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US and APAC equity markets closed lower, while European markets
closed mixed after a very challenging week for global equity and
credit markets. US and most European benchmark government were
lower on the day and most credit indices closed slightly wider
across both regions. Oil was lower again on the potential for a
slowdown in demand driven by the second wave of COVID-19
restrictions, with prices for both Brent/WTI near the lowest levels
since late-May. The US dollar closed slightly lower, while gold and
silver were higher on the day. The markets will be closely watching
for further COVID-19 restrictions next week, alongside Tuesday's US
elections, Q3 earnings reports, and Friday's US employment
report.
Americas
US equity markets closed lower on the day and week-over-week;
Nasdaq -2.5%/-5.5% week-over-week, Russell 2000 -1.5%/-6.2% week,
S&P 500 -1.2%/-5.6% week, and DJIA -0.6%/-5.5% week.
10yr US govt bonds closed +5bps/0.88% yield and 30yr bonds
+5bps/1.66% yield, with both ending the week 13bps higher than the
week's lowest intraday yield on Wednesday.
CDX-NAIG closed flat/65bps and CDX-NAHY +3bps/421 bps, which is
+8bps and +48bps week-over-week, respectively.
DXY US dollar index closed -0.1%/93.90.
Gold closed +0.6%/$1,880 per ounce and silver +1.2%/$23.65 per
ounce.
Crude oil closed -1.1%/$35.79 per barrel, which is its lowest
close since 1 June.
The Employment Cost Index (ECI) increased 0.5% for the
three-month period ended in September 2020 (the reference day is
the pay period that includes the 12th day of September). (IHS
Markit Economist Patrick Newport)
Year-over-year (y/y) growth was 2.4%, a dip from the June 2020
reading of 2.7%.
Year-over-year real growth was 1.2%, just higher than the 1.0%
y/y reading of September 2019 (the Bureau of Labor Statistics
calculates real growth using the consumer price index as the price
deflator).
Wages and salaries (about 70% of compensation costs) rose 0.4%
for the three-month period ended September 2020 and 2.7% y/y;
benefits (about 30% of compensation) increased 0.6% for the
three-month period ending September 2020 and 2.3% y/y.
Private industry compensation grew 2.4% y/y, wages and salaries
(about 70% of compensation costs) rose 2.7%, and benefits (about
30% of compensation) grew 2.0%.
State and local government compensation increased 2.3% y/y; for
this sector, wages and salaries (about 62% of compensation costs)
rose 1.8% and benefits (about 38% of compensation) grew 3.2%.
The index measuring how much private industry health benefits
cost employers rose 1.8% y/y, down from 2.0% y/y in September
2019.
Response rates were "comparable with prior releases," according
to the report.
This is the second pandemic reading. The private industry index
has slowed to 2.4% from a pre-pandemic 2.5-2.7%. During the Great
Recession, this index slowed from 3.0% in the second quarter of
2008 to 1.2% five quarters later. The milder slowdown this time can
be considered a good thing if it is validated by stronger
productivity growth. But if it results from sticky wages, as it
likely has, employers will slow hiring, slowing the decline in the
unemployment rate.
The Federal Reserve watches this index closely because it
measures total compensation, not just gains in wages and salaries.
Some forms of compensation, such as tips, payment in kind, and
stock options, are not incorporated into the index. The survey also
excludes some civilian workers, including self-employed business
owners, employees at private households, and federal
employees.
Personal income increased 0.9% in September and real disposable
personal income (DPI) advanced 0.7%. Employee compensation (+0.8%)
and proprietors' income (+5.1%) were the primary positive
contributors to personal income. (IHS Markit Economists James
Bohnaker and David Deull)
Transfer receipts were a small negative for personal income in
September, declining 0.1% month on month. Fewer disbursements from
the Pandemic Unemployment Compensation (PUC) program—weekly
supplemental payments of $600 that expired on 31 July—and other
pandemic unemployment insurance programs were largely offset by
other transfer receipts. Namely, "lost wages supplemental
payments"—money redirected from FEMA to individuals impacted by
the pandemic—increased $275.6 billion (annual rate).
Monthly growth of real PCE kicked up to 1.2% in September after
slowing in August; this gain was stronger than expected and
resulted in a 0.7 percentage point upward revision to our
fourth-quarter forecast for real PCE, which now stands at
5.2%.
Consumers continued to spend strongly on durable goods, where
growth of 2.9% in September jolted real PCE on durable goods to a
level that was 13.9% above its pre-pandemic February mark. Services
continued to lag, with growth of 0.8% in September; this nudged
real PCE on services to a level that was 7.3% below February.
Although incoming data for personal income and outlays have
exceeded expectations, we remain guarded about consumer spending
over the next several quarters given the "third wave" of COVID-19
cases, waning fiscal support, and exhaustion of demand for durable
goods.
The US University of Michigan Consumer Sentiment Index rose 1.4
points (1.7%) to 81.8 in the final October reading, the highest
since March. The index has recovered one-third of its decline from
February to April and its sluggish rise is consistent with our
expectation for sharply slower growth of consumer spending in the
fourth quarter. (IHS Markit Economists David Deull and James
Bohnaker)
The final October Consumer Sentiment reading was 0.6 point
higher than the preliminary reading, suggesting that sentiment was
stable over the course of the month in spite of rising rates of new
COVID-19 infections nationally that have surpassed previous
highs.
