News

Summary: Euro-zone industrial production slumps; monthly figure lower than consensus estimate; annual growth slips; weakness concentrated in capital goods sector.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in early 2016. Growth rates then fluctuated through 2016/2017 before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April but the months which followed produced an almost-equally steep bounce.

According to the latest figures released by Eurostat, euro-zone industrial production slumped by 1.6% in December on a seasonally-adjusted and calendar-adjusted basis. The fall was greater than the 0.8% decrease which had been generally expected and in contrast to November’s 2.6% rise after revisions. On an annual basis, the calendar-adjusted growth rate declined from November’s revised rate of -0.6% to -0.8%.

German and French 10-year sovereign bond yields moved higher despite the report. By the close of business, German and French 10-year yields had each gained 4bps to -0.38% and -0.15% respectively.

“Weakness was mainly concentrated in the capital goods sector, which fell 3.1%, with falls evident in France, Italy and Spain”, said ANZ senior economist Felicity Emmett.

Industrial production growth expanded in two of the euro-zone’s four largest economies. Germany’s production grew by 0.6% while the comparable figures for France, Italy and Spain were -0.8%, -0.2% and +0.7% respectively.

Summary: US consumer confidence posts declines for second consecutive month; University of Michigan index below consensus figure; views of present, future conditions both fall; low-income households more pessimistic; short-term inflation expectations rise, highest since 2014.

US consumer confidence started 2020 at an elevated level. However, by March, surveys had begun to reflect a growing uneasiness with the global spread of COVID-19 and its reach into the US. After a plunge in April, US household confidence recovered in a haphazard fashion. Recent reading have consistently remained at below-average levels.

The latest survey conducted by the University of Michigan indicates the average confidence level of US households deteriorated for a second consecutive month in February. The University’s preliminary reading from its Index of Consumer Sentiment registered 76.2, below the generally expected figure of 80.5 and lower than January’s final figure of 79.0. Consumers’ views of current conditions declined while their expectations regarding future conditions fell markedly in comparison to those held at the time of the January survey.

“Consumer sentiment edged downward in early February, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000,” said the University’s Surveys of Consumers chief economist, Richard Curtin. He noted low-income households “reported significant setbacks in their current finances” while over 50% of higher-income households reported improved finances.

Long-term US Treasury bond yields moved higher on the day. By the close of business, the 10-year yield had added 4bps to 1.21% and the 30-year yield had gained 6bps to 2.01%. The 2-year yield finished unchanged at 0.11%.

ANZ economist Hayden Dimes noted households’ expectations of the one-year inflation rate had increased, rising from 3.0% in January to 3.3%, “its highest level since March 2014.” Longer-term expectations remained unchanged at 2.7%.

Summary: January US CPI up in January; under expectations; “core” rate flat; “no signs” of inflationary pressures”; headline rate driven by higher fuel prices; used vehicles prices down again, Fed January’s UIG annual rate unchanged from December; categories with higher prices during 2020 reversing.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March to May but subsequent reports indicated consumer inflation has largely returned to pre-pandemic levels.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices rose by 0.3% on average in January. The result was less than the 0.4% increase which had been generally expected but above December’s 0.2% increase after it was revised down from +0.4%. On a 12-month basis, the inflation rate ticked up from December’s reading of 1.3% to 1.4%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, returned a flat reading on a seasonally-adjusted basis for the month. The result was less than the expected 0.1% but the same as December’s figure. The seasonally adjusted annual rate fell back to 1.4% after slipping to 1.6% in December.

“Shelter prices, 33% of the CPI, remained soft and elsewhere in the report there were no signs of emerging inflationary pressures,” said ANZ economist John Bromhead.

Long-term US Treasury bond yields fell moderately on the day. By the close of business, US 10-year and 30-year yields had each shed 4bps to 1.12% and 1.91% respectively. The 2-year yield finished unchanged at 0.11%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. February 2022 futures contracts implied an effective federal funds rate of 0.08%, in line with the spot rate.

Summary: Household sentiment improves in February; breaks four-month run of improvements; consumers remain “extraordinarily confident”; well above long-term average; all index components lower;

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again around July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April but, after a few months of to-ing and fro-ing, it then staged a full recovery.

According to the latest Westpac-Melbourne Institute survey conducted in the first week of February, household sentiment has improved and is at a robust level. The Consumer Sentiment Index rose from January’s reading of 107.0 to 109.1, recovering some of January’s 5 point fall.

