Japanese IP confirmed to have contracted sharply in August

Chris Scicluna
Emily Nicol

US bond yields drift lower following CPI report; most Asian equities firmer today by Chinese equities slightly weaker as PPI inflation hits 26-year high
While higher food prices in September propelled the US headline CPI to a larger than expected 0.4%M/M advance, investors took heart from a 0.2%M/M lift in the core CPI that was in line with the consensus forecast, albeit leaving annual inflation at a heady 4%Y/Y for a second consecutive month. And so while that result owed to some weakness in prices sensitive to the virus – such as airfares, hotel charges, car rental fees and apparel – the yield on the 10Y UST continued to descend from last week’s highs, closing 4bps lower at about 1.54%. Bond investors also shrugged off the FOMC minutes, which confirmed that officials had become more attuned to upside inflation risks and indicated no qualms about a scenario presented by the Fed’s staff in which QE purchases would be tapered by $15bn per month and so phased out over an eight-month period. The decline in yields provided a modest boost to Wall Street, with a rally in tech stocks leading the S&P500 to a 0.3% advance, but saw the greenback ease back off its highs for the year.

Since the close, US equity futures have firmed several tenths and the 10Y UST yield has nudged up to just under 1.55%. Against that background, it has been a positive day for most major Asian bourses, especially those tied closely to the tech sector. After declining over the previous two sessions, the TOPIX has firmed 0.5% today. There were no Japanese data aside from confirmation of a large auto-led drop in factory output in August (indeed, slightly larger than first reported), while the run-up to national elections at the end of the month is now underway with the Lower House completing its last sitting before being dissolved. In China, news of another larger-than-expected increase in producer prices was coupled with subdued inflation at the CPI level. So with the data pointing to growing pressures on downstream corporate profitability, the CSI300 has declined modestly. The KOSPI has rallied about 1% for a second consecutive day, but stocks are up only modestly in Singapore. The MAS, forecasting above-trend growth in coming quarters, unexpectedly tightened monetary policy settings, raising slightly the slope of its currency band (from zero) to lean against inflation pressures. After yesterday’s closure due to a major typhoon, markets in Hong Kong were closed for a public holiday today.

In the Antipodes, Australia’s ASX200 has advanced 0.5%, led by the technology and materials sectors. While Aussie employment fell a further 1.1%M/M in September, some comfort could be taken from a 0.9%M/M increase in hours worked, albeit the latter were still down 3.1%Q/Q in Q3 and broadly indicative of the likely contraction in output during the quarter. Given the rally in USTs since the previous US close, the 10Y AGCB rallied 6bps to 1.63%. However, the Kiwi 10Y bond underperformed, closing unchanged at 2.19%, amidst news of continued growth in house prices in September despite restrictions leading to a large drop in sales. Unsurprisingly, RBNZ Deputy Governor Bascand took the opportunity to reiterate the Bank’s concern about house prices and its intention to consult on the introduction of new debt servicing restrictions to be applied by banks.

Japanese IP confirmed to have contracted sharply in August, led by slump in auto output
The only economic release in Japan today was the final IP report for August, which confirmed the sharp auto-led contraction in factory output indicated in the preliminary report. Indeed, total production declined a revised 3.6%M/M – 0.4ppts more than estimated previously – and annual growth was revised down 0.5ppts to 8.8%Y/Y. In the detail, production of consumer durables slumped 14.5%M/M – only fractionally more than estimated previously – but the decline in production of consumer non-durable was revised to 2.4%M/M from just 0.5%M/M previously. Production of capital goods fell an unrevised 6.5%M/M. Given the likelihood of a further slight decline in production in September, today’s revised figures make it even more likely that output will proved to have declined around 2%Q/Q in Q3, with tomorrow’s Tertiary Industry Activity Index likely to bring additional bad news from the service sector.

Elsewhere in the final report, the decline in shipments was revised to 4.4%M/M from 3.8%M/M previously. As a result, inventories declined 0.1%M/M rather than the 0.3%M/M decline estimated previously. As always, the brand new content in today’s release concerned capacity utilization, which in aggregate declined 3.9%M/M in August to an 11-month low (albeit still more 7% above that seen a year ago). Meanwhile, firms’ productive capacity declined 0.1%M/M in August and so was down 1.2%Y/Y.

