Japan’s lower house formally elects Fumio Kishida as new PM

Chris Scicluna
Emily Nicol

Wall St rallies Friday as bond yields retrace; however, markets mixed in Asia today, with HK and Japan weaker during a holiday-impacted session, with China Evergrande in the news
The debt ceiling and other fiscal worries that had weighed on Wall Street seemed to melt away on Friday, at least temporarily, with the S&P500 advancing 1.2% and so almost completely erasing Thursday’s loss. Some comfort was taken from a robust ISM manufacturing survey for September and a solid lift in consumer spending in August, even as supply constraints lowered September auto sales to a 17-month low. Also helpful was a further nudge lower in bond yields, with the 10Y note closing down 3bps at 1.46%. The decline in bond yields, which weighed a little on the greenback, came despite the core PCE deflator rising a slightly greater than expected 3.6%Y/Y in August and even though the University of Michigan’s 5-10Y measure of inflation expectations printed at an upwardly-revised five-month high of 3.0%Y/Y.

Today, markets in Mainland China remained closed for the Golden Week holiday, while South Korean markets were closed in observance of National Foundation Day. Elsewhere in Asia the tone has been very mixed, notwithstanding the rebound on Wall Street, and so US equity futures have at times traded several tenths lower. Of particular note are developments in Hong Kong, with the Hang Seng down more than 2% after trading in shares of China Evergrande Group and its property services unit was halted – possibly signaling an impending asset divestment – with the market also awaiting news regarding payment of a debt maturity due today. By contrast, stocks have rallied more than 1% in Singapore following a similar loss on Friday.

In Japan, despite opening firmer, the TOPIX is currently down around 0.7%. On a quiet day for economic data, new LDP leader Fumio Kishida was elected in the lower house as Japan’s new PM and he will soon formally announce his new cabinet members (many already mooted in the media over recent days). According to the Nikkei newspaper, of his rivals for the leadership, only Seiko Noda is to be offered a position in his new cabinet, with Taro Kono demoted to the post of LDP communications chief and Sanae Takaichi to be the new party policy chief. Meanwhile, today the Nikkei also reported that Kishida plans to dissolve the lower house later this month to hold an election on Sunday 31 October – several weeks earlier than many commentators had expected – perhaps hoping to capitalise on the positive mood following the recent end of state of emergency restrictions and before any post-Suga honeymoon fades or virus resurgence occurs.

In the Antipodes, the Aussie bond market was closed today due to public holidays in New South Wales and several other states. However, the equity market was open for trade, with the ASX200 largely ignoring developments in Hong Kong and instead taking its lead from Wall Street and so rallying more than 1%. In New Zealand, with a small number of virus cases continuing to be discovered each day, the Government announced a phased reduction in restrictions in the Auckland region, starting with a very modest easing of gathering and movement restrictions from Wednesday. Weekly reviews will determine when each step is taken – the next to include the reopening of retail stores – with decisions guided by developments in the virus and vaccination progress.

Japan’s monetary base growth slows further in September; inflation, consumer spending, income and sentiment indicators the focus over the remainder of the week
The only economic data in Japan today were the BoJ’s monetary base figures for September. In seasonally-adjusted terms, the monetary base declined at an annualised pace of almost 8%Y/Y, marking the third contraction in the past four months. So with the monetary base having expanded a year earlier at an annualised pace of more than 30%Y/Y, thanks to the BoJ’s pandemic support policies, annual growth still slowed to a 13-month low of 11.7%Y/Y from 14.9%Y/Y in August.

Looking ahead, tomorrow will bring the release of the advance Tokyo CPI for September, which will doubtless continue to suggest no more than a fractional increase in prices after excluding the impact of this year’s sharp decline in mobile phone call fees and the rebound in energy prices. The final services and composite PMI readings for September will be released tomorrow, which should confirm that activity improved from August amidst a sharp reduction in virus cases. In addition, BoJ Governor Kuroda is scheduled to give some opening remarks to the TCFD (Task Force on Climate-related Financial Disclosures) Summit and the Bank will release updated estimates of potential growth and the output gap. Following a quiet Wednesday, on Thursday the BoJ will release its Consumption Activity Index for August, which should reveal a pullback in spending due to that month’s surge in virus cases and associated restrictions. The BoJ will also release its quarterly Regional Economic Report, while the Cabinet Office will release its business indicators for August. On Friday, the MIC’s monthly survey of household income and spending and the MHLW’s Monthly Labour Survey are both likely to show some weakening in August due to the virus outbreak. However, with virus numbers falling sharply in September, which along with an increased vaccination rate has allowed the government to remove restrictions, the latest Economy Watcher’s survey should report a lift in sentiment following a soft report in August.

