Equities mixed in Asia as investors await today’s US payrolls report; Japanese stocks outperform after surprise news that Suga will not contest the LDP presidential election and will thus step down as PM
On a day devoid of any major US data surprises, the S&P500 advanced a modest 0.3% yesterday, thus eking out a new closing high on light summer volumes. Meanwhile, with investors awaiting direction from today’s non-farm payrolls report, a similarly quiet session in the Treasury market left the 10Y yield down just 1bp to 1.28%, while the greenback was just a little weaker against its main counterparts.
US equity futures and the 10Y yield have nudged higher since the close, driven by surprising developments in Japan. Despite a downward revision taking the services PMI to a 15-month low in August, the TOPIX has continued its recent strong run, advancing 1.6% to trade at the highest level since April 1991. Sadly for the deeply unpopular PM Suga, the advance gathered significant pace following the shock news – first reported by public broadcaster NHK and later confirmed by Suga in a very brief news conference – that he would not seek re-election as President of the LDP at the upcoming election later this month. This development – which follows reports earlier this week that he had unsuccessfully sought to delay the party’s presidential election until after the Lower House election – means that Suga will relinquish his role as PM little more than twelve months after adopting the role.
Campaigning for the LDP leadership election – whose winner will then succeed Suga as PM – will officially begin in a fortnight, with the poll to be conducted on 29 September. The Lower House election could then be held before 21 October when the terms for current members of that chamber are due to end. But – assuming the new LDP leader wants time to establish his profile and platform – perhaps more likely is that Suga’s successor chooses to hold an extraordinary Diet session that enables the Lower House election to be held as late as 28 November.
Investors likely viewed today’s development – which, somewhat ironically, Suga said was motivated by his desire to focus on protecting Japan from the virus – as a positive for the LDP’s prospects in the Lower House election. Moreover, investors perhaps also expect Suga’s replacement to be more proactive in combating the economic impact of the pandemic. Indeed, one front-runner Fumio Kishida – who had already declared his candidacy and has reconfirmed today – has promised a large fiscal stimulus to help lift the economy. It now remains to be seen whether other candidates emerge, such as current Vaccine and Administrative Reform Minister Taro Kono (most popular in a Nikkei opinion poll conducted at the end of last month, and reported to be mulling a run), former Defence Minister Shigeru Ishiba (who has previously unsuccessfully sought the role on a number of occasions) or popular young Environment Minister Shinjiro Koizumi (son of former PM Junichiro Koizumi). It is worth noting that the reaction in the JGB market has been very restrained, suggesting that investors expect the BoJ’s monetary policy to continue in current form no matter who takes over the reins.
Turning elsewhere, after declining yesterday, stocks have also rebounded solidly in South Korea and Taiwan. However, a combination of a very weak Caixin services PMI – confirming the slump in the official PMI released earlier this week – and ongoing regulatory worries have depressed stocks in mainland China and Hong Kong, while stocks are also modestly weaker today in Singapore. In the Antipodes, Australian investors also shrugged off a downward revision to the services PMI to an identical 15-month low as that reported in Japan, with a rally in energy and materials stocks helping to drive the ASX200 to a 0.5% gain. Aussie bond yields have nudged higher, even as new virus cases in New South Wales leapt to a record 1,431 and a further 208 cases were reported in Victoria. Meanwhile, Kiwi bond yields again moved higher again today, supported by the encouraging news that the number of new virus cases had fallen to a 12-day low of just 28 today.
Japan's services PMI revised down to a 15-month low of just 42.9 in July
This week’s busy Japanese economic diary concluded today with the release of the final service sector and composite PMI reports for August. In contrast to recent tendency for revisions to moderate the decline reported in the flash report, the headline PMI services index – the business activity index – was revised down 0.6pt from the flash reading to an even weaker 42.9. As a result, this index is now 4.5pts below the July reading, and at its lowest level since in May last year when it stood at an especially depressed 26.5. The new orders index was revised up 0.2pt to 44.6, but this still left the index down 3.9pts for the month and also at a 15-month low. Similarly, while the business expectations index was revised up a more significant 1.8pts to 55.3, this remains 1.7pts lower than in July and the lowest reading since January. Encouragingly, there was no material revision to the employment index, which remained up 1.1pts for the month at an expansionary 50.9, thus continuing to signal a degree of optimism about the medium-term outlook. However, given the present weakening of activity, revisions to the surveys pricing indexes were downward. Of particular note, the 0.2pt revision to the output prices index extended the decline for August to 2.3pts with the final reading of 48.3 marking a 12-month low.
In combination with the small downward revision to the manufacturing PMI output index reported earlier this week, today’s weaker showing from the service sector meant that the composite PMI output index was revised down 0.4pt to a final reading of 45.9. This constitutes the lowest reading since August last year with the average for the quarter to date at the lowest level since Q3 last year.
China’s Caixin services PMI confirms shock contraction in services activity in August
Consistent with the shock decline in the broadly equivalent official PMI survey earlier this week, today’s Caixin services PMI pointed to a substantial weakening of activity in August, confirming that the local virus outbreak and associated curbs on activity were much more significant than the market had appreciated. The headline business services index slumped 8.2pts to 46.7 – the first contractionary reading since April last year and more than 5pts below the consensus estimate. The new orders index fell 4.9pts to 49.6 (also a 16-month low), but more encouragingly the future activity index fell a comparatively very modest 0.7pt to 62.0. The weakening in activity carried through into the survey’s pricing indicators, with the input prices index falling 2.7pts to 52.2 and the output prices index falling 3.9pts to 49.3.
In combination with the decline in the manufacturing PMI output index reported earlier this week, today’s slump in activity in the service sector meant that the composite PMI output index fell 5.9pts to a 17-month low of 47.2. While China’s reported success in containing it virus outbreak points to the likelihood of a substantial rebound when the September PMI is released, the average reading through Q3 – while above 50 – will almost certainly be weaker than the Q2 average of 53.0.
Euro area data to report drop in retail sales in July; German car sales and final August services PMIs to come
In the euro area, July’s retail sales figures for the region are due. In light of the substantive drop in Germany that month, we expect sales to have fallen back somewhat after two consecutive months of firm growth, as households rebalanced their spending away from goods towards services. Sales will, however, have remained firmly above the pre-Covid level. Today should also bring German new car registrations data for August, which are bound to be weak in light of supply constraints. Meanwhile, the final services and composite PMIs are expected to align with the flash releases which continued to point to a solid recovery, albeit at a slightly moderated pace. The preliminary services activity PMI edged a little lower to 59.7 in August, from 59.8 previously, while the composite PMI fell 0.7pt to 59.5, still the joint-second-strongest reading since 2006.
UK services PMI likely to confirm moderation of growth in the sector in August
The week in the UK will also end with the final release of the services and composite PMIs for August. In contrast to the euro area, the UK’s flash PMIs signalled a more pronounced slowdown in the pace of recovery last month. In particular, despite being the first full month of looser Covid restrictions, the services sector reported the greatest loss of momentum – the activity PMI was down 4.1pts on the month to 55.5 – with businesses reporting that reduced output due to shortages of staff or materials was fourteen times higher than usual and the largest since the survey began in 1998. The preliminary composite PMI fell to a six-month low of 55.3.
Non-farm payrolls the focus in the US today as Fed looks for ‘substantial further progress’ to kick off QE taper
Undoubtedly, most attention in the US today will centre on the official employment report for August. With the Fed still looking for ‘substantial further progress’ in the labour market, today’s report will likely go some way to determining whether the Fed announces its QE taper at its next FOMC meeting in September or perhaps delays until the following meeting in November. Daiwa America’s Mike Moran anticipates a further 750k lift in non-farm payrolls and a modest 0.1ppt decline in the unemployment rate to 5.3% (the latter constrained by a likely increase in labour force participation). In light of this week’s much weaker than expected ADP and ISM employment readings, the consensus estimate regarding payrolls has nudged a little lower since the beginning of the week and now stands at 725k according to Bloomberg’s survey. The ISM services survey for August will also be released today, and while too late to add insight into today’s payrolls report will still cast important light on the recent performance of the economy. In light of rising virus cases, Mike expects the headline index will decline 3.1pts from last month’s record high to a still impressive 61.0, thus continuing to signal very favourable conditions in the sector. The final reading of the Markit services PMI for August – which fell 4.7pts to 55.5 in the flash report – will also be released just ahead of the ISM’s survey.
Australia services PMI revised down to new 15-month low of 42.9 in August
With Australia’s virus outbreak worsening over the month, the final services PMI reading for August was revised down 0.4pts to 42.9 – a 15-month low, in common with the aforementioned identical reading in Japan. In the detail, all of the component indices were weaker than there flash readings. For example, the new orders index was revised down 0.7pts to 43.3, although this remains 0.8pts firmer than reported in July. Meanwhile, the employment index was revised down 0.4pts to a 15-month low of 48.5. The input pricing index was revised down 0.8pts to a 9-month low of 58.8. While the output price index was revised down 0.7pts to 54.2, this was still 1.0pts firmer than in July.
Despite today’s outcome, given the earlier upward revision to the manufacturing PMI output index, the composite PMI output index was revised down just 0.2pts to 43.3, with the average for the quarter to date now standing at a contractionary 43.3.