China’s PPI inflation hits 26-year high in September, but CPI inflation remains very subdued
Following on from yesterday’s trade figures, today China released both the PPI and CPI reports for September, which mirrored the outcomes from the previous month. Driven by continued growth in commodity prices and increased costs associated with supply bottlenecks, the overall PPI output index increased 1.2%M/M. This marked the largest increase since May and meant that annual inflation increased by a larger-than-expected 1.2ppts to a 10.7%Y/Y – the fastest pace since November 1995. Prices increased a further 5.5%M/M in the mining sector, lifting annual inflation to over 49%Y/Y (led by a 75%Y/Y increase in coal prices), while prices for other raw materials increased 1.9%M/M and over 20%Y/Y. Firms are passing some of that pressure downstream, with the price of manufactured producer goods increasing 0.9%M/M, lifting annual inflation by 0.9ppts to 8.9%Y/Y. This marks the fastest pace seen in data stretching back as far as 1999, led by large price increases for manufactured chemical and metal products. However, there was again little evidence of rising input prices materially affecting factory gate prices for the consumer. Indeed, the PPI for consumer goods was unchanged for a second consecutive month in September and so up just 0.4%Y/Y, with prices for durable consumer goods increasing by an even weaker 0.2%Y/Y.

The subdued inflation in consumer goods prices at the PPI level was again evident in the CPI, which in contrast to the PPI fell slightly short of the consensus expectation. The headline index was unchanged in September, which given base effects caused annual inflation to ease by an unexpected 0.1ppts to just 0.7%Y/Y – the slowest pace since March. The soft result owed to a 0.7%M/M decline in food prices – now down 5.1%Y/Y – led by a sharp decline in prices for pork. Non-food prices increased 0.2%M/M in September, led by higher prices for clothing and education services, causing their rate of annual inflation to edge up 0.1ppts to 2.0%Y/Y. The core CPI, which excludes both food and energy, also increased 0.2%M/M in September, but annual inflation was steady at a very subdued 1.2%Y/Y – far below the PBoC’s target of 3% annual inflation. So today’s inflation news provides no obstacle to the PBoC delivering further targeted support to the economy if required, most likely via a reduction in the RRR rather than a reduction in interest rates.

UK RICS survey suggests lack of supply will sustain increases in house prices; BoE quarterly credit survey and speeches by MPC doves Tenreyro and Mann lie ahead
On a relatively quiet day for UK data, the overnight release of the RICS Residential Markey Survey suggested that, despite the conclusion of the government’s stamp duty holiday at the end of last month, there was a pickup in buyer enquiries after a decline in August. But the survey also continued to flag a persistent lack of available stock in the housing market, with surveyors reporting a further decline in the number of new instructions in September. So, while the number of agreed sales continued to moderate, surveyors expect the mismatch between supply and demand to maintain upwards pressures on prices. Indeed, while the headline house price balance fell for the fourth consecutive month, at +68% it remained within shooting distance of May’s record high (82%) and well above the long-run average (9%). Moreover, more than two thirds of respondent surveyors expect house prices to continue to grow over the year ahead.

Later this morning, the BoE’s quarterly credit conditions survey for Q3 is due. But given recent hawkish commentary from several MPC members, including BoE Governor Bailey, of most interest in the UK today will be speeches by the up-to-now dovish externals Tenreyro and Mann. The latter of these speeches might well be most relevant to the near-term policy outlook as Mann discusses “Coping with the legacy of the Covid-19 crisis”, while Tenreyro will talk about “Dominant currency and the impact of monetary policy”.

A quiet day ahead in the euro area, headlined by final September inflation figures in Spain
After final German inflation for September yesterday confirmed that the headline measure (on the EU-harmonised measure) rose to a series high of 4.1%Y/Y, today will bring the equivalent release from Spain. The preliminary estimate showed headline Spanish CPI rising 0.7ppt to 4.0%Y/Y, principally reflecting higher electricity prices. Today will also see Eurostat publish the latest quarterly labour force survey, which among other things will provide an update on spare capacity in the labour market back in Q2.

