%M/M to be up 20.9%Y/Y, with prices up 22%Y/Y or more Canberra, Darwin and Hobart. In Melbourne prices increased 1.2%M/M and 13.1%Y/Y.

Kiwi house prices continue to grow strongly in August, but momentum slows slightly
According to Corelogic, Kiwi house prices increased a further 1.6%M/M in August, down slightly from the 1.8%M/M increases over the previous two months. Even so, the annual pace of house price inflation increased to a whopping 27.0%Y/Y from 24.8%Y/Y previously, doubtless to the disappointment of both the Government and the RBNZ. We would expect momentum to slow further over coming months due to a combination of record building activity, tighter macro-prudential policy and – once the current virus outbreak is brought under control – tighter monetary policy. 

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