“Recall that the December print was a ten year high so the bounce-back in February signals that the consumer remains extraordinarily confident,” said Westpac chief economist Bill Evans.

Long-term Treasury bond yields slipped a little on the day. By the close of business, 10-year and 20-year ACGB yields had each slipped 1bp to 1.23% and 1.94%. The 3-year yield remained unchanged at 0.18%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, did not change materially. At the end of the day, contract prices implied the cash rate would trade in a range between 0.030% and 0.055% through to mid-2022.

Summary: US quit rate rises in December; job openings up, total separations down; higher job openings “normally associated with expanding economy”.

The number of US employees who quit their jobs as a percentage of total employment increased slowly but steadily after the GFC. It peaked in March 2019 and then tracked sideways until virus containment measures were introduced in March 2020. The quit rate plummeted as alternative employment opportunities rapidly dried up but then recovered quite quickly over the remainder of 2020.

Figures released as part of the most recent JOLTS report show the quit rate ticked up in December following three months of unchanged readings. 2.3% of the non-farm workforce left their jobs voluntarily, a slightly higher rate than November’s 2.2%. The largest source of additional quits arose from the “Accommodation and food services”, accounting for around 45% of the increase, while the “Professional and business services” sector experienced the greatest reduction. Overall, the total number of quits for the month increased by 106,000 from November’s revised figure of 3.180 million to 3.286 million.

April’s non-farm payroll report indicated average hourly pay had spiked in that month, possibly the result of fewer lower-paid jobs relative to higher paying ones. Subsequent months’ figures then saw falls in average hourly pay, with a corresponding fall in the annual growth rate from 8.0% in April to 4.4% in November. It has since picked up to 5.4% in January.

Total vacancies at the end of December increased by 74,000, or 1.1%, from November’s revised figure of 6.572 million to 6.646 million, driven by a 296,000 rise in the “Professional and business services” sector. 76,000 fewer openings in the “Accommodation and food services” sector provided the single largest offset. Overall, 7 out of 18 sectors experienced more job openings than in the previous month.

Total separations during the same period declined by a net 63,000, or 1.1%, from November’s revised figure of 5.523 million to 5.460 million. The fall was led by the “Federal Government” sector, where there were 86,000 fewer separations than in November. Separations decreased in 10 out of 18 sectors.

ANZ senior economist Catherine Birch said the growing number of job vacancies was “a development normally associated with an expanding economy.”

Summary: Business conditions deteriorate but confidence improves in January; divergence in conditions across industries; components of conditions index remain above average; capacity usage rate increases again; jobless rate “could fall quite quickly in 2021”, but end of JobKeeper will be “test”.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s indices then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the indices trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions have improved markedly since then.

According to NAB’s latest monthly business survey of over 400 firms conducted over the second half of January, business conditions deteriorated after four consecutive months of improvement. NAB’s conditions index registered 7 in January, down from December’s revised reading of 16.

“The divergence in conditions across industries continues to track as expected, with retail and wholesale still strong, but recreation and personal services continuing to lag,” said NAB chief economist Alan Oster.

“All three components of conditions – trading, profitability and employment – declined, but importantly, they remain above average,” said ANZ senior economist Catherine Birch.

Business confidence improved and NAB’s confidence index rose from December’s revised reading of +5 to +10. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“Overall in trend terms, recreation and personal continue to lag the other industries, while retail and wholesale are most optimistic,” said NAB’s Oster.

Longer-term Commonwealth Government bond yields fell on the day, outpacing lower US Treasury yield movements overnight. By the end of the day, the 10-year ACGB yield had lost 4bps to 1.28% while the 20-year yield shed 4bps to 1.95%. The 3-year yield remained unchanged at 0.18%.

Summary: January non-farm payrolls increase in line with expectations; November, December figures revised down; jobless rate drops considerably, participation rate falls; “not good news”, workers “discouraged”; jobs-to-population ratio up after pause; underemployment rate down again, half of April peak; COVID-19 still dragging on “self-sustaining recovery”.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April. May’s non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been more modest and not always positive.

According to the US Bureau of Labor Statistics, the US economy created an additional 49,000 jobs in the non-farm sector in January. The increase was slightly under the 50,000 which had been generally expected earlier in the week but it was in contrast to 227,000 jobs which had been shed in December after revisions. Employment figures for November and December were revised down by a total of 159,000. 

The unemployment rate dropped significantly, from December’s rate of 6.7% to 6.3%. The total number of unemployed decreased by 0.616 million to 10.130 million while the total number of people who are either employed or looking for work decreased by 0.405 million to 160.161 million. The fall in the number of people in the labour force led to a decline in the participation rate from December’s rate of 61.5% to 61.4%.

