European central bank commentary triggers bond sell-off; equity markets rise nonetheless in the US and Japan, but mixed elsewhere; Lagarde pushes back this morning
While the US Treasury market had initially reacted calmly to Wednesday’s slightly more hawkish Fed communication, messaging from (some) European central bankers kicked yields sharply higher yesterday. Of particular note, a Reuters report indicated that eight ECB policymakers shared the Fed’s sense of clear upside risk to the inflation outlook (albeit the latter buried deep in the Summary of Economic Projections materials). A more hawkish BoE commentary, with the Bank signalling a "strengthened" case for "some modest tightening" ahead, only served to reinforce the case for higher yields. So, by the close the US 10Y yield had increased 13bps to 1.43% – a level last seen in late June – while earlier the 10Y Gilt had closed up 11bps and the 10Y Bund up 7bps. Higher yields might have been expected to weigh on equity markets, especially with September flash PMIs indicators softening a little in both the US and Europe. However, the S&P500 rallied 1.2% to its highest close in five sessions, with trading dominated by a recovery in risk sentiment as China Evergrande contagion worries eased. The reduction in risk aversion led to less demand for the greenback (and even less for the yen), notwithstanding the sharp lift in Treasury yields.
Treasury yields have nudged a little higher still in Asian trading today. Meanwhile, it has been a somewhat mixed session for Asian equity markets. In Japan, the anchor provided by the BoJ’s ultra-accommodative policy means that the 10Y JGB yield has increased only slightly more than 1bp to 0.05%. As a result, the TOPIX has rallied more than 2% to largely erase the losses posted over the previous two sessions. A welcome rebound in Japan’s services PMI probably helped sentiment, even as the latest manufacturing PMI data pointed to a temporary loss of forward momentum amidst worsening supply bottlenecks (more on today’s Japanese data below). Looking elsewhere, with investors awaiting confirmation of the coupon payment that was scheduled yesterday, China’s Evergrande’s stock has erased about half of yesterday’s almost 18% rebound. Nonetheless, the Hang Seng is roughly flat today and the CSI300 is up about 0.4%. Stocks are little changed in both South Korea and Singapore, but slightly weaker in Australia. At least in part, the latter owes to a 14bp sell-off in the 10Y AGCB, with materials stocks also declining despite a further recovery in the price of iron ore. The Kiwi 10Y bond yield increased 11bps to 1.99%, with news of just nine new virus cases re-establishing the downward trend and increasing the likelihood of the RBNZ hiking its policy rate next month.
So far this morning, European government bond yields have opened a little higher again. However, that move has come despite an interview given by ECB President Christine Lagarde a little while ago, in which she appeared to push back on yesterday’s Reuters story. Certainly, the tone was broadly dovish. Among other things, Lagarde highlighted that many factors driving inflation higher – including energy prices and Germany’s tax changes – will prove temporary. She again emphasised that there remains “quite a lot of slack” in the labour market, which the ECB was paying “great and close attention to”. And, once again, she invoked Thatcher, repeating that “the lady is not for tapering”.
Japan’s flash services PMI rebounds in September; flash manufacturing PMI falls as supply bottlenecks worsen
In contrast to the softer readings reports in the US and Europe yesterday, on balance Japan’s flash PMI surveys for September cast the economy in a stronger light. In particular, after declining 3.3pts to a 12-month low in August, the composite PMI output index rebounded 2.2pts to 47.7 in September – still the third lowest reading this year but a welcome result nonetheless. The improvement this month owed to less dire conditions in the service sector, doubtless reflecting a very sharp decline in new virus case numbers amidst an accelerated vaccination programme. Indeed, the headline services index – the business activity index – increased 4.5pts to 47.4, thus recapturing the level it had held in July. The new orders index also improved 3.0pts to 47.6 and the employment index increased 0.5pt to five-month high of 51.4. On the pricing front, the input prices index increased 0.4pt to a six-month high of 54.1, while the output prices index rebounded 1.9pts to 50.1, but remains short of where it stood in July.