The expectations index rose 3.6 points to 79.2, while the
current conditions index fell 1.9 points to 85.9.
Consumer sentiment rose 3.0 points to 80.2 among households
earning less than $75,000 a year and edged up 0.3 point to 83.9
among households with earnings above that threshold.
The expected one-year inflation rate ended the month unchanged
from September at 2.6%, while the expected five-year inflation rate
fell 0.3 percentage point to 2.4%.
Perceptions of buying conditions were mixed in October. The
index of buying conditions for large household durable goods fell 5
points to 109, while that for vehicles fell 8 points to 119, a
six-month low. The index of buying conditions for homes jumped 9
points to 141, the highest since February.
Indices of buying conditions in the University of Michigan
report indicate the net percent of respondents saying it is a "good
time to buy" particular items. The decline of these indices for
durable goods and vehicles in October is similar to declines seen
in the Conference Board's measure of purchasing plans for the same
items, and points to a declining rate of growth for consumer
spending on durable goods in the coming months, consistent with our
forecast. Strength in durable goods spending has propped up
consumer spending thus far during the COVID-19 pandemic.
Tesla is looking to increase its number of service centers
sharply in 2021, targeting building one per week, according to
media reports. An Eletrek report cites a source familiar with the
matter as saying that Tesla has notified its staff of its plan for
a significant increase in service centers. Reportedly, Tesla will
select locations for the centers where it sees strong demand for
its electric vehicles and where its service-center capability is
lacking. It is not clear if the target for new service centers is
for the United States or globally. Tesla operates 466 service
centers globally, but because of its increased sales, it has a need
for more service centers. Tesla operates its own sales and service
centers directly, whereas traditional automakers use dealership
networks. Although Tesla initially expected its mobile service and
over-the-air capabilities to be sufficient, as the company
increases sales and its vehicles age, the need for servicing
increases. Automotive News and Electrek reported on plans for the
investment in service centers, but Tesla did not provide a comment
or confirmation. (IHS Markit AutoIntelligence's Stephanie
Brinley)
The state of Rhode Island in the United States is calling for
the submission of competitive request for proposals (RFP) to
procure up to 600 MW of new offshore wind energy. The RFP will be
developed by National Grid, with oversight by the state's Office of
Energy Resources. Approval will be determined by the Public
Utilities Commission. The state is host to North America's first
operational offshore wind farm Block Island, and in 2019, received
state approval for the 400 MW Revolution Wind offshore wind
project. (IHS Markit Upstream Costs and Technology's Melvin
Leong)
Ford has announced that it will reveal an electric version of
the full-size Transit van, to be called E-Transit, on 12 November.
The van is to be revealed via a virtual event hosted by new CEO Jim
Farley. In announcing the reveal, Ford cites a survey noting that
consumers in the United States, the United Kingdom, and Germany are
increasingly open to deliveries being made using electric and
zero-emission vehicles. Ford said, "The world - and the way we
power our vehicles - is changing. It's why the time is right for a
new type of Transit, something that remains the backbone of
commercial business while serving both our community and the
environment. Never has there been a better time to realize that
doing the right thing is good for business - ours and yours." (IHS
Markit AutoIntelligence's Stephanie Brinley)
Visteon has reported its financial results for the third
quarter, including a 2.8% year-on-year (y/y) increase in net sales
to USD747 million and net income of USD6 million. In the year to
date (YTD), the auto industry supplier's sales are down 20% y/y and
the company has reported a net loss of USD74 million. In the second
quarter, the coronavirus disease 2019 (COVID-19) pandemic caused
plant shutdowns in Europe and the Americas, and in the third
quarter, production resumed and, in many areas, was focused on
replenishing inventories, even in the face of lower demand. As a
result, Visteon's production third quarter 2020 was a little better
than in third quarter 2019. Visteon states that its gross margin
was USD99 million in the third quarter, up from USD84 million in
third quarter 2019. However, the company's net income attributable
to Visteon of USD6 million in the third quarter was notably lower
than USD14 million a year earlier. In the third quarter, Visteon's
adjusted net income was USD38 million. The supplier reported
adjusted EBITDA of USD87 million in the third quarter, up from
USD62 million a year earlier. Visteon stated it was awarded new
business of USD1.5 billion during the third quarter and USD3.2
billion in the year to date. (IHS Markit AutoIntelligence's
Stephanie Brinley)
LyondellBasell Industries posted third-quarter net income of
$114 million compared with $965 million in the year-ago quarter.
The combination of an impairment charge on its Houston, Texas,
refinery and an inventory valuation benefit overall reduced net
income by $313 million. Net sales of $6.8 billion were down 23%
year-on-year (YOY).
Olefins & polyolefins - Americas segment operating income
was $309 million, down 41% YOY. Olefins results decreased about
$135 million driven by decreases in margins partially offset by an
increase in volumes. Ethylene margin decreased primarily due to
lower coproduct prices. Polyolefin results decreased approximately
$60 million owing to lower margins as a result of reduced spreads,
LyondellBasell said.
