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Major equity markets closed mixed today, with the Nasdaq being
the only major US index to close in positive territory. US
government bonds closed slightly lower and benchmark European bonds
were mixed. Investment grade credit indices were flat across
iTraxx-Europe and CDX-NAIG, while the high yield indices
iTraxx-Xover closed wider and CDX-NAHY tighter. The US dollar broke
through a new 30 month low, while oil/silver were higher and gold
flat was on the day. The US holiday shopping season officially
begins on Friday after tomorrow's Thanksgiving holiday, with
markets closely watching for any indications that the recent
increase in COVID-19 cases is impacting brick and mortar and online
sales during this critical time of the year for retailers.
Americas
Most US equity markets closed lower except for Nasdaq +0.5%;
Russell 2000 -0.5%, DJIA -0.6%, and S&P -0.2%.
10yr US govt bonds closed +1bp/0.89% yield and 30yr bonds
+1bp/1.62% yield.
CDX-NAIG closed flat/52bps and CDX-NAHY -3bps/311bps.
DXY US dollar index closed -0.2%/92.00, being as low as 91.93
at 10:46pm EST. It is currently at its lowest level since April
2018.
Gold closed flat/$1806 per ounce and silver +0.3%/$23.36 per
ounce.
Crude oil closed +1.8%/$45.71 per barrel.
General Motors (GM) has said that it will offer Cadillac
dealers up to USD500,000 in severance payments if they do not want
to commit to investing in selling the company's planned range of
new electric vehicles (EVs), according to an Automotive News
report. GM has previously stated that dealers will have to invest
in the region of USD200,000 in order to prepare their dealerships
for the new generation of Cadillac battery electric vehicles
(BEVs). However, a number of Cadillac dealers are unhappy with
having to make the investment, as well as the overall strategy, and
they now have until 30 November to accept the buyout. With Cadillac
being such an iconic and traditional US brand, it is perhaps not
surprising that some dealers are having a hard time accepting GM's
strategy of an electric future. However, in terms of
future-proofing the brand, it is the only decision that GM can make
and Cadillac's traditional brand values of comfort, refinement, and
luxury will be well aligned to what a BEV powertrain can offer from
an engineering point of view. GM is being generous and fair by
offering this settlement, which is the latest attempt to reduce its
dealership footprint of 880 outlets. GM previously offered buyouts
of between USD100,000 and USD180,000 to its 400 lowest-volume
retailers in 2016. (IHS Markit AutoIntelligence's Tim
Urquhart)
US personal income decreased 0.7% in October as a 6.2% decline
in transfer receipts swamped moderate increases in employee
compensation (up 0.7%) and proprietors' income (up 1.2%). (IHS
Markit Economists James Bohnaker and David Deull)
The decline in transfer receipts was primarily driven by
decreases in "Lost Wages Supplemental Payments," federal money used
for wage assistance to individuals impacted by the pandemic. These
payments declined by more than 70% in October as most of the
allocated funds had been used up in September.
Farm proprietors' income was boosted by the Coronavirus Food
Assistance Program intended to support farmers impacted by the
pandemic. This income support increased from $7.6 billion
(annualized) in September to $92.9 billion (annualized) in
October.
Real personal consumption expenditures (PCE) increased 0.5%,
which was the slowest monthly growth rate since the recovery began
in May, yet still above our expectation for a sharper slowdown. We
revised up our forecast for fourth-quarter real PCE growth from
4.6% to 5.9%. Real PCE through October was 2.2% shy of its
pre-pandemic February level.
Spending on both goods and services slowed. Notably, real PCE
for several services most at risk to virus spread such as food
services and accommodations backtracked in their recoveries as
COVID-19 cases skyrocketed in October.
We remain guarded about consumer spending over the next several
months given the recent wave of COVID-19 cases, waning fiscal
support, and exhaustion of demand for durable goods.
Seasonally adjusted (SA) US initial claims for unemployment
insurance rose by 30,000 to a five-week high of 778,000 in the week
ended 21 November. While claims are well below the spring high,
initial claims remain at historically high levels—the high
during the Great Recession was 665,000. The not seasonally adjusted
(NSA) tally of initial claims rose by 78,372 to 827,710. (IHS
Markit Economist Akshat Goel)
Seasonally adjusted continuing claims (in regular state
programs), which lag initial claims by a week, fell by 299,000 to
6,071,000 in the week ended 14 November. Prior to seasonal
adjustment, continuing claims fell by 167,617 to 5,911,965. The
insured unemployment rate in the week ended 14 November was down
0.2 percentage point to 4.1%.
