Japanese orders decline and economy watchers survey disappoints

Emily Nicol

While US stocks had a positive end to last week, Asian equities started the week on the back foot as tensions in Hong Kong intensified today after a protester was shot, leaving the Hang Seng down a sizeable 2.7% on the day. China’s main CSI 300 closed 2.7% lower, while Japan’s TOPIX bucked the trend, to close 0.1% higher despite some disappointing Japanese machine orders data and a downbeat Economy Watchers survey at the turn of the quarter (see more details below).

In terms of bond markets, having risen to a near-six-month high last Friday, 10Y JGBs edged slightly lower today by 1bp to -0.08%. And European markets have had a mixed start to the day. While core European govvies have seen modest gains, periphery bonds have made modest losses, as the outcome of yesterday’s Spanish election – the fourth in four years – appeared to deliver an even more hung parliament. As had been expected, the Socialist party (PSOE) once again took the largest number of seats. But like in April, its share fell well short of a majority and 3 seats less at 120. The right-wing establishment Partido Popular (PP) saw its share rise, with the number of seats up by 22 to 88. And there was a worrying increase in the share of the ultra-nationalist/traditionalist Vox party, which achieved 52 seats this time around (up 28 from April) to become the third largest party in Parliament at the expense of the centre-right Ciudadanos (C’s), which saw a collapse in its seat count to just 10. The populist left-wing Podemos also saw the number seats won fall back to just 35. Therefore, broad policy inertia in Spain looks set to continue, with yet another election likely in spring 2020.

It was a relatively busy start to the week for Japanese data releases, which on the whole had a more downbeat tone to them at the turn of the quarter. Certainly, the latest machine orders figures fell short of expectations in September, with core orders – the measure that typically provides a guide to non-residential investment three months ahead – recording the third successive monthly decline and by 2.9%M/M. This principally reflected a further fall in orders placed by manufacturers (-5.2%M/M), leaving them almost 4½% lower than a year earlier. In contrast, core orders placed by non-manufacturers rose in September (2.6%M/M) for the first month in three to leave almost 12% higher than a year earlier.

Of course, orders data are notoriously volatile. And the recent weakness to some extent likely reflects payback for the double-digit monthly increase in June, which was the strongest for 16½ years. Nevertheless, on average over the third quarter as a whole, both manufacturing and non-manufacturing orders fell. And this left total private sector core orders in Q3 down 3½% compared with Q2, suggesting that private sector capex will contract in the final quarter of the year. The decline in orders in Q3, however, reversed just half the increase in Q2 and the Cabinet Office today forecast it to be fully reversed in Q4.

Other details of today’s release were also disappointing, with government orders down for the first month in three and by a sizeable 45.2%M/M, to leave them down more than 25% compared with a year earlier. And there was renewed weakness in overseas orders too, with the 12½%M/M drop marking the fourth monthly decline out of the past six.

The Economy Watchers survey for October was also predictably downbeat about economic conditions in the aftermath of the consumption tax hike. In particular, the headline current conditions index plunged 10pts to 36.7, the largest monthly drop since the previous consumption tax hike in April 2014 and the weakest level since the post-2011 quake slump. While the weakness was broad based, the most significant drop was reported in retail-related DI, with the more-than 18pt decline leaving it at its third-lowest reading since the Global Financial Crisis. Overall, the household-related DI was down 12.7pts to 35, while the corporate-related DI fell 4.6pts to 40.5, both at multi-years lows and well below the key-50 mark that indicates ‘improving conditions’. The survey wasn’t all doom and gloom however. For example, the future conditions DI rose for the second month out of the past nine and by 6.8pts leaving it at 43.7, albeit still its third-lowest reading since mid-2016.

Looking ahead, the most noteworthy release this week will be preliminary Q319 GDP data on Thursday. These will be closely watched for signs of pent-up domestic demand ahead of October’s consumption tax hike. But with net trade set to provide a modest drag, we expect GDP growth to have moderated slightly to 0.2%Q/Q, from 0.3%Q/Q in Q2. With respect to inflation, the goods PPI data on Wednesday will be closely watched for insight into the impact of the tax hike that month. Other releases at the end of the week include the tertiary activity index for September on Thursday and final industrial production data for the same month on Friday. In the markets, the MoF will sell 30Y bonds tomorrow and 5Y JGBs on Thursday.

Euro area:
There are various top-tier euro area releases this week, including September industrial production figures on Wednesday, which are expected to show that output slipped back on the month to leave it down over Q3 as a whole for the second successive quarter. Nonetheless, the updated estimate of euro area Q3 GDP growth the following day is expected to align with the flash estimate of 0.2%Q/Q (unchanged from Q2). Against this backdrop, euro area labour market figures (also due Thursday) are likely to show employment growth in Q3 no firmer than the 0.2%Q/Q rate in Q2. Of course, of most interest on Thursday will be the first estimate of German Q3 GDP. Given the significant weakness in industrial and construction output in the third quarter, there is a significant risk that the economy slipped into a technical recession, with the consensus expectation for growth of -0.1%Q/Q. We are a touch less downbeat given the pickup in retail sales that quarter, admittedly merely forecasting GDP growth of zero in Q3. Euro area trade figures for September (due Friday) should provide some insight into the extent to which net exports weighed on GDP growth in Q3. The first half of the week, meanwhile, will bring the German ZEW and French BoF sentiment surveys for November and October respectively.