Olefins & polyolefins - Europe, Asia, international
operating income was $52 million, down 74% YOY. Olefins results
decreased approximately $115 million YOY owing to lower margin
driven by declining ethylene prices. Combined polyolefins results
decreased about $45 million primarily driven by a lower
polypropylene price spread over propylene.
Intermediates & derivatives segment operating income of
$180 million was down 43% YOY. Propylene oxide & derivatives
and intermediate chemicals results were relatively unchanged offset
sharply lower oxyfuels results driven by weaker margins owing to
lower gasoline prices and higher feedstock prices. Compounding
& solutions results were relatively unchanged with higher
margins offset by lower volumes. Advanced polymers results
decreased approximately $15 million owing to lower margins and
volumes driven by reduced demand.
Refining segment posted a net loss of $733 million reflecting a
$582 million impairment charge. The segment posted a loss of $6
million in the year-ago quarter. Income was lower on weaker margins
and volumes in response to lower demand for fuels.
Technology segment net income was $101 million, up 38% driven
by higher licensing revenue.
Advanced polymer solutions operating income of $116 million was
up 73% YOY on favorable inventory benefits. Compared with the prior
period, compounding & solutions results were relatively
unchanged with higher margins offset by lower volumes. Advanced
polymers results decreased approximately $15 million owing to lower
margins and volumes driven by reduced demand.
ElectraMeccanica aims to open six US retail locations by the
end of November 2020, offering its three-wheeled electric commuter
vehicle. According to an Automotive News report, the stores will be
in San Diego, Santa Clara, Walnut Creek, and Brea, California, and
Scottsdale and Glendale, Arizona. The stores will be in prominent
shopping centers and "strategically positioned in high-visibility
areas alongside notable name-brand anchor stores," the company is
quoted as saying. CEO Paul Rivera is quoted as saying the plan is
"consistent with our rollout strategy… We are continuing with our
planned, methodical ramp up in production to ensure quality and
consistency," he said. "While we have encountered certain hurdles
through this growth process, our team is hard at work making select
supply chain and technical improvements." The company already has
four stores in the US. The Solo is priced starting from USD18,500,
similar to the starting price of the Smart ForTwo, which offered
seats for two but failed to capture US attention. As we noted in
earlier reports, the three-wheeled, single-seat Solo is classified
as a motorcycle in the US, meaning that it has to meet a different
set of safety requirements from other electric vehicles (EVs). In
addition, it would not be included in the IHS Markit light-vehicle
sales and production forecasts. The Solo has a 100-mile range, can
drive at highway speeds, and is charged using a standard 100-volt
household socket in about six hours. In the US, sales of the Solo
are scheduled to start in 2020 and its retail price is expected to
be less than USD20,000. In 2018, ElectraMeccanica set up a
car-sharing initiative in Canada. (IHS Markit AutoIntelligence's
Stephanie Brinley)
Autonomous truck startup TuSimple has secured property for a
logistics hub in AllianceTexas' Mobility Innovation Zone (MIZ) in
north Fort Worth. MIZ was launched last year as a platform to test
and develop technologies tied to passenger and freight
transportation. Hillwood, a real estate company, will establish the
space that will support TuSimple to expand its autonomous trucking
operations in Texas. Hillwood and TuSimple will begin construction
on the project in November, with an expected completion by March
2021. Greg Abbott, Texas Governor, said, "We're pleased to welcome
TuSimple to Texas, adding the company to our nation-leading roster
of firms engaged in the implementation of next generation mobility
platforms. The AllianceTexas Mobility Innovation Zone provides the
perfect infrastructure, landscape and scale for the company to
launch their national expansion and 'Texas Triangle' operations."
TuSimple focuses on developing Level 4 autonomous solutions for the
logistics industry. The company currently has about 40 vehicles in
its test fleet and expects that fully autonomous operations can be
achieved in 2021. Recently, Traton Group and TuSimple announced a
global partnership on autonomous trucks, which will involve Scania
testing the technology. (IHS Markit Automotive Mobility's Surabhi
Rajpal)
Canada's real GDP by industry output increased 1.2% month on
month (m/m) in August, as output declined in only three industries.
(IHS Markit Economist Arlene Kish)
The gain in the goods-producing industries (up 0.5% m/m) was
weaker than the solid advance in the services-producing industries
(up 1.5% m/m).
Industrial production output was almost flat at 0.1% m/m, as
natural resource output losses almost offset manufacturing's
gain.
Statistics Canada estimates September's real GDP by industry
output increasing 0.7% m/m and third-quarter real GDP growth to
advance 10% from the previous quarter.
Real GDP's third-quarter gain is in line with October's
forecast, and the fourth quarter's increase will be muted given
renewed containment measures.
August's real GDP by industry output climb was bigger than
expected as real manufacturing activity increased in the month
despite the decline recorded for real manufacturing sales volumes.
These two series are typically in sync. On the flip side, oil and
gas extraction was down thanks to hefty losses for non-conventional
oil extraction (down 7.5%) and the decline in mining and quarrying
output. Combined, industrial production was virtually
unchanged.