Euro area producer prices, retail sales and ECB account due in the coming week
In the euro area, after Friday’s flash CPI estimate showed consumer price inflation running to a 13-year high, tomorrow’s release of producer price data will provide an insight into price pressures at the factory gate. After rising a hefty 2.3%M/M in July, the second-highest monthly increase in 36 years, to leave annual PPI inflation at 12.6%Y/Y, the highest level since the early 1980s, producer prices are expected to have risen notably further in August as wholesale gas prices took off. Euro area retail sales figures for August, due on Wednesday, are likely to mirror the trend in Friday’s German retail figures, which showed only a modest rebound following a marked decline in July.

The second half of the week also sees the publication of national manufacturing data for August, with IP numbers from France (tomorrow), Spain (Wednesday) and Germany (Thursday) due alongside German factory orders data (Wednesday). These releases are highly likely to show that supply constraints continue to bite, particularly in the autos sector. Other monthly indicators due include French and German August trade numbers (Thursday and Friday respectively), together with German car registrations figures for September (tomorrow).

Survey-wise, the euro area’s Sentix investor confidence survey for October is due later this morning and will be followed tomorrow by the release of the final September service sector and composite PMIs. The euro area preliminary services activity PMI declined 2.7pts to 56.3, a four-month low, while the composite PMI fell for the second successive month in September, by 2.9pts to 56.1, the lowest reading since April. The equivalent construction PMIs for the euro area and three largest euro area economies will be published on Wednesday. On the policy front, Thursday will bring the publication of the ECB’s account from September’s meeting, when the Governing Council signalled that it expected to conduct its net PEPP purchases at a “moderately lower pace” this quarter. In addition, ECB Chief Economist Lane will participate in a panel discussion on “The ECB strategy – the 2021 review and its future”.

UK new car registrations, final PMIs and a labour market survey due
In the UK, this week’s economic data calendar kicks off with the release tomorrow of new car registrations figures for September, which are likely to echo the continued weakness amid supply bottlenecks reported in Thursday’s car production numbers. Tuesday will also bring the final September services and composite PMIs. The preliminary services activity PMI moderated to a seven-month low (55.0), while the composite output PMI fell for a fourth successive month and by 0.7pt to a seven-month low of 54.1, with the respective indicator for new orders similarly falling to the lowest since February (down more than 2pts to 53.8). Construction PMI data follow on Wednesday, while the KPMG/REC Report on Jobs, which provides an update from recruitment consultants on permanent and temporary placements, as well as vacancies and earnings data, will be published on Friday

In the US, the focus initially will remain on Capitol Hill and the debt ceiling impasse; with the Fed’s QE taper looming, Friday’s payrolls report is the key data release
While last week Congress passed a continuing resolution to keen the government open, as yet there remains no solution to the impasses concerning the advancement of the bipartisan infrastructure bill and the much larger budget bill, and the raising or further suspension of the debt ceiling. The latter is particularly pressing, with Treasury Secretary Yellen warning last week of ‘catastrophic’ consequences if action is not taken before the Treasury expects to run out of options to avoid default – likely on or around 18 October. So undoubtedly, developments on Capitol Hill will once again be a key focus this week, although experience suggests that Congress will only be able to find a solution at the last minute.

Turning to this US week’s economic diary, most interest will centre on Friday’s September employment report, with Fed Chair Powell looking for a “decent” outcome as a prelude to the Fed formally announcing the start of its QE taper at its next meeting on 3 November. Daiwa America’s Chief Economist Mike Moran has pencilled in a 400k lift in non-farm payrolls – slightly below the consensus estimate but an improvement on the 235k advance in August – which he expects will lower the unemployment rate by 0.2ppts to a pandemic low of 5.0%. Ahead of the employment report, the data flow begins today with Mike anticipating a 0.8%M/M lift in factory orders in August, driven by the already published solid lift in orders for durable goods (especially aircraft). Given advance data from the goods sector, tomorrow’s international trade report will likely point to a modest narrowing of the overall goods and services deficit in August. Tomorrow will also bring the release of the ISM’s services index for September and the final Markit services PMI reading for September, with developments in the employment components likely to be analysed especially closely. The ADP employment report for September will follow on Wednesday, while weekly jobless claims are the only diary entry of great note on Thursday. Aside from the employment report, Friday’s diary also includes the final wholesale trade report for August. The Fed speaking diary is light this week, but today includes St Louis Fed President Bullard’s participation in a panel discussion on the economy.