There were 311,675 unadjusted initial claims for Pandemic
Unemployment Assistance (PUA) in the week ended 21 November. In the
week ended 7 November, continuing claims for PUA rose by 466,106 to
9,147,753.
Pandemic Emergency Unemployment Compensation (PEUC) claims have
been steadily rising as claimants are exhausting their regular
program benefits. In the week ended 7 November, continuing claims
for PEUC rose by 132,437 to 4,509,284.
The Department of Labor provides the total number of claims for
benefits under all its programs with a two-week lag. In the week
ended 7 November, the unadjusted total rose by 135,297 to
20,452,223.
Total nonfarm payroll employment increased in 45 states in
October 2020, gaining a net 763,000 jobs from the previous month on
a seasonally adjusted basis, according to the most recent report
from the US Bureau of Labor Statistics (BLS). This was down from
the gain of 887.5 million jobs in September 2020 and significantly
lower than July's increase of 1.6 million; however, the numbers
this month look better compared to September after factoring in the
winding down of temporary Census workers, which resulted in huge
losses in Federal government payrolls. Much like the previous
months, a large portion of the jobs added in October were in the
leisure and hospitality sector, specifically in food and
accommodation services, as restaurants and hotels around the
country cautiously re-opened for business. Professional and
business services also boosted payrolls, particularly in
administrative and accommodation services, as some employers either
allowed or started to prepare for office workers returning in a
limited capacity. Much like last month's report, many of the
largest states led the jobs rebound in absolute terms, including
California, Texas, Florida, Virginia, and Ohio. These states' job
gains resulted from the aforementioned hiring in the leisure and
hospitality sector, with the exception of Texas, which had a burst
of hiring in professional and business services. This was most
likely aided by Texas Governor Greg Abbott's loosening of
coronavirus restrictions for offices, increasing the amount of
office workers allowed to return from 50% to 75%. A look at the
percentage change of total jobs from February to October 2020 shows
which state economies have fared the best or worst since the
beginning of the pandemic. States in the Northeast, specifically
New York, New Jersey, Massachusetts, Vermont, and New Jersey,
suffered the biggest early employment impacts from the coronavirus
outbreak and efforts to contain it. Meanwhile, tourism and
travel-reliant states like Hawaii and Nevada, and heavily
goods-producing Midwestern states like Michigan, also sustained
heavy blows. (IHS Markit Economist Steven Frable)
US manufacturers' orders for durable goods rose 1.3% in
October, beating consensus expectations by a few tenths. Orders for
September were revised higher. Shipments of durable goods rose 1.3%
and inventories of durable goods rose 0.3%. (IHS Markit Economists
Ben Herzon and Lawrence Nelson)
The details of this report that inform our GDP tracking raised
our forecast of fourth-quarter GDP growth by 0.4 percentage point.
Separate reports out this morning (on trade, inventories, personal
consumption expenditures, and new home sales) added another 1.1
percentage points to our forecast of fourth-quarter GDP growth,
which now stands at 5.7%.
With today's report on durable goods, both orders and shipments
are back in line with pre-pandemic trends. This highlights that
some sectors of the economy are doing well (goods-producing
sectors) while others (notably services) remain weak.
Both orders and shipments of nondefense capital goods excluding
aircraft ("core" capital goods) rose more than we expected in
October from September levels that were revised higher.
This sets up fourth-quarter equipment spending for robust
growth. We look for 17.6% annualized growth of equipment spending
in the fourth quarter following 66.6% growth in the third quarter,
a cumulative increase that would more than reverse the
pandemic-induced declines over the first half of this year.
The increase in durable-goods inventories was larger than we
had assumed. Moreover, a separate report out this morning on
October wholesale and retail inventories was also robust. All told,
we raised our forecast of the change in fourth-quarter inventory
investment by about $15 billion.
The University of Michigan Consumer Sentiment Index fell 4.9
points (6.0%) to 76.9 in the final November reading, a three-month
low. (IHS Markit Economists David Deull and James Bohnaker)
The index was 24.9 points beneath its pre-pandemic February
high and just 5.1 points above its April trough. The absence of a
meaningful rebound in consumer sentiment since the COVID-19
pandemic began is consistent with our expectation that consumer
spending growth will continue to slow.
The final November Consumer Sentiment reading was 0.1 point
beneath the preliminary reading, suggesting that the impacts of
skyrocketing COVID-19 cases and the November elections overwhelmed
any positive effect from encouraging reports on the likely efficacy
of several vaccines.
The expectations index plunged 8.7 points to 70.5 even as the
current conditions index rose 1.1 points to 87.0. Relative to the
midmonth reading, expectations worsened and views on current
conditions improved.