The services industries did the heavily lifting in the month as
education was the biggest contributor to growth as preparations
were being made well in advance of the school year. Professional
services was a big contributor, and a full month of accommodation
and food services openings was also a significant contributor.
Among the goods-producing industries, agriculture, forestry,
fishing and hunting, as well as utilities output are above
pre-pandemic February levels. Within services, wholesale trade,
retail trade, finance and insurance, and real estate are the
industries with output surpassing February levels. There are clear
industry winners and losers with the reopening of the economy.
Total economic growth is 4.6% below February levels, with
goods-producing industry output lagging slightly behind
services.
At its 28 October policy meeting, the Central Bank of Brazil
(Banco Central do Brasil: BCB) left the policy rate at 2.0% and
stated that the current spike in inflation does not alter the
inflation picture in the relevant horizon for monetary policy,
which includes years 2021 and 2022. (IHS Markit Economist Rafael
Amiel)
Annual inflation has increased in the past four months,
reaching 3.1% at the end of September, well above the policy
rate.
Inflation in the food and beverages category has been soaring
and reached 13.5% at the end of September; one of the drivers of
inflation in the past three months is the correction of petrol
prices, driven in turn, by international oil prices. Service
inflation remains low.
The core inflation rate, which excludes volatile items
(agriculture and energy prices), was 1.2% in the 12-month period
ended in September, which confirms that there has not been
contagion from sectors with high inflation to those that enjoy
price stability.
At current levels, the policy rate is at its historic low. The
BCB targets inflation at 4.0% +/- 1.5 percentage points.
Producer prices have increased substantially in the past four
months and some of these may continue to pass onto consumer prices.
The depreciation of the exchange rate has also been pushing up
inflation.
The BCB's latest statement is very similar to the previous one
(16 September); one major difference is that it acknowledges a
higher exchange rate and rules out completely the possibility of a
hike in the rate in the short term.
The central bank highlights a number of risks in terms of
future action: favoring lower inflation, the output gap - the
difference between the potential output and actual output - remains
wide, which means that additional demand can be easily met by
increases in production without the need to increase prices. This
downside risks may intensify if the COVID-19-virus pandemic's
negative impact on demand extends further than anticipated and if
precautionary savings (because of the COVID-19 virus)
increase.
The Central Bank of the Argentine Republic (Banco Central de la
República Argentina: BCRA) published on 28 October its monthly
banking-sector bulletin covering August. Among the key figures are
the credit growth ratio standing at 33.6% year on year (y/y), below
the inflation ratio; the non-performing loan (NPL) ratio standing
at 4.9%; and the capital adequacy ratio standing at 23.4%
(shareholders' equity stood at 15.1% of total assets). Moreover,
profitability remains low for Argentine standards, with the
return-on-average-assets (ROA) ratio standing at 2.7%. Regarding
the liability side, liquid assets stood at 66.1% of short-term
liabilities and the loan-to-deposit ratio stood at 47.1%. One of
the latest additions to the bulletin is a series revealing the
government's exposure to the public sector: the sum of both
sovereign bonds and loans to the government represents 10% of total
assets. The limited exposure to the sovereign is a risk-positive
factor. This is the first figure revealing the effect of the
country's sovereign-debt renegotiation in August. Nevertheless, the
government's lack of access to diverse sources of funding is likely
to expand this figure as it has increased incentives to rely more
on banks to finance its fiscal gap. (IHS Markit Banking Risk's
Alejandro Duran-Carrete)
Europe/Middle East/Africa
European equity markets closed mixed; Spain +0.6%, France
+0.5%, Italy +0.4%, UK -0.1%, and Germany -0.4%.
Most European govt bonds closed lower except for Spain -1bp; UK
+4bps, France/Italy +2bps, and Germany +1bp.
iTraxx-Europe closed +1bp/66bps and iTraxx-Xover +3bps/369bps,
which is +11bps and +42bps week-over-week, respectively.
Brent crude closed -0.8%/$37.94, which is its lowest close
since 29 May.
The "preliminary flash" estimate delivered a large upward
surprise, reflecting the prior unwinding of COVID-19 virus
containment measures. But the reverse effect points to a subsequent
contraction in the fourth quarter of the year. (IHS Markit
Economist Ken Wattret)
The third quarter's double-digit q/q surge in eurozone GDP far
surpassed the market consensus expectation (9.4% according to
Reuters' survey) and also IHS Markit's baseline forecast
(8.3%).
On a year-on-year (y/y) basis, eurozone GDP fell by 4.3% in the
third quarter of 2020, a ten percentage point-plus improvement from
the second (-14.8%).
Despite the third quarter's record rise, GDP remained 4.3%
below its pre-pandemic level back in the fourth quarter of 2019
given the exceptionally large declines in the first half of
2020.
Eurostat's "preliminary flash" estimate is based on the data of
16 of 19 member states, covering 93% of eurozone GDP. Given the
exceptional circumstances, subsequent revisions are likely.
The next "flash" estimate for the third quarter of 2020 will be
released on 13 November, along with the first estimate of
employment. A breakdown by expenditure component will be released
only on 8 December.
Among the larger member states, upward surprises in the third
quarter were most pronounced in France (18.2% q/q), Spain (16.7%
q/q), and Italy (16.1% q/q), partly reflecting their relative
underperformance in the prior two quarters. German GDP also
surprised to the upside (8.2% q/q) but by a smaller margin.