Chinese markets closed until Friday, at which point the Caixin services PMI for September should confirm a rebound from the 16-month low reported in August
Markets in Mainland China are closed for most of the week due to the Golden Week holiday. When markets reopen on Friday, the only scheduled economic data is the Caixin services and composite PMIs. In common with last week’s official PMIs, with a local virus outbreak brought under control and restrictions being eased, the Caixin PMIs are likely to have rebounded from the 16-month lows reported in August. The only other data that might make an appearance, perhaps over the weekend, is the PBoC’s money and credit aggregates for September. In light of the recent slowdown in the economy due to the virus outbreak, supply bottlenecks, floods and energy shortages, the market anticipates that the PBoC will have guided institutions to unveil the strongest growth in credit since June.

Australia’s inflation gauge points to rising CPI pressures; tomorrow’s RBA meeting should be a non-event; the RBA’s Financial Stability Review and a smattering of data also lie ahead
While a number of states were enjoying the Labour Day holiday today, the state of Victoria remained open for business and so the Melbourne Institute released its monthly Inflation Gauge for September. The gauge reported a 0.3%M/M increase in headline prices, lifting annual inflation by 0.2ppts to a three-month high of 2.7%Y/Y. Meanwhile, the trimmed mean reported a solid 0.4%M/M increase, lifting annual inflation on this measure to a near four-year high of 2.6%Y/Y – an outcome that points to the possibility of a chunky lift in prices when the Q3 CPI is released later this month.

Looking ahead, the focus this week will be mostly on the RBA. That said, following the conclusion of its latest meeting, tomorrow the Board will likely make no changes to any of its interest rate or other policy settings, with the QE taper already underway and next scheduled for review at the Board’s February 2022 meeting. The Bank will surely acknowledge the recent weakness in activity given ongoing restrictions in many states, but doubtless retain its view that the economy will rebound reasonably quickly just as soon as vaccination progress permits these restrictions to begin to ease (most likely from towards the end of this month and through November). At the same time, the RBA will retain its strident view that it will be sometime – most likely not until 2024 – before underlying inflation rises to levels that would warrant a policy tightening. The Board will likely be less relaxed about developments in house prices, however, which have continued to increase briskly throughout the lockdown. This will get more airplay on Thursday, when the Bank will release its semi-annual Financial Stability Review. The RBA will no doubt continue to champion the resilience of domestic banks, which reflects their high capital levels, their significant holdings of liquid assets and their ongoing profitability. However, given developments in the housing market, we expect the Bank will stress the importance of maintaining lending standards, with the growing risk of a future downward correction in prices – perhaps triggered by a new shock that undermines household incomes – exposing lenders to the possibility of large losses.

Aside from the RBA, this week’s diary also features a smattering of Aussie economic reports, all released tomorrow. The full publication of the retail sales survey for August will confirm a 1.7%M/M decline in aggregate spending, while providing some more granular detail. Similarly, the final results of the services PMI survey for September should broadly confirm the flash report’s pickup from the August low, but with activity still clearly in contractionary territory. The international trade report for August will be of interest following the record surplus reported in July, while the ANZ’s Job Ads Survey is likely to have weakened somewhat in September with restrictions on activity providing a major obstacle to hiring.

RBNZ likely to deliver previously deferred rate hike this week, but perhaps less certain than market pricing indicates
The focus in New Zealand this week will be on the outcome of the Wednesday’s RBNZ policy review. Last month the RBNZ deferred an intended rate hike at the 11th hour, responding to the current virus outbreak and the resulting imposition of a strict national lockdown. Since then, restrictions have eased somewhat across the country – more in some regions than others – and so Bloomberg’s survey of analysts and market pricing suggests a very high likelihood that the RBNZ will go ahead this week and lift the Official Cash Rate (OCR) by 25bps to 0.5%. In our view, that does seem the most likely outcome in light of ongoing signs of pressures on spare capacity, rising inflation and inflation expectations and unrelenting upward pressure on house prices. However, the current virus outbreak is not fully under control – indeed restrictions were tightened in one region just yesterday following the emergence of unexplained virus cases – so we don’t rule out the possibility of the RBNZ deferring the hike again until its next meeting in November. Regardless of whether the OCR is raised at this meeting, the accompanying short statement will indicate an expectation that monetary stimulus will be withdrawn gradually over time, with the pace of withdrawal to depend on how the economy performs as growing vaccination rates permit a more complete removal of the current restrictions on activity.

On the data front, the only scheduled release this week is tomorrow’s instalment of the long-running quarterly QSBO Business Outlook Survey for Q3. The confidence measures will be dominated by firms’ reaction to the current virus outbreak and re-imposition of restrictions, but the measures of skill shortages, capacity utilisation and pricing pressures will still be of some interest. 

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