In November, for the first time in four years, respondents
self-identifying as Democrats expressed a more optimistic outlook
than those identifying as Republicans. However, 59% of Democrats
reported that the coronavirus had significantly changed their
lives, versus just 36% of Republicans.
Consumer sentiment fell 6.6 points to 73.6 among households
earning less than $75,000 a year and fell 4.4 points to 79.5 among
households with earnings above that threshold. The pandemic has
disproportionately eliminated employment for lower-income workers,
while equity markets are pushing record highs. According to the
University of Michigan, 69% of households owned stocks in 2020, up
from 61% in 2015.
The expected one-year inflation rate rose 0.2 percentage point
to 2.8% and the expected five-year inflation rate rose 0.1
percentage point to 2.5%.
The index of buying conditions for large household durable goods
rose 5 points to 114, while that for vehicles rose 2 points to 121.
The index of buying conditions for homes fell 9 points to 132, the
same as in September.
US new home sales slipped 0.3% in October (±13.6%, not
statistically significant) to a seasonally adjusted annual rate of
999,000. The three-month moving average climbed above the 1.0
million threshold for the first time since September 2006 (note:
the three-month estimates are more informative than the monthly
estimates because averaging reduces statistical noise). Sales were
41.5% (±22.6%, statistically significant) higher than in October
2019. (IHS Markit Economist Patrick Newport)
Sales are strong in four regions. Year-to-date sales are up 30%
in both the Northeast and Midwest, 20% in the West, and 19% in the
South.
Sales of un-started homes increased for the sixth straight
month to a 385,000 rate, its highest level since March 2006 (note:
an un-started new home sale usually turns into a single-family
housing start within a couple of months). Completed homes sold
tumbled from 337,000 to 266,000.
Sales for the prior three months were revised up a cumulative,
whopping 64,000.
The months' supply of unsold homes was unchanged at a record
low 3.6 months.
Despite strong demand, new home prices are hardly budging. The
three-month average median and average price in October are both up
about 1% from October 2018 and 2-3% from October 2017.
Bottom line: Although sales were unchanged in October, this
report was solid: it included large upward revisions; it pointed to
further increases in single-family housing starts in the next two
months; and it nearly guarantees that sales this year will be the
highest since 2006.
The surge in US home price growth continued unabated in
September. Data for the three months ending in September show that
US home prices grew at the fastest pace in over six years, at 7.0%
y/y. (IHS Markit Economist Troy Walters)
The 10-city index advanced 6.2%, its fastest pace since April
2018. The 20-city index gained 6.6%, its fastest pace since March
2018. This data release covers the June through September period
and is the second to exclude the months during which the strictest
initial shutdowns of nonessential business were in place.
The summer months brought a surge of potential homebuyers who
were largely shut out of the market from late March to mid-May. The
resulting surge of delayed demand, combined with low mortgage rates
and perhaps an additional sense of urgency due to fears of a
resurgence in COVID-19 caseloads, brought about even faster price
of appreciation.
Limited supplies also continued to play a significant role.
Data from the National Association of Realtors show that
inventories of existing homes for sale, at 1.46 million in
September, are near historic lows and falling rapidly at a
double-digit y/y pace.
Price growth accelerated across the country, with many cities
again seeing faster appreciation.
All 19 cities covered in this release saw home prices grow
faster than in the previous month, a repeat of August's
unprecedented performance.
Phoenix remained in the top spot with an annual increase of
11.4% in September.
Seattle, in second place, saw an increase of 10.1% y/y.
San Diego jumped into the third spot in September with near
double-digit gains as well at 9.5% y/y.
Growth in Chicago and New York remained the slowest of the
cities covered, at 4.3% and 4.7%, respectively; nevertheless, both
saw significant acceleration in the late-summer months.
The US goods deficit widened by $0.9 billion in October, in
line with the consensus expectation but less than we had assumed.
Furthermore, the combined inventories of wholesalers and retailers
rose 0.9% in October, also more than we had assumed. (IHS Markit
Economists Ben Herzon and Lawrence Nelson)
In response to these developments, we raised our forecast of
fourth-quarter GDP growth by 0.6 percentage point. Other reports
out this morning added m
Both exports and imports of goods posted healthy increases in
October. Imports have already surpassed the pre-pandemic trend, and
exports have now reversed about three-quarters of the
pandemic-induced decline.
Areas of relative strength within exports include food, feeds,
and beverages; automotive vehicles, parts, and engines; and
consumer goods excluding foods and autos.
The increase in inventories (wholesale + retail) was the fourth
consecutive monthly increase following steep declines earlier this
year.
The unexpected strength in October led us to add about $21
billion to our forecast of fourth-quarter inventory
investment.