Factoring in the third quarter's huge upward surprise but
leaving IHS Markit's October quarterly forecast profile unchanged
from the fourth quarter onwards would imply an annual contraction
in eurozone GDP in 2020 of around 6½%, much less severe than our
current estimate of around -8%.
Having surprised significantly to the downside in August and
September, October's 'flash' HICP data for the eurozone matched
expectations. (IHS Markit Economist Ken Wattret)
The headline inflation rate remained negative for the third
successive month, unchanged at -0.3%. Energy remained the key
driver of sub-zero inflation, edging down to -8.4% year on year
(y/y).
The inflation rate excluding food, energy, alcohol, and tobacco
prices was unchanged from September at 0.2%, matching its record
low.
The inflation rate for non-energy industrial goods (accounting
for around one-third of the core measure above) remained negative
for the third straight month but ticked upwards (-0.3% to
-0.1%).
In contrast, services inflation (the other two-thirds) slipped
to a new record low (from 0.5% to 0.4%). A full breakdown of
October's eurozone HICP by item will be released on 18 November and
is likely to show continued weakness in the services items most
affected by the COVID-19 virus pandemic, including prices for
recreational activities, restaurants, and hotels.
The impact of the pandemic, measurement challenges, and German
VAT reductions all complicate the short-term assessment of
inflation developments.
However, with the output gap having surged, unemployment to
continue to rise, and inflation expectations still uncomfortably
low, the big picture remains one of disinflationary and potentially
deflationary forces in the eurozone.
"Flash" data released by the Federal Statistics Office (FSO)
shows that German real GDP rebounded by 8.2% quarter on quarter
(q/q) in the third quarter, following declines of 1.9% q/q in the
first quarter and 9.8% q/q in the second. The third-quarter bounce,
although somewhat stronger than we had expected (7.0%), still
leaves GDP 4.2% below that of the final quarter of 2019, prior to
the pandemic. Revisions to the first two quarters were minimal and
mutually offsetting. (IHS Markit Economist Timo Klein)
The year-on-year (y/y) rate based on the calendar and
seasonally adjusted series is now -4.2%, up from the second-quarter
record low of -11.2%. For comparison: At its worst in the first
quarter of 2009, GDP had slumped to -7.0% y/y during the global
financial market crisis.
As usual, only the flash data relating to total GDP (real and
nominal) have been released today - detailed component data will be
released on 24 November. Nevertheless, the qualitative guidance
provided by the FSO in its press release reveals that exports,
private consumption, and - to a somewhat lesser extent - investment
in equipment were the driving factors for the third-quarter
recovery. Public consumption and construction played less of a
role, but then these components had been the chief stabilizers
during the sharp downturn in the previous quarter. The FSO do not
indicate whether net exports provided a positive or negative
contribution to GDP, but we strongly suspect the former due to
exports' stronger decline during the second quarter.
Owing to the exceptional volatility caused by the lockdown and
the subsequent loosening of restrictions, it is impossible to say
at this point to what extent consumers satisfied their pent-up
demand and how well producers were able to satisfy this with
increased production despite lingering supply chain issues. Thus,
the direction of the stock of inventories is unclear, but one can
safely assume that final domestic demand excluding changes in
stocks will have rebounded sharply in any case.
External trade had been impeded throughout the first half of
2020, hurting exports more than imports. The performance of exports
relative to imports should have reversed in the third quarter, not
least because many Asian countries, most notably China, lifted
lockdown restrictions already from April onwards, which allowed
their economies to recover strongly. Germany is one of the prime
beneficiaries of recovering Chinese demand, helping sectors such as
automobiles, machines, and electrical equipment.
The stronger-than-expected third-quarter rebound will be
broadly offset by the setback now expected for the final quarter of
2020 due to the partial lockdown scheduled for November. Although
restrictions will mostly hurt the recreation sector (notably via
closed restaurants) and not manufacturing or retail, a modest GDP
contraction appears likely in late 2020.
According to Federal Statistical Office (FSO) data, Germany's
real retail sales excluding cars declined by 2.2% month on month
(m/m; seasonally and calendar adjusted) in September, fully
unwinding their August increase by 1.8% m/m (revised down from
3.1%). In effect, September's retail sales have returned to the
levels observed in June, just before the VAT cut. (IHS Markit
Economist Timo Klein)
Nevertheless, given the huge rebound in May after the end of
the lockdown period, also helped by an extra shopping day,
September's unadjusted year-on-year (y/y) rates were 6.5% in real
terms and 7.7% in nominal terms. Even adjusting for the shopping
day effect, annual rates at 3.9% (real) and 5.1% (nominal) exceeded
average growth of 3.1% and 3.7%, respectively, in 2019. This holds
all the more in relation to long-term trend growth of 0.6% and
1.3%, respectively.
The recent above-trend retail sales are attributable to three
factors: the temporary VAT cut (July-December 2020), catch-up
effects due to the enforced inability to make purchases during the
March-April lockdown, and substitution effects with respect to
income that cannot be used for services that - for public health
reasons - are either not available at all or available only with
restricted capacity. Furthermore, with a greater share than usual
spent indoors, people want to improve their living conditions at
home.