In terms of inflation, the final readings of October CPI are also due from Germany (Wednesday), France and Spain (Thursday), and the euro area (Friday). The flash estimate showed the headline euro area CPI declining 0.1ppt to 0.7%Y/Y, on the back of lower energy prices. However, given rounding effects, there is a non-negligible risk that it will be revised higher. Core CPI is expected to be confirmed at 1.1%Y/Y, 0.1ppt higher than September. Elsewhere, various ECB members are scheduled to speak publicly this week, including Vice President de Guindos in London and Chief Economist Lane in Frankfurt on Wednesday. In the markets, Germany will sell 2Y bonds tomorrow and 10Y Bunds on Wednesday, while Italy will also sell 3Y and 7Y bonds on Wednesday.

It will be a busy week ahead for top-tier UK economic data, kicking off today with the first estimate of Q3 GDP and the monthly output and trade figures for September. Given the strength in activity at the start of the third quarter, the UK’s economy is expected to have returned to expansion in Q3, with the consensus forecast for growth of 0.4%Q/Q in line with the BoE’s assumption in yesterday’s Monetary Policy Report. We think risks to this forecast might be skewed to the downside. And while household consumption is expected to have posted steady growth, business investment will no doubt have maintained a downward trend. Moreover, the monthly output releases look set to illustrate a further slowing in economic momentum towards the end of the quarter.

Tomorrow will bring the latest labour market data, which are expected to report a steeper pace of decline in employment in the three months to September, albeit leaving the unemployment rate unchanged at 3.9%. Average earnings growth is also expected to remain close to the near-4%3M/Y growth seen over recent months. Wednesday, meanwhile, will bring October’s inflation figures, which are expected to show a further fall in the headline CPI rate by 0.1ppt to 1.6%Y/Y, not least reflecting Ofgem’s reduced price caps on tariffs that month. But the core CPI rate is also expected to be little changed at 1.7%Y/Y, suggesting that underlying price pressures remain subdued. Finally, Thursday’s release of October retail sales numbers are expected to show a modest increase in spending at the start of Q4 despite still weak consumer and retailer sentiment surveys. Other releases in the coming week include the ONS house price index (Wednesday) and the RICS house price balance (Thursday). Supply-wise, the DMO will sell 20Y Gilts on Thursday.

In the US, after a quiet start to the week with markets closed for Veterans Day, this week will bring a number of noteworthy releases including October CPI (Wednesday), retail sales and IP data (Friday), while Fed Chair Powell’s testimony on the economy before the Joint Economic Committee on Wednesday will be closely watched for any further insight into the near-term policy outlook. Despite an anticipated pickup in prices last month, the annual CPI rate is expected to move sideways at 1.7%Y/Y as energy inflation remains subdued. Core CPI is also expected to move sideways, albeit at a slightly firmer 2.4%Y/Y. But while retail sales are expected to have reversed some of the weakness seen in September, IP is forecast to have had a soft start to the fourth quarter, with a third monthly contraction out of the past four. Friday will also bring the latest business inventories figures for September, export and import prices data for October and the Empire Manufacturing index for November. In addition, the NFIB small business optimism survey will be published tomorrow, while PPI figures are due Thursday. In the markets, there are no UST bond auctions scheduled in the coming week.

In China, the weekend brought the latest inflation figures, which saw the headline CPI rate surge 0.8ppt to 3.8%Y/Y, the strongest since the start of 2012. But this reflected a further jump in food price inflation (up 4.3ppts to 15½%Y/Y) on the back of a more than 100%Y/Y increase in pork prices. Indeed, when excluding food and energy, core CPI was unchanged at 1.5%Y/Y for the third consecutive month. And the latest PPI figures indicated disinflationary pressures further down the pipeline, with the headline rate down 0.4ppt to -1.6%Y/Y, the steepest decline since mid-2016. Looking ahead, this week will bring a further update on economic activity at the start of Q4, with October’s retail sales, industrial production and fixed investment figures due on Thursday.

There will be a number of key Aussie data releases this week. Given the RBA’s focus on labour market developments, the latest wage figures for Q3 (due Wednesday) and employment report for October (Thursday) will be closely watched. Against the backdrop of slowing employment growth, the annual increase in wages is expected to have moderated slightly in Q3, to 2.2%Y/Y. which would market a five quarter low. And the increase in employment is likely to have remained relatively subdued at the start of Q4, leaving the unemployment rate unchanged at 5.2%. Ahead of this will bring the NAB’s latest business confidence survey for October (Tuesday), followed by the Westpac consumer confidence indicator (Wednesday).

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