Today's report rounds out the data we need to estimate real
goods GDP through October, which we estimate slipped 0.8%. This
would follow increases in prior months that have left the level of
monthly goods GDP roughly in line with the pre-pandemic trend.
The goods sector, by some measures (especially monthly goods
GDP), has fully recovered from disruptions from COVID-19.
Peru's National Institute of Statistics and Information
(Instituto Nacional de Estadística e Informática: INEI) reports
that the country's economy grew by 28.5% quarter on quarter (q/q)
on a seasonally adjusted basis in the third quarter of 2020. The
result slightly exceeded IHS Markit's expectations and set Peru on
a path towards recovery, although considerable momentum has already
been lost in recent months. (IHS Markit Economist Jeremy Smith)
Even after the strong third-quarter performance, output
remained 9.4% below levels recorded in the same quarter of 2019, a
testament to the extent of the historic -26.6% q/q collapse in the
second quarter that was brought about by the especially rigorous
and protracted containment measures enacted to slow the spread of
the coronavirus disease 2019 (COVID-19) virus.
Large-scale loss of employment generated a 37.1% year-on-year
(y/y) decline in real wages; this has weighed heavily on private
consumption, which was down by 9.7% y/y despite a 16% q/q recovery.
Consumption of durable goods and services has fallen substantially
more than consumption of non-durables and food as households
prioritize essential items.
Government expenditure is the only component of aggregate
demand to grow in y/y terms (3.5% y/y). The rise in spending,
especially in the area of public health (up by 19.6% y/y),
primarily results from the implementation of an ambitious economic
stimulus package. The government has so far only partially executed
the spending announced in March, worth 12% of GDP, leaving room for
further stimulus.
Fixed investment surged 125% q/q after grinding to a
near-complete halt in the second quarter. Purchases of capital
goods continue to suffer, but investment has been bolstered by
resumption of previously stalled projects and new public
infrastructure projects under the "Arranca Perú" program.
The trade balance returned to surplus as export recovery
outpaced imports. Copper prices, driven higher by mainland Chinese
demand for construction materials, surpassed pre-crisis levels.
However, mineral products, which amount to around 60% of total
exports, recorded a 28% y/y decline by dollar value.
The gradual relaxation of containment restrictions starting in
May gave the Peruvian economy a boost, and the monthly production
index rose by an average of 10.2% until June. Since that time,
however, the recovery has lost considerable momentum, most recently
slowing to a 1.5% month-on-month increase in September. The
observed bounce-and-fade pattern is consistent with our expectation
that the low-hanging fruit of economic reopening would be collected
quickly but may soon be exhausted.
Europe/Middle East/Africa
European equity markets closed mixed; Italy +0.7%, Spain +0.3%,
France +0.2%, Germany flat, and UK -0.6%.
10yr European govt bonds closed mixed; UK/Germany -1bp,
France/Spain flat, and Italy +1bp.
iTraxx-Europe closed flat/49bps and iTraxx-Xover
+5bps/269bps.
The United Kingdom's Society of Motor Manufacturers and Traders
(SMMT) has issued its latest warning regarding the potential impact
from a "no-deal" Brexit. According to a statement, the SMMT
anticipates that World Trade Organization (WTO) tariff terms would
cost the UK automotive industry GBP55.4 billion (USD73.8 billion)
by 2025, as well as causing production to fall below 1 million
units per annum consistently. The SMMT added that "even with a
so-called 'bare-bones' trade deal agreed, the cost to industry
would be some GBP14.1 billion". Separately, Nissan has denied a
report in Automobilwoche that it is planning to close its
Sunderland (UK) facility. The German trade publication cited a
"Nissan manager familiar with the matter" as stating that "a
decision has been made and it's not favorable for the UK". However,
the Japanese automaker told The Telegraph Online, "These rumors are
not true." When asked about the company's post-Brexit future, the
representative added, "As a sudden change from the current
arrangements to the rules of the WTO will have serious implications
for British industry, we urge UK and EU negotiators to work
collaboratively towards an orderly balanced Brexit that will
continue to encourage mutually beneficial trade." The latest
statement from the SMMT comes as the final deadline looms for the
end of the transition period of the UK's departure from the
European Union. With a little over one month to go, discussions on
certain key topics, such as following EU standards and state aid,
remain ongoing. (IHS Markit AutoIntelligence's Ian Fletcher)
Specialty chemicals producer Elementis (London, UK) has
rejected a second and improved possible takeover offer from
Minerals Technologies (New York, New York) that values the company
at £679 million ($905 million). Minerals made a second approach on
24 November regarding a possible all-cash offer to acquire
Elementis, with the board of Elementis rejecting the revised
proposal "after approximately two hours," Minerals says. The
increased proposal comprised an offer of 117 pence per Elementis
share, representing a rise of 9% on the initial proposal by
Minerals of 107 pence per share. The increased proposal represents
a premium of approximately 43% to Elementis's closing share price
of 81.70 pence on 4 November, the date immediately prior to
Minerals' initial approach, it says. It also represents a premium
of 61% to Elementis's 90 trading-day volume weighted average share
price of 72.66 pence on the same date, it adds. The original
approach by Minerals on 5 November valued Elementis at £621
million, with the Elementis board rejecting the takeover offer
saying it "significantly undervalued" the company. Elementis has
more than 580 million issued shares. The board of Elementis has so
far declined to enter into discussions, according to Minerals,
which adds it has announced the details of the increased proposal
so that Elementis's shareholders "have access to this information."