Major categories of the price-adjusted y/y data for September
(total 6.5% y/y; see table below) show a little difference between
food sales (6.8%) and non-food sales (6.5%), but differences in
performance between sub-groups of the non-food category remain
stark. As before, 'internet and mail orders' (up by 21.2% y/y) are
far ahead of the rest. 'Furniture/household goods/DIY' (up by
11.1%) and sales in 'specialty stores such as for toys, books,
bicycles' (up by 7.7%) also did well, whereas the other major
groups of goods all posted declines: pharmaceutical/cosmetic goods
by 0.4%, textiles/shoes by 7.3%, and sales at general department
stores by 9.9%.
The robustness of recent retail sales data - notwithstanding
September's correction - must not be confused with the situation
for consumer demand in general, given the above-mentioned
catching-up, substitution, and tax effects. Many services in the
recreation and entertainment sectors will remain underutilized
until an effective vaccine has been made available (thus likely
until at least mid-2021), leading consumers to spend their money on
retail goods instead.
The Volkswagen (VW) Group has moved back into the black for the
third quarter and for the first three quarters of 2020 after the
losses in the first half of the year, according to a company press
release. The firm recorded net profit of EUR2.75 billion in the
third quarter, down 31% y/y from EUR3.99 billion last year. The
third-quarter profit was generated from revenue which fell by 3.4%
y/y to EUR59.36 billion, which was a positive recovery given the
extremely difficult environment in the first part of the year.
Customer deliveries for the quarter were down by 2.61 million
units. The third-quarter operating result stood at EUR3.18 billion
which was down 29.9% y/y, from EUR4.813 billion last year, and
which was an operating return on sales of 5.4%, down from 7.4% in
the third quarter of 2019. Earnings before tax stood at EUR3.61
billion, which was a 29.0% y/y decline. Like all the other major
global OEMs, VW experienced an extremely tough first half of the
year as a result of the impact on demand, production and confidence
from the initial phase of the global COVID-19 virus pandemic. This
is reflected in the accelerated falls in revenue, sales and net
profit in the first nine months of the year. Sales momentum has
started to return, led by the strong recovery in China, although
sentiment remains weak in Europe and the United States. For the
full year, IHS Markit forecasts the Group's combined light-vehicle
sales will be 9.0 million units, down from 10.7 million units last
year. (IHS Markit AutoIntelligence's Tim Urquhart)
UK consumers drank some 2.8 billion liters of packaged water
(retail and foodservice) in 2019, compared with just under 3.0
billion liters in 2018. This follows steady incremental increases
between 2013 and 2018, reports Statista. However, during 2013 and
2019, total consumption increased by over 745 million liters.
Growth was highest in 2014 with 9.6 percent YOY growth. Per capita
consumption amounted to an average of 44.9 litres per person in
2018. The UK soft drinks market has seen almost continual growth
between 2013 and 2019, with the only drop in market value seen in
2015. The soft drinks market value amounted to over GBP16.3 billion
(USD21.1 billion). While the value of the market increased, per
capita consumption of soft drinks dropped by five liters/head
between 2013 and 2017 but rebounded in 2018. Sales of cola,
carbonated soft drinks, concentrates, and fruit juices saw their
market shares decline between 2015 and 2018 while bottled water and
energy drinks increased their market shares. Coca Cola remains the
leading UK brand. (IHS Markit Food and Agricultural Commodities'
Neil Murray)
According to the flash estimate, Italy's real GDP rose by
markedly stronger-than-expected 16.1% quarter on quarter (q/q) in
the third quarter, after falls of 13.0% q/q in the second quarter
and 5.5% q/q in the first. (IHS Markit Economist Raj Badiani)
Nevertheless, Italian GDP in the third quarter was still 4.5%
below its level at the end of 2019.
Italy's National Institute of Statistics (Instituto Nationale
di Statistica: ISTAT) has not provided a detailed breakdown of the
data, but it has confirmed sharp rises in value added in industry
and services during the third quarter. On the expenditure side,
ISTAT reports positive contributions from both domestic demand and
net exports.
The reopening of factories from 4 May triggered a robust rise
in industrial production, which is driving the recovery.
Specifically, industrial production rose 42.1% month on month (m/m)
in May, followed by m/m gains of 8.2% in June, 7.0% in July, and
7.7% in August. Encouragingly, industrial output in August was only
1.8% below the level in February, the month prior to the COVID-19
virus outbreak-related lockdown.
The pace of Italy's economic recovery is likely to slow notably
from the latter stages of this year. According to our October
forecast, growth is set to slow to 0.6% q/q in the fourth quarter
of 2020 and 1.0% q/q in the first three months of 2021. In
addition, the balance of the risks is tilting to the downside.
Asia-Pacific
APAC equity markets closed lower across the region; South Korea
-2.6%, Hong Kong -2.0%, China/Japan -1.5%, Australia -0.6%, and
India -0.3%.