As in previous months, the flash manufacturing PMI cast the factory sector in better shape than the service sector, but worsening bottlenecks – especially in the auto sector – are clearly closing the gap. The headline manufacturing PMI fell 1.2pts to 51.2, thus marking the weakest outcome since January. And while this reading would normally point to an ongoing – albeit slowing – expansion in activity, the detail of the survey suggests downward pressure on output in the near-term. In particular, the output index fell 2.9pts to a contractionary 48.1, marking a 12-month low for this series. A significant note of caution was also sounded by the new orders index, which also fell 2.9pts to a 10-month low of 48.8. Evidence of intensifying supply bottlenecks was provided by the supplier deliveries index, which declined 1.1pts to 38.4 – the lowest level seen since that recorded in the aftermath of the huge Tohoku earthquake and tsunami in 2011. In addition, despite downward pressure on activity, the input prices index jumped 3.8pts to 63.3 and the output prices index increased 0.5pt to 54.9 – in both cases the highest readings since 2008. On a more positive note, after slumping 3.0pts last month, the new export orders index rebounded 1.4pts to 50.7 and the employment index increased 0.2pt to a 22-month high of 51.8 – the latter indicating that manufacturers expect improved conditions over the medium-term once supply bottlenecks are resolved.
Japan’s underlying inflation trend remains fractionally above zero in August
The other key report in Japan today was the national CPI for August, although as usual this printed close to the consensus expectation following the guidance given earlier by the release of advance data for the Tokyo area. The headline CPI index declined 0.2%M/M in seasonally adjusted terms, thus erasing the 0.2%M/M lift reported in July. As a result, the annual inflation rate fell by 0.1ppt to -0.4%Y/Y, which was just 0.1ppt below the consensus forecast. While prices for fresh food increased 1.7%M/M, this was a smaller increase than usually seen in August and so the annual decline in prices more than doubled to 8.8%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – declined by a smaller 0.1%M/M. This was sufficient to lift annual inflation by 0.2ppt to 0.0%Y/Y – the first non-negative reading in 13 months and in line with the consensus estimate. In aggregate, energy prices were stable in August – the first month this year they have not increased – and so base effects lowered their annual increase to 5.5%Y/Y. And so the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – declined 0.3%M/M in August, also erasing a 0.3%M/M increase in July. This lifted annual inflation on this measure by 0.1ppt to -0.5%Y/Y, which was just 0.1ppt weaker than the consensus estimate. The narrower measure of core inflation used overseas – which excludes all food and energy – also firmed 0.1ppt to -0.7%Y/Y. Of course, all of these measures remain impacted to by the sharp decline in mobile call fees that occurred back in April. Netting out this impact and the impact of the rebound in energy prices, we would characterise the inflation trend as being very modestly positive, as was indicated last month by the 0.2%Y/Y increase in the BoJ’s measure of the trimmed mean (on Tuesday, the BoJ will updated this measure for August).
Elsewhere in the detail, total goods prices increased 0.1%M/M for a second consecutive month, which due to base effects lowered their annual inflation rate by 0.3ppt to just 0.5%Y/Y. However, the decline in annual inflation owes solely to the aforementioned weakness in fresh food prices, as goods price inflation increased 0.2ppt to 1.4%Y/Y once fresh food is excluded. Industrial goods prices decline 0.1%M/M but were up a steady 1.4%Y/Y, which mostly reflects the impact of higher energy prices. After increasing almost 4% over the previous two months, prices for household durable goods declined 0.4%M/M in August but annual inflation for these items still increased to a 21-month high of 5.3%Y/Y. In the services sector, prices were stable in August, so the annual decline in prices – driven by the aforementioned reduction in mobile calling fees – eased 0.2ppt to 1.3%Y/Y. Prices for recreational services increased 7.0%Y/Y, but this follows the 5.6%Y/Y decline recorded a year earlier when the government launched it’s ill-fated “Go-to” travel and hospitality subsidy programme.