Minerals is currently considering its position, and there is no
certainty that any firm offer will be made, it says. Elementis
manufactures additives for products in the consumer and industrial
markets, including personal care, coatings, chromium, energy, and
talc. (IHS Markit Chemical Advisory)
EPCI contractor DEME has made good progress on the installation
of the jacket foundations for the Moray East offshore wind farm
project. Using heavy lift vessel Seajacks Scylla, 72 wind turbine
jackets and three offshore transformer module (OTM) jackets have
been installed since work started in July 2020. It is expected that
the remaining 28 jackets will be completed by January 2021. The
jackets were fabricated by Smulders, with 55 jackets awarded to it,
and the remaining by Lamprell. The later also fabricated the
jackets for the three OTMs. The 950 MW Moray East wind farm is
expected to be commissioned in 2022 and comprises 100 MHI Vestas
V164-9.5 MW wind turbines. Installation of the foundations was
originally planned to be supported by DEME's newbuild installation
vessel Orion. The project however suffered a setback in May when
the vessel sustained damage to its deck and crane due to the
catastrophic buckling of its 5,000 MT crane during load tests. (IHS
Markit Upstream Costs and Technology's Melvin Leong)
In a high-profile visit to Berlin for the European Battery
Conference, Elon Musk outlined plans to make the battery cell
factory at Tesla's new Brandenburg site the biggest in the world,
while also discussing plans for a potential C-segment car for
Europe. Musk was in typical swashbuckling mood during his trip, no
doubt fueled by the news that Tesla's share price has now climbed
to such an extent that on paper he is now the second richest man on
the planet after Amazon's Jeff Bezos. Tesla is well placed to
achieve Musk's ambitions stated here. It is perhaps surprising that
Musk had not so far realized that the Model X SUV-E is a very large
car by European standards. A car like the Model X certainly makes
more sense in the expansive wide open spaces of US cities, which
have always been designed around car use, and the fact that the
Model 3 has been such a success in Europe shows where most
customers' preferences lie in the region. At the moment, IHS Markit
forecasts that the Brandenburg plant will begin production of the
new Model Y (effectively a higher riding Model 3) SUV in 2022,
followed by the Model 3 in 2023. (IHS Markit AutoIntelligence's Tim
Urquhart)
Clariant says it plans to "rightsize" its regional
organizations and service units, reducing their combined workforce
by approximately 1,000, around 6% of the company's total workforce.
The decision follows the divestments of the company's healthcare
packaging business in October 2019 and masterbatches business in
July 2020, as well as the anticipated divestment of the company's
pigments business, it says. Approximately one-third of the
reductions will be included in the divestment transfers, the
company says. Clariant says it is transforming itself to focus more
on its core business areas of care chemicals, catalysis, and
natural resources. The company says that the timeline for the
measures will extend over a maximum of two years and include
departures attributable to natural fluctuation. It has also decided
to make a provision of 70.0 million Swiss francs ($76.7 million) in
discontinued operations in the fourth quarter of 2020 for the
reorganizing program. Meanwhile, Clariant's previously announced
efficiency program is in full implementation to cut approximately
600 jobs and realize SFr50 million of cost-base savings in the
continuing business until the end of 2021, it says. (IHS Markit
Chemical Advisory)
An advocate general from the European Court of Justice will
next week issue an opinion - a non-binding preliminary ruling - on
the European Commission's appeal against a February 2019 judgement
by the General Court annulling the EU executive's 2016 decision
that Belgium's tax sweetener deals for domestic companies,
including brewing giant AB InBev, constituted illegal state aid.
(IHS Markit Food and Agricultural Policy's Sara Lewis)
The Commission maintains that it was right to condemn the
Belgian tax rulings that from 2004 to 2015 reduced the taxable
profits of 55 domestic companies belonging to multinational groups,
via a tax exemption on additional profits.
