Final PMIs signals post-tax hike slump in Japan

Emily Nicol

Asian equities were mixed today. On the positive side, Japan’s TOPIX pared back earlier losses to close unchanged on the day despite a disappointing downwards revision to the final services and composite PMIs in October, which signalled contraction for the first time for more than three years (see more details below). China’s main CSI 300 gave up some of the gains seen earlier in the week to close ½% lower on the day as markets await further information regarding the US-China trade deal, while the Aussie ASK 200 was down 0.6%. Perhaps more significantly were the further notable moves in Asia-Pacific bonds overnight which followed the global trend lower. In particular, 10Y JGBs were 4bps higher at -0.10%, the highest since early June as today’s 10Y JGB auction attracted weaker demand that had been expected. And 10Y ACGB yields were a further 7bps higher today at 1.27%, the highest since late July. It has been a more mixed start to the day for European govvies, although Bunds have moved marginally lower after this morning’s German factory orders data offered a rare upwards surprise in September, albeit still pointing to a downward trend over the third quarter as a whole.

The final Japanese services and composite PMIs brought a downwards revision to what was an already weak outturn in October’s flash estimates reflecting a greater negative impact of the consumption tax hike and the typhoons that month. In particular, the headline services PMI fell a further 0.6pt from the preliminary reading to 49.7, leaving it more than 3pts lower than September and the first sub-50 reading for more than three years. But services firms were also much more downbeat about the near-term outlook, with the new orders index revised 1.7pt lower from the flash to 50.9, a seventeen-month low. And so firms in the sector were somewhat less upbeat about their employment intentions signalling one of the slowest rates of growth for two years. Overall, with the manufacturing output PMI having been revised lower too – by 0.7pt to 48.6 – the headline composite PMI fell a steeper-than-initially-estimated 2.4pts in October to 49.1, the weakest reading for more than three years. The new orders component (48.0) similarly fell into contractionary territory for the first time since July 2016.

With respect to prices, while the direct impact of the tax hike was clearly evident in the services output price PMI it was less than initially estimated, nevertheless still leaving the index 4.1pts higher at 54.3. And with prices in the manufacturing sector less impacted by the tax hike, the increase in the composite output price PMI was somewhat more moderate at 2.7pts, albeit still the largest monthly increase since April 2014. But given the steady downward trend over recent months, this merely left the index (52.7) at its highest since July 2018, suggesting that underlying price pressures in Japan remain subdued.

Euro area:
It will be a busier day for euro area economic news, with the final services and composite PMIs for October set to align with the flash estimates showing only a modest improvement in the headline services index, by 0.2pt to 51.8. So, while the equivalent manufacturing output PMI was nudged higher earlier in the week, the composite PMI (the flash estimate was 50.2) seems set to remain broadly consistent with stagnation at the start of Q4. This morning will also see the release of euro area retail sales figures for September, which are expected to report only a modest increase on the month (0.1%M/M). But this would still leave sales up over the third quarter as a whole and consistent with an acceleration in household consumption in Q3.

Attention at the country level this morning was on the manufacturing sector, with German factory orders and Spanish IP figures for September. And there was a rare upwards surprise in the German factory orders data at the end of Q3, with headline manufacturing orders up 1.3%M/M in September. There was a welcome pickup in domestic orders (1.6%M/M), which reflected increased demand across the key sectors – i.e. new orders for consumer goods were up 3.1%M/M, capital goods up 2.3%M/M and intermediate goods up 0.3%M/M. And there was also a jump in overseas orders for capital goods too (+3.5%M/M).

When adjusting for major items, the news was also more encouraging in September, with total orders 1.5% higher on the month with a 2% increase in domestic orders and a more than 1% increase in overseas orders (admittedly, this masked a more than 3%M/M drop from orders within the euro area). Of course, the more positive outturn in September follows marked weakness over recent months. And when smoothing out monthly volatility, total orders (on an adjusted basis) were still down 0.4%Q/Q over the third quarter as a whole, the seventh consecutive quarterly contraction. And on an unadjusted basis, total orders were down a steeper 0.8%Q/Q in Q3 and almost 5.5% lower than a year earlier.

Today’s figures also showed that German manufacturing turnover – which typically closely aligns with production – fell for the fourth month out of the past six in September, with the 1.1%M/M decline leaving it down 1.0%3M/3M. This further suggests that tomorrow’s industrial production release will be soft. Indeed, expectations are for a drop in IP of around ½%M/M in September, which would leave it almost 1% lower over the third quarter as a whole.

Elsewhere, ECB Vice President de Guindos and members of the Supervisory Board Enria, Hakkarainen and af Jochnick will speak at an ECB Forum on Banking Supervision.

In the US, this afternoon will bring labour productivity and costs data for Q3. While non-farm productivity growth is expected to have slowed in Q3, to roughly half the 1.8%Q/Q ann. pace seen in the previous four quarters, the annual increase in unit labour costs is expected to have moderated only slightly from the 2.6%Q/Q ann. rate in Q2. Elsewhere, the Fed’s Evans, Williams and Harker are scheduled to speak in New York.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at