Inflation focus continues in the US with the release of the September PPI; jobless claims, more Fedspeak and bank earnings reports also ahead today
Following yesterday’s CPI report, attention in the US today will turn to the PPI report for September. Daiwa America’s Mike Moran expects a chunky 0.6%M/M increases in the both the headline and core indexes amidst the impact of ongoing supply shortages. Today will also bring the release of weekly jobless claims figures and there are several speaking engagements by Fed policymakers. Meanwhile, the bank reporting season heats up, with Morgan Stanley, Bank of America, Citigroup and Wells Fargo all releasing their quarterly earnings today.

Australian employment falls in September amidst ongoing lockdown; but hours worked pick up and unemployment rate rises only slightly as labour force participation declines
The domestic focus in Australia today was on the labour market, with the ABS’s Labour Force survey casting light on the ongoing impact of the lockdown in New South Wales – only now beginning to ease – and in those in Victoria and the ACT. The survey revealed a 138k decline in nationwide employment, which was slightly more than the consensus had expected but well within the very wide range of estimates that analysts had submitted. This equates to 1.1%M/M decline in employment – identical to that reported in August – with a 3.5%M/M decline in Victoria dominating the outcome as the state endured its first full month of lockdown. Employment declined a further 0.6%M/M in New South Wales, but was little changed in both South and Western Australia. After declining during the previous month following a short period of restrictions, employment in Queensland rebounded 1.2%M/M. Despite the decline in September, nationwide employment remains up 2.4%Y/Y, but has fallen back below its pre-pandemic level.

Somewhat surprisingly, despite the further decline in employment, the total number of hours worked increased 0.9%M/M in September. This increase follows three consecutive monthly declines – include a hefty 3.7%M/M decline in August – and suggests that firms and employees are beginning to adjust working practices to cope with the restrictions. Even with the modest rebound in September, total hours worked have declined 3.1%Q/Q in Q3 – much largely than the 0.6$Q/Q decline in average employment – and indicative of the overall decline in economic output that is likely to have occurred over the quarter. Unsurprisingly, restrictions have had a disproportionate impact on part-time employment, which declined almost 165k in September and so was down 3.4%Y/Y. By comparison, full-time employment rebounded almost 27k in September – still well above pre-pandemic levels – with annual growth also firming 0.9ppts to 5.2%Y/Y.

As was the case last month, the headline news concerning the unemployment rate was better than expected. While the fall in employment was slightly larger than the consensus had expected, the labour force participation rate also fell a larger than expected 0.7ppts to a 15-month low of 64.5%. As a result, after declining to a near 13-year low in August, the unemployment rate increased just 0.1ppts to 4.6% – 0.2ppts less than the consensus forecast. Meanwhile, the underemployment rate – which captures workers who would prefer longer hours – declined 0.1ppts to 9.2%, which remains 1.7ppts lower than its pre-pandemic level. With restrictions now beginning to ease in New South Wales and Victoria hoping to begin easing restrictions before long, both the economy and the labour market are likely to end the year in better shape than they began despite the significant disruption to activity in recent months.

Kiwi house sales slump continues as restrictions curb activity, but prices continue to rise
In New Zealand, REINZ reported that nationwide house sales declined almost 38%Y/Y in September, with the level of sales also the lowest for a September month since 2011. Of course, this reflects the ongoing curb on activity due pandemic-related restrictions, especially in the north of the country, with REINZ continuing to report still strong buyer demand. Sadly, for the Government and the RBNZ, the lull in activity is not constraining prices, with the House Price Index – which corrects for the composition of home sales – rising a further 2%M/M in September to a new record high (and also up a whopping 31.1%Y/Y). At least to some extent this likely reflects urgency amongst buyers to purchase ahead of tightening LVR restrictions – with additional macro-prudential restraint also under consideration – and forecast increases in mortgage interest rates as the RBNZ begins to remove monetary policy accommodation.

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