The tax breaks were based on a provision of the Belgian Income
Tax Code which, in accordance with the internationally accepted
arm's length principle, allows profits to be adjusted between two
affiliated companies if the conditions agreed between them were not
the same as those that would apply to independent companies.
The Commission contends that the Belgian tax authorities had
not used the arm's length principle, as provided for in the Income
Tax Code, to reassess charges for services between two associated
companies, but rather compared the profits of the company forming
part of a "cross-border group" with those of a non-affiliated
company, irrespective of the services offered.
More specifically, the Belgian tax authorities determined what
these additional profits were by estimating the hypothetical
average profit that an independent company carrying on a similar
activity would have made in a comparable situation and deducting
this amount from the actual profit made by the Belgian company
concerned.
To benefit from this special treatment, it was sufficient for
the profits to be linked to a new situation, such as a
reorganization leading to the resettlement of the main company in
Belgium, the creation of jobs or additional investments. The
Belgian authorities even advertised the possibility of an advance
tax assessment, which would make a negative adjustment to profits -
a tax exemption on additional profits.
Turkey's Banking Regulation and Supervision Agency (Bankacilik
Düzenleme ve Denetleme Kurulu: BDDK) has announced that it will
abolish the minimum asset ratio requirement for banks at the end of
2020. The requirement was announced in April and was designed to
boost credit growth and mitigate the economic fallout from the
COVID-19-virus shock. (IHS Markit Banking Risk's Gabrielle Ventura)
The asset ratio was rolled back for the second time in
September, requiring a minimum loan-to-funding ratio of 90% for
commercial banks and 70% for Islamic banks (participating banks)
(see Turkey: 29 September 2020: Turkey's banking regulator further
reduces minimum asset ratio in second tightening measure of the
month).
In IHS Markit's view, the elimination of the loan-to-funding
ratio requirement is credit positive for the Turkish banking
sector. The requirement forces banks to loosen lending standards,
driving up expected non-performing loans.
The termination of the asset ratio should allow banks to
further tighten lending standards in 2021 and prevent the
accumulation of additional credit risks through rapid lending
expansion, as seen in the first three quarters of 2020.
We expect credit growth to decelerate in the final quarter of
2020 as some stimulus measures are curtailed and pressure on asset
quality begins to rise, with headline credit growth rates
registering about 28% at the end of the year.
The Central Bank of Eswatini, in consultation with the Monetary
Policy Consultative Committee (MPCC), decided to leave its policy
rate unchanged at 3.75% throughout November. (IHS Markit Economist
Archbold Macheka)
Year-on-year (y/y) inflation is trending upwards. Headline
inflation in October ticked up to 4.7% y/y from 4.1% y/y in
September, driven by higher prices for food and non-alcoholic
beverages (4.4% y/y); housing and utilities (6.4% y/y); and
furnishing and housing equipment (5.2% y/y). Consequently, the
central bank has revised its average annual inflation forecasts for
2020 and 2021 upwards, to 3.84% y/y (from 3.74% y/y) and 5.23% y/y
(from 4.34% y/y), respectively.
In the second quarter of 2020, Eswatini's economy declined by
8.2% y/y (seasonally adjusted), following the 3.6% y/y contraction
in the first quarter of 2020. According to the monetary policy
statement, the decline "was largely attributed to poor performance
in all three sectors of the economy, especially severe in the
secondary sector, which further contracted by a significant 24.5%
y/y in the second quarter of 2020, from a 16.4% y/y contraction
recorded in the first quarter".
Private-sector credit weakened by 0.4% due to weak credit
extension to households (down 1.2% month on month (m/m)) and the
business sector (down 0.3% m/m). The country's foreign reserves
stood at SZL9.3 billion (about USD595 million) on 13 November 2020,
equivalent to four months' import coverage. At the end of October,
the country's total debt stock stood at SZL25 billion (39.6% of
GDP), with public external debt at SZL10.8 billion, equivalent to
17.2% of GDP.
Eswatini's monetary policy remains closely aligned with that of
South Africa, therefore its interest rate decisions mirror those
taken by the South African Reserve Bank (SARB). IHS Markit expects
a 25-basis-point hike in the SARB's policy rate by the fourth
quarter of 2021, with the risk tilted towards an unchanged monetary
policy stance for the upcoming year.
Moody's Investors Services has downgraded the South African
government's long-term foreign-currency and local-currency issuer
rating to Ba2 (Likely to Fulfil Obligations on the generic scale).
The outlook for both ratings has been left unchanged at Negative.
(IHS Markit Economist Thea Fourie)
The key driver behind the decision from Moody's to downgrade
the South African government's long-term foreign currency and
local-currency issuer rating to Ba2 is the further deterioration of
South Africa's fiscal strength over the medium term. The difficult
fiscal backdrop will hamstring the country's ability to address
economic challenges and social obstacles to reform. Moody's warns
that South Africa's capacity to mitigate the shock from the fallout
of the COVID-19 virus pandemic is lower than that of other
sovereigns facing similar fiscal, economic, and social constraints
and rising borrowing costs.
Moody's expects South Africa's public-sector debt - including
state-owned enterprises (SOE) guarantees - to reach 110% of GDP by
the end of fiscal year (FY) 2024. This will leave South Africa's
public-sector debt burden 40 percentage points above the FY 2019
level. Moody's warns that wider fiscal deficits will persist over
the medium term. The government's medium-term spending objectives
rest heavily on cuts in the public-sector wage bill. "Its ability
to do so is questionable," Moody's warns.
From FY 2022, Moody's estimates show that interest costs will
become the largest contributor to the rising debt-to-GDP ratio and
will reduce South Africa's fiscal flexibility further. The
proportion of government revenue needed to cover interest costs
could increase to 25% over the medium term.
Moody's expects South Africa's GDP growth rate to average 1%
over the medium term, limited by structural constraints in the
economy. The COVID-19 crisis will worsen the country's
long-standing economic and social constraints and hamstring its
ability to implement much-needed reforms. Among the areas in need
of reform, South Africa's rigid labour market is the most
pressing.
The Negative outlook reflects the possibility that South
Africa's debt burden and debt affordability could exceed current
estimates. Downside risks to GDP growth and fiscal consolidation
efforts are the most prominent in Moody's view, in conjunction with
the potential for further financial demands from SOEs or higher
interest rates due to local or global shocks.
IHS Markit's medium-term sovereign risk rating for South Africa
is currently set at 55/100 (B+ on the generic scale) with a Stable
outlook. Our medium-term sovereign risk rating is higher than those
of S&P Global Ratings, Moody's, and Fitch.
South Africa's external debt burden is modest but has been
increasing, from 39.2% of GDP in 2015 to an estimated 67.6% of GDP
in 2020. By the end of 2020, external debt is expected to average
219.4% of total foreign-exchange earnings, while external debt
servicing costs will take up 27.3% of total foreign-exchange
earnings, up from 14.6% in 2019. South Africa relies heavily on
volatile portfolio flows as a source of external liquidity.
Asia-Pacific
APAC equity markets closed mixed; India -1.6%, Mainland China
-1.2%, South Korea -0.6%, Hong Kong +0.3%, Japan +0.5%, and
Australia +0.6%.
Subaru has partnered with SoftBank to demonstrate 5G-based
cellular vehicle-to-everything (C-V2X) communication technology to
assist autonomous vehicle (AV) applications. To conduct the
demonstration, SoftBank will deploy its portable device that
provides 5G connectivity with high radio wave, called 'Outing 5G',
at Subaru's Meishen test site in Hokkaido (Japan). SoftBank will
also use its high-precision positioning technology 'ichimill' that
will help in sourcing vehicle position information. The
demonstration involves AVs merging to the main road from the branch
line under two different scenarios. The first one is an AV merging
smoothly from the confluence to the main road on highways and the
other is an AV merging when there is no space available on the main
road owing to traffic jams. Last year, Subaru partnered with
SoftBank to conduct a joint research on 5G-based C-V2X
communication systems. C-V2X systems enable vehicles to communicate
directly with other vehicles, pedestrians, devices, and roadside
infrastructure and assist operations of advanced driver assistance
systems (ADAS). C-V2X technology not only supports AV functioning
but also helps in optimizing traffic flow and reducing vehicle
emissions. Subaru aims to reduce traffic accidents, including
deaths, and advance its safety technology developed through its
EyeSight driver assist system. (IHS Markit Automotive Mobility's
Surabhi Rajpal)
Singapore's real GDP increased sharply in the third quarter,
but it was not nearly enough to offset the decline induced by the
COVID-19 virus pandemic. (IHS Markit Economist Dan Ryan)
Singapore's economy in the third quarter grew 9.2% over the
second (actual percent, not annual rate). This recovered roughly
half of the decline experienced in the first half of the year.
The biggest contributor was private consumption. In some ways
this was surprising, given the pandemic, but then again Singapore
managed to lower cases quickly after the initial impact.
Government consumption showed a small decrease, which at first
glance seems contrary to the goal of fiscal stimulus. However, some
policies were instituted via tax policy, and may be partly
responsible for the rise in fixed investment.
Exports and imports both increased, showing an increase in
demand both abroad and domestically. Interestingly, external demand
has been the dominant factor recently, with net exports - exports
minus imports - rising sharply in the second and third
quarters.
From the production point of view, most of the gain was from
increased services. This correlates with the increase in private
consumption, and again is somewhat surprising in light of the
shutdowns caused by the coronavirus.
The next gaining sector was manufacturing, reflecting the rise
in exports. And lastly there was a rise in construction, though
this only recovered one-fourth of the decline in Q2.
Singapore's bounce-back in the third quarter was welcome but
not exceptional. Other Asian exporters in the third quarter
regained three-quarters of their prior losses, making Singapore
something of a laggard.
Toyota Motor has expanded its partnership with Intelematics to
launch connected car services in Australia. From late 2020, select
Toyota vehicles will be integrated with Intelematics' ASURE product
suite that will support the automaker's connected safety and
security offering, including automatic collision notification
(ACN), SOS emergency call (SOS), and stolen vehicle tracking (SVT).
Stephen Owens, CEO of Intelematics Australia, said, "Intelematics
has a heritage in providing highly valued services to the
Australian Automobile industry and being an integral part of this
program continues that tradition. The Intelematics ASURE product
suite has again proven its capability in supporting large scale
connected vehicle programs in local and global market."
Communications technology is essential to enhance vehicle
connectivity and Toyota has been increasing its efforts in this
space. Recently, it collaborated with KDDI and Telstra to deploy 4G
mobile network connectivity for select vehicles introduced in
Australia later this year. In 2019, Toyota's Lexus Australia
partnered with Telstra to test cellular vehicle-to-everything
(C-V2X) technology and advanced driver assist features on Victorian
roads. (IHS Markit Automotive Mobility's Surabhi Rajpal)
Australia's milk production has experienced a significant
turnaround in 2020, after the worst drought in the last 25 years
put the brakes on the country's dairy product manufacturing and
export ambitions. According to the USDA's Foreign Agricultural
Service (FAS), milk production in 2020 is pegged at 9.2 million
tons, which is 4% higher than 2019's drought-driven 8.83 million
tons. Sufficient rains in 2020 have resulted in a dramatic reversal
of Australia's falling milk production, and the effects of these
drought-breaking rains, good pasture conditions, a bumper grain
crop and improved water availability are expected to overspill into
2021. The scene is set for 2021 milk production to recover to near
pre-drought levels of 9.4 million tons, up 2% on 2020. With
increased milk production, the manufacturing industry is expected
to continue to prioritize cheese production over other manufactured
products, which is a continuing trend. As a result, cheese is
anticipated to see the largest rise in production, with practically
all of this increase being exported. FAS forecasts cheese
production for 2020 to be revised down to 385,000 tons, from the
official USDA estimate of 390,000 tons. Despite the revision, the
2020 cheese production estimate is still an increase of almost 6%
over 2019 production of 364,000 tons. In addition, 2021 production
of cheese is to reach 395,000 tons, up 3% on the 2020 estimate. If
realized this would be the highest production since 2002 and the
second highest in Australia's history. The primary reason for the
increase in cheese production is the forecast for expanded milk
production in 2021, along with the trend by manufacturers in
Australia over recent years to focus on cheese production at the
expense of WMP, butter, and SMP. (IHS Markit Food and Agricultural
Commodities Jana Sutenko)
Perusahaan Listrik Negara (PLN), Indonesian public utility
company, has signed a memorandum of understanding (MOU) with four
companies to encourage the adoption of electric vehicles (EVs) in
Indonesia, reports The Jakarta Post. The agreement is signed with
three automakers - Gesits, Hyundai, and Wuling - and ride-hailing
company Grab to examine ways to ensure easy electricity access for
EV owners and operators. This deal is aimed at introducing special
electricity charges for nighttime EV charging at home and improving
Cost.IN, the utility firm's app that tracks public EV charging
stations. Significance: The latest development follows the
Indonesian government's 2019 regulation aimed at making the country
an electrified-vehicle hub of Asia and beyond, with 2022 being the
target for the start of production of such vehicles. The country
also aims for electrified vehicles to account for 20% of its total
car production by 2025. By pushing for electrified vehicles, the
government plans to reduce its carbon footprint and reliance on
fossil fuels, as well as create a downstream industry for the
country's rich supply of nickel laterite ore. Nickel and cobalt are
key materials to make lithium-ion batteries. (IHS Markit Automotive
Mobility's Surabhi Rajpal)
Posted 25 November 2020 by Chris Fenske, Head of Fixed Income Research, Americas
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