Japan's index of industrial production (IIP) rose by 4.0% month
on month (m/m) in September and rebounded with a 8.8%
quarter-on-quarter (q/q) rise in the third quarter of 2020
following a 16.9% q/q drop in the previous quarter. Manufacturers'
shipments also continued to rise solidly (up 3.8% m/m) while
inventory fell for the sixth straight month (down 0.3% m/m) and the
index of inventory ratio declined by 2.7% m/m. (IHS Markit
Economist Harumi Taguchi)
A robust recovery in exports drove the fourth consecutive month
of improvement in industrial production. The better-than-expected
increase in production was thanks largely to continued solid
improvement in production of autos, electric parts and devices, and
iron and steel, as well as a rebound in production of
machinery.
Thanks to continued improvement in external demand and the
supply chain, destocking in producers goods (including iron and
steel and electric parts and devices) progressed and autos and some
other industry groupings have begun increasing inventories from
historically low levels. That said, the relatively high inventory
ratio largely reflected delays in destocking in capital goods and
chemical products.
The September results were better than expected thanks largely
to improved external demand. The progress in destocking means
improved demand could prompt manufacturers to raise production in a
timely manner. However, the continued decline in shipments of
capital goods (excluding transport machinery) in the third quarter
suggests a continued decline in fixed investment could partially
mitigate a rebound of real GDP growth in the third quarter (which
will be released on 16 November).
Japan's unemployment rate held at 3.0% in September, as a
decline in the number of employees was partially offset by a
decline in labor participation. An increase in the number of
unemployed people was largely down to increases in mandatory
retirement or the termination of employment contracts and severe
circumstances of employers or businesses. (IHS Markit Economist
Harumi Taguchi)
The resumption of economic activities eased the contraction of
the number of employees in manufacturing and transport and
increased the number of employees in construction and wholesale and
retail sales. However, larger y/y declines in
accommodation/eating/drinking services (down 10.6%) and increases
in the number of furloughs and layoffs reflected a weak recovery of
economic activity and downside from social distancing
practices.
Employment conditions remain weak, as the ratio of active job
openings to active job applications continued in September,
slipping to 1.03, although an increase in ratio of new openings to
new applications signaled an improvement in job availability. That
said, a faster decline in the ratio for full-timers (0.78)
reflected greater applications and weaker job openings for
full-time positions.
The September results suggest employment conditions remain weak
and that it is harder to find new employment. Although new job
openings could increase in line with the resumption of business
activity, the modest pace of a recovery could increase termination
of contracts and turn furloughs into unemployment.
According to figures released by the Japan Automobile
Manufacturers Association (JAMA) today (30 October), Japanese
vehicle production experienced a decline of 18.0% year on year
(y/y) to 556,276 units during August mainly because the COVID-19
virus outbreak affected automakers' production operations. (IHS
Markit AutoIntelligence's Nitin Budhiraja)
The figure includes passenger vehicles, trucks, and buses.
Output in the passenger car category reached 482,607 units during
the month, down by 17.63% y/y.
Within the passenger car category, production of standard cars
with an engine displacement of more than 2.0 liters was down by
21.08% y/y to 294,646 units during the month, while output of small
vehicles was down by 10.23% y/y to 92,741 units.
Production of mini-vehicles, categorized as vehicles equipped
with engines smaller than 660cc, was down by 12.85% y/y to 95,220
units. Similar declines were recorded in the truck and bus
segments, falling by 17.0% y/y to 69,455 units and by 53.0% y/y to
4,214 units, respectively.
In January-August, Japanese vehicle production declined by
25.55% y/y to nearly 4.874 million units.
Output in the passenger car category reached 4.183 million
units during the period, down by 25.75% y/y, while truck production
declined by 23.0% y/y to 643,187 units and bus output by 37.7% y/y
to 48,236 units.
The significant drop in production in August was also due to a
higher base of comparison. There was a rush in demand for new
vehicles in August and September last year as the VAT rise was
scheduled for implementation in October 2019, which increased the
production of vehicles in these months last year.
The Japanese individual cautiousness, social distancing, and
lower household incomes could continue to suppress consumer
spending over the short term.
In the Japanese automotive sector, eco-car tax breaks were
re-extended for two more years from April 2019 to March 2021, but
with more stringent fuel economy standards.
Tax breaks for greener cars were also extended for two more
years from April 2019 to March 2021.
Automobile tax is also permanently reduced for engine size
displacement of more than 1 liter. These could support demand for
new vehicles.
According to IHS Markit's forecasts, Japanese light-vehicle
output is expected to decline by 18.0% y/y to around 7.556 million
units in 2020.
China's Ministry of Transport has said it will support pilot
projects in the field of smart transport such as connected and
autonomous vehicles (CAVs) in the cities of Beijing and Shanghai as
well as Hebei province, reports the South China Morning Post. Wu
Chungeng, policy research director at the Chinese Ministry of
Transport, said, "We support cities and autonomous driving
companies to accelerate the development and application of
autonomous driving technology under the premise of ensuring
safety." According to the report, the Ministry of Transport has
partnered with the Ministry of Science and Technology to identify
research and development tasks required for CAVs as part of
considerations ahead of China's 14th five-year plan. China is
pushing to commercialize autonomous smart vehicles, which are a key
part of the country's "Made in China 2025" plan. In February, 11
central government departments jointly issued the "Strategy for
Innovation and Development of Intelligent Vehicles", providing a
more realistic vision for the development of autonomous vehicles
(AVs). The strategy aims to develop an ecosystem for AVs and to
have conditional AVs (Level 3) in large-scale production by 2025.