NAB currency strategist Rodrigo Catril said, “The unemployment rate unexpectedly fell to 6.3% from 6.7%, well below the consensus for an unchanged outcome, but this was not good news given the decline was largely explained by a pullback in the participation rate…meaning about 405,000 of workers left the market, a sign of discouragement.” ANZ Head of Australian Economics David Plank described the increase as “disappointing”.

Short-term US Treasury yields declined a while long-term yields moved a little higher on the day. By the close of business, the 2-year bond yield had slipped 1bp to 0.11% while the 10-year yield had gained 2bps to 1.17% and the 30-year yield finished 3bps higher at 1.97%.

One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. January’s reading increased to 57.5% after pausing at 57.4% for the previous three months.

Summary: ADP payroll numbers increase in January; more than consensus figure; December fall revised up by 45,000; result leads to “reasonably prospect” of January NFP rise on Friday; figures up across firms of all sizes; services sector accounts for 90% of gains.

The ADP National Employment Report is a monthly report which provides an estimate of US non-farm employment in the private sector. Since publishing of the report began in 2006, its employment figures have exhibited a high correlation with official non-farm payroll figures, although a large difference can arise in any individual month.

The ADP January report indicated private sector employment increased by 174,000, more than the 70,000 which had been generally expected. December’s fall was revised up by 45,000 to -78,000.

Longer-term US Treasury yields moved noticeably higher on the day. By the close of business, the 10-year Treasury bond yield had gained 4bps to 1.14% and the 30-year yield had increased by 6bps to 1.93%. The 2-year yield finished unchanged at 0.11%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained soft. Federal funds futures contracts for February 2022 implied an effective federal funds rate of 0.075%, just under the current spot rate.

NAB Head of FX Strategy within its FICC division Ray Attrill said the higher-than-expected result holds “out a reasonably prospect of a rise in employment come Friday’s non-farm payroll numbers.”

Employment numbers in net terms increased across businesses of all sizes, with medium-sized firms the main drivers of the month’s gain. Firms with less than 50 employees filled a net 51,000 positions, mid-sized firms (50-499 employees) gained 84,000 positions while large businesses (500 or more employees) accounted for 39,000 additional employees.

Summary:  Euro-zone GDP contracts in December quarter; result better than expected but annual rate falls further into negative territory; Europe lagging global recovery cycle; “double-dip” likely.

Euro-zone GDP growth has been lacklustre at best since the GFC and the European debt crisis of 2011/12. Despite exceptionally loose monetary policy, euro-zone GDP growth averaged less than 0.5% per quarter from the beginning of 2013 to the end of 2019. In 2020, GDP growth collapsed in the March and June quarters before rebounding strongly in the September quarter.

According to the latest figures released by Eurostat, euro-zone GDP contracted by 0.7% in the December quarter on a seasonally and calendar adjusted basis. The figure was better than the -0.9% which had been generally expected but in stark contrast to the September quarter’s 12.4% expansion. On an annual basis, GDP contracted by 5.1%, down from -4.3% in the September quarter.

NAB currency strategist Rodrigo Catril said the result was “thanks to better performances by France and Spain, with Germany in line.”

Summary: Bell Potter views Macquarie hybrid as representing value late last week; some price increase since then; expects margin to major bank hybrids to narrow; may have already run its race.

Bell Potter’s fixed interest desk has identified Macquarie Bank Capital Notes 2 (ASX code: MBLPC) as an ASX-listed hybrid which represents value relative to other hybrid securities.

The hybrids have an issue margin of 4.70%, inclusive of franking credits. The distributions have been 40% franked to date, so Bell Potter expects just over $4.00 in cash over the next twelve months. The hybrids have a first call date on 22 December, 2025.

The report was put together late last week, with the price of MBLPC finishing at $107.50 on Friday 29 January. By the close of business on 3 February, the price had increased to $108.20, providing a 3.85% (40% franked) running yield and a trading margin of 2.78% over 3 month BBSW.

The Bell Potter team see the “trading margin differential narrowing between Macquarie and the major bank hybrids”. Since the Macquarie hybrid began trading in early June, the spread between MBLPC and a basket of major bank hybrids (ANZPH, CBAPG, WBCPH) with similar call dates has averaged 17bps (0.17%). At a trading margin of 278bps, the MBLPC are just 8bps higher to the average of these bank hybrids. It may be that the MBLPC’s have already run their race.