Finally, in today’s other news, amidst rising virus cases and the re-imposition of restrictions, Japan’s national department store sales declined 11.7%Y/Y in August, contrasting sharply with the 4.2%Y/Y lift reported in July. Moreover, this outcome is flattered by base effects associated with the pullback in spending following the onset of the pandemic last year, as the level of sales in August was around a third lower than in August 2019. In the detail, spending on personal accessories declined 11.9%Y/Y and spending on clothing fell an even greater 18.5%Y/Y. After outperforming in the early days of the pandemic, sales of household goods also fell 17.4%Y/Y. Of course, the aforementioned improvement in the services PMI perhaps suggest that a rebound in spending likely occurred this month.
UK consumer confidencefalls to 5-month low in September as concerns about rising cost of living and end of furlough grow
While the BoE stated yesterday that the case has strengthened for some modest tightening of monetary policy over its forecast horizon, and also cited strong household sentiment, the latest UK consumer confidence survey released overnight highlighted the downside risks to demand over the near term. Indeed, seemingly not least due to concerns about the rising cost of living, the end of furlough and imminent cuts to Universal Credit welfare payments, the headline sentiment indicator fell a steeper-than-expected 5pts in September to -13, the lowest reading since April. The weakness was broad-based. While the biggest drop was recorded in households’ expectations for the economic outlook over the coming twelve months, which fell to its lowest since March, respondents were also more downbeat about their expected financial situation. So, unsurprisingly, households also assessed it to be a less favourable climate for making major purchases, with the survey index falling to its lowest since May, albeit remaining considerably higher than the lows seen earlier on in the pandemic. The CBI’s distributive trades survey – due later this morning – is expected to report softer retail sales growth compared with a year earlier despite the relatively low base a year ago. While we continue to expect the UK’s economic recovery to continue over coming months, the recent softening in forward-looking indicators – among consumers and businesses alike – supports our view that the BoE will want to wait a little longer to assess the impact of these supply-driven price pressures before tightening policy. Indeed, we think that take-off for Bank Rate will not occur before the second half of next year.
Today’s euro area sentiment data likely to confirm yesterday’s softer flash PMI readings
The end of the week will bring several more national sentiment surveys, including most notably the German ifo business climate indicators. Like yesterday’s flash PMIs, these are expected to show a deterioration in the headline index in September to a four-month low as firms’ optimism about the near-term outlook is tempered by concerns about supply disruption and rising cost pressures. The Italian ISTAT business and consumer confidence surveys are similarly expected to show a further moderate loss of momentum at the end of Q3 albeit with headline indices remaining at historically high levels.
New home sales data for August wraps up this week’s US economy diary
The week’s US economic diary concludes today with the release of new home sales data for August. Daiwa America’s Mike Moran notes that the easing in new home sales that began early in the year seems to be stabilizing, but hints of a pickup are scarce. The index of buyer traffic through new homes has declined for four consecutive months, and mortgage applications have picked up only modestly. As a result, he expects new home sales to have remained close to the level reported in July.
New Zealand’s trade deficit widens in August as exports decline, but import surge continues
New Zealand’s merchandise exports declined 4.9%M/M in August – a second consecutive decline following a surge to a record high in June, and so leaving exports little changed from a year earlier. To some extent, this outcome would have been affected by the national lockdown that commenced in the second half of the month. That said, imports receipts increased 4.4% M/M despite the lockdown and so were up a whopping 38.4% Y/Y. Indicative of the economy’s strong momentum ahead of the lockdown, imports of consumption goods increased more than 24%Y/Y and imports of machinery and plant increased almost 30%Y/Y. Given these figures, the unadjusted trade deficit widened to a record NZ$2.1bn in August, although slightly more than half of that deficit can be attributed to seasonal factors (the usual seasonal lull in primary exports, in particular).