Under the strategy, the country expects to build a complete set of
standards for AVs between 2035 and 2050. The country expects to
release the Chinese-specification taxonomy of driving automation
for vehicles in January 2021, after the draft is completely
approved. (IHS Markit Automotive Mobility's Surabhi Rajpal)
Autotalks, a vehicle communication chipset maker, has partnered
with seven consortiums and five carmakers for a demonstration of
its cellular vehicle-to-everything (C-V2X) solution in Shanghai
(China). The demonstration took place as part of the China SAE
Congress and Exhibition's "New Four Layers" event. During the
demonstration, Autotalks' OEM partners conducted rides for hundreds
of visitors, exhibiting capabilities at all levels: chipset,
system, software, and security. Autotalks said that its V2X
solution complies with the latest Chinese C-V2X standards and that
the solution is ready for deployment in China as well as in other
international markets. Ram Shallom, Autotalks' vice-president of
business development and marketing in Asia Pacific (APAC), said,
"This year's New Four Layers event is an important milestone for
the Chinese V2X industry, since it shows industry readiness for
mass rollout of C-V2X. In this event, Autotalks showed that it is a
trusted chipset supplier for the Chinese market, with an
established, broad and production ready eco-system." (IHS Markit
Automotive Mobility's Surabhi Rajpal)
The South Korean government has unveiled its master plan to
boost the adoption of electric vehicles (EVs) and fuel-cell
electric vehicles (FCEVs) in the country by expanding the number of
charging stations while making such vehicles more affordable,
reports the Yonhap News Agency. Under the plan, the government aims
to increase the number of EVs and FCEVs on the country's roads to
1.13 million units and 200,000 units, respectively, by 2025. The
report highlights that there were 120,000 EVs and 9,500 FCEVs in
the country, as of September. To achieve its target, the government
aims to have 500,000 EV charging stations by 2025, a sharp rise
from around 60,000 units installed throughout the nation as of
September. Starting in 2022, new buildings will be obligated to
have a certain number of charging stations. The government will
install fast-charging stations as well, which will be able to
charge up to 80% within 20 minutes. It also plans to increase the
number of hydrogen charging stations to 450 by 2025, up from 72
this year; extend tax deductions on the purchase of EVs and FCEVs
by 2022; and work closely with private firms to slash the price of
major parts, in a bid to reduce the prices of such vehicles. It
will roll out a pilot run of the "battery-less" project, in which
buyers can purchase EVs without paying for batteries and instead
lease them. Furthermore, the government plans to complete drawing
up rules for autonomous vehicles (AVs) by 2022, including their
safety and insurance regulations, as it seeks to partially adopt
Level 4 AVs by 2024. The latest development is in line with the
South Korean government's commitment to improve air quality in the
country by bringing down particulate levels, fostering
hydrogen-related businesses as future growth drivers, and reducing
the heavy reliance on imported oil. (IHS Markit AutoIntelligence's
Jamal Amir)
According to the Japan Bank for International Cooperation
(JBIC)'s press release dated 28 October, the development bank,
together with Sumitomo Mitsui Banking Corporation, MUFG Bank,
Mizuho Bank, Shizuoka Bank, and the Bank of Yokohama, will provide
the State Bank of India (SBI) with a total of USD1-billion worth of
loans, financed 60% by the JBIC and the rest by the commercial
banks. The JBIC's press statement noted that the SBI will be
expected to on-lend to "manufacturing and sales business of
suppliers and dealers of Japanese automobile manufacturers as well
as for the provision of auto loans for the purchase of Japanese
automobiles". The JBIC will provide guarantee for the loan lent by
the commercial lenders. (IHS Markit Banking Risk's Angus Lam)
IHS Markit assesses the guarantee provided by the JBIC to mean
a guarantee for the losses incurred by the Japanese commercial
banks rather than a guarantee for the loans on-lend by the SBI;
therefore, the credit risk arising from lending by the SBI will not
be offset as a result.
As of the June quarter of 2020, the SBI reported that it had
INR183.3-billion (USD2.47 billion) worth of loans outstanding to
"automobiles and trucks", while outstanding auto loans stood at
INR701.5 billion. Based on the higher figure, the loans given by
the JBIC (the cost of funding for the SBI was not highlighted)
represents close to a significant 10% increase. However, this only
means a 0.4% increase in overall lending.
Indian financial news website LiveMint reported in September
that some car dealerships were facing immense difficulties because
of the lockdown and the end of the loan moratorium. The additional
funding is likely to provide liquidity to at least some of the
Japanese players in the sector, reducing immediate cashflow
problems.
The SBI was previously reported to have tighten its lending
standards to car dealerships; no update has since been issued.
Based on the same tighter lending criteria, the bank is likely to
see limited deterioration in its asset quality, with the
non-performing loan ratio of automobiles and trucks standing at
5.8% in June.
Posted 30 October 2020 by Chris Fenske, Head of Fixed Income Research, Americas